|Raymond Mallon - Australian senior economist |
Most importantly, both Vietnamese and international travel and transport restrictions will likely continue to be eased throughout 2022. The late 2021 rebound in economic performance (5.22 per cent GDP growth in Q4 of 2021) following the partial easing of travel restrictions, demonstrates the potential for a relatively strong economic recovery as restrictions are further eased in line with the new policies, such as the government’s action on safe and flexible adaptation and effective control over the pandemic.
Vietnam’s rollout of the vaccination programme was remarkably rapid once supplies were obtained. With increased global capacity to produce vaccines, it is very likely that vaccination rates will remain high, resulting in improved health outcomes for those who contract COVID-19. The reopening of the economy will help stimulate a recovery across all sectors, and especially tourism. But it may take time for the tourism and hospitality sub-sectors to return to pre-pandemic levels. In addition, economic restructuring continues to lay the foundations for a more innovative and productive economy.
Positive structural developments include increased urbanisation, the growing participation by domestic firms in regional value chains, and the emerging transition towards more sophisticated manufacturing activities with an increasing share of economic output and exports coming from higher value-added production.
Technological developments are helping Vietnam to stimulate innovation and help accelerate efforts to catch up in terms of productivity, and product and service quality. The efficiencies generated from the rapid shift to e-transactions in the public and private sector is particularly encouraging. Such developments have the additional bonus of reducing opportunities for corruption.
Domestic and foreign businesses are looking to invest more in ICT, robotics, fintech and other emerging industries to facilitate new models of business activity (including e-commerce and online education, health, and entertainment services) that have the potential to boost productivity and reduce health risks. Vietnamese firms are demonstrating an increasingly strong competitive advantage in innovating in such areas.
Other domestic drivers of growth
Next, while the pandemic has caused tremendous hardships to many households, workers and businesses, Vietnamese businesses have demonstrated remarkable resilience with continuing appetite to invest in expansion.
While the number of businesses closing has increased, and the number of newly registered ones grew at a slower rate in 2021, there was an acceleration in new business registrations in the last two months of the year. Total domestic private sector investment increased by 7.2 per cent in 2021, despite a 2.9 per cent decline in public sector investment and a 1.1 per cent decline in disbursed foreign direct investment (FDI) (approved FDI increased by 9 per cent). And the Vietnamese government has renewed its commitment to further reduce obstacles faced by businesses to ensure that all businesses compete on a level playing field.
Expected accelerated growth in business investment will be particularly important in generating new employment opportunities.
Furthermore, the easing of restrictions will make it easy for the government to deliver on stimulus packages. The government has committed to increasing expenditure on health, education, and infrastructure, and to sustain limited business support. With the easing of travel and trade restrictions, a strong recovery in public investment is expected in 2022.
Finally, Vietnam’s domestic middle class continues to expand, contributing to accelerated growth in domestic consumer demand. Increasing domestic demand will gradually reduce past dependence on international trade as the primary engine of growth. The reductions in travel restrictions will also release pent-up demand for some goods and services.
As travel and trade restrictions ease, those Vietnamese consumers that have survived the crisis with minimal economic losses will want to travel, entertain, and consume more goods. Initially, this expenditure is likely to be concentrated within Vietnam, helping to stimulate domestic economic activity.
In summary, domestic drivers of economic performance are likely to include strong domestic and private investment growth, a recovery in public sector investment and the implementation of other government stimulus measures, innovation and technological change, and increased consumer demand.
External drivers of growth
The pandemic has resulted in global slumps in equity markets, travel and tourism, disruptions to global supply chains, factory closures, and increased unemployment in 2020. These developments, combined with global public concerns about the impacts of climate change, technology, automation/job loss, digital economy, low returns on savings, economic inequality, and rising debt, added to investor uncertainty and undermined consumer confidence.
Nevertheless, the global economic recovery began to recover in 2021, with the International Monetary Fund estimating that the world economy grew by about 6 per cent in 2021, and forecasts global growth of nearly 5 per cent in 2022. In response to recent supply chain disruptions, many businesses are trying to minimise risks by reducing their dependence on single input markets.
International businesses were already diversifying sources of production inputs and final products prior to the pandemic. Foreign investors have been moving production bases, from China to Vietnam (and elsewhere in Asia). Many are trying to strengthen production links with domestic businesses. Vietnamese enterprises are increasingly integrating into global production chains, boosting investment, technology transfer, productivity growth and incomes. Recently-implemented regional and international cooperation deals will also help to further deepen regional supply chain links. This should boost trade and foreign investment, providing new opportunities for domestic businesses.
Risks and responses
Some of the biggest risks to the Vietnamese economy are global. These include the ongoing pandemic, a slower than expected global economic recovery, rising inflationary and interest rate pressures, likely tightening of fiscal policy in major markets, and uncertainty about the Chinese economy.
Other critical factors that are negatively impacting on the global outlook include the impacts of – and tepid global response to – climate change, and growing protectionism and possible instability in some major markets.
But there are also domestic risks that could especially impact vulnerable groups. Firstly, there is the real risk of another major wave of COVID-19 slowing the revival of domestic travel and services and potentially slowing economic recovery.
Environmental risks are growing and are an increasing concern for Vietnamese society and businesses. Environmental deterioration will undermine efforts to promote sustainable development, improve health and the quality of life, and attract and retain the best national and international expertise in Vietnam.
It will be important to continue to monitor and provide appropriate support to those most adversely impacted by the pandemic, climate change/disaster impacts, and ongoing economic restructuring. Increasing the low wages paid to public sector health and education workers could further stimulate expenditure throughout the country and help encourage employment in these key services.
Further public action may be needed to: strengthen education and health outcomes; address environmental challenges; facilitate the movement of workers out of declining industries; strengthen social safety nets (especially for informal workers); continue improving the business environment; build on recent success in reducing bottlenecks to efficient public investment and expenditure; and address continuing infrastructure bottlenecks.
There is also a need for a renewed focus on building market institutions and an effective and predictable policy and regulatory environment that encourages fair, equitable and sustainable development.
Finally, it will be important to contain any resurgence in inflationary pressures. Maintaining macroeconomic stability will be challenging given the need for deficit spending to ameliorate the negative economic impacts of COVID-19, expected rise in international inflationary pressures, and ongoing supply chain constraints.
While Vietnamese businesses will continue to face pressures to restructure and adapt, Vietnam is likely to emerge with a more competitive and productive economy over the next 5-10 years. Despite the global risks discussed earlier, Vietnam should record relatively strong growth in incomes, employment, trade and FDI inflows in 2022 and beyond, helping the country to emerge from the pandemic with further progress in improving living standards.