Protracted restrictions put main growth drivers at risk

According to the World Bank, it is still expected that a surplus in the current account will be seen this year in Vietnam.

The economy has continuously earned a current account surplus since 2011. Additionally, it hit 2.9 per cent in 2017, 3 per cent in 2018, and 3 per cent in 2019.

On the external front, Vietnam maintained a positive external position with an increase in international reserves, but both merchandise trade and current account balances have deteriorated, according to the World Bank.

The country accumulated $6 billion in international reserves between December 2020 and April this year. Yet, the growth of imports outpaced that of exports while the services account continued to be negatively impacted by the closing of the country’s borders to most international visitors.

After recording its highest ever merchandise trade surplus in 2020 of $19.95 billion, Vietnam’s trade balance turned into a deficit in the first eight months of 2021, worsening since May. Figures from the General Statistics Office (GSO) showed that in the first eight months of 2021, the economy’s total export turnover is estimated to reach $212.55 billion, up 21.2 per cent on-year, while the total estimated import value hit $216.26 billion, up 33.8 per cent on-year.

This period saw a trade deficit of $3.71 billion, following a similar shortfall of $2.41 billion in the first seven months and $1.47 billion in the first half of this year. Such a deficit was also seen in May ($2.07 billion), June ($1 billion), July ($1.25 billion), and August ($1.3 billion).

The GSO also reported that in the first eight months of this year, Vietnam was visited by only 105,000 international arrivals, down 97.2 per cent on-year, with total revenue of merely VND4.5 trillion ($195.65 million), down 61.8 per cent on-year.

The Vietnam National Administration of Tourism reported that in 2019 before the pandemic emerged, Vietnam welcomed over 18 million international tourist arrivals – up 16.2 per cent on-year, and served 85 million domestic tourist arrivals. Total revenues from tourists in 2019 were over VND720 trillion ($31.3 billion), up 16 per cent on-year.

Last year, however, the figure reduced to only VND17.9 trillion ($778.26 million).

“The external sector has lost some of its dynamism, since accumulated foreign direct investment inflows were 11 per cent lower in the first seven months of 2021 than during the same period in 2020, while the merchandise trade balance turned into a deficit after reporting the highest-ever surplus in 2020,” said the World Bank report.

“It appears that exporters are facing disruptions due to the resurgence of the pandemic, forcing them to close factories or delay production, and are increasingly confronted with competition from other countries that are witnessing a stronger rebound in their production activities.”

The Ministry of Planning and Investment reported that in the January-August 20 period, foreign direct investment (FDI) inflows into Vietnam – including newly-licensed, newly-added capital, and capital from stake acquisition and capital contribution – totalled $19.12 billion, down 2.1 per cent on-year.

Of this figure, foreign investors pledged to pour $11.33 billion in newly-licensed 1,135 projects, an on-year expansion of 16.3 per cent in terms of capital volume. Foreign investors also committed to investing an additional $4.98 billion in 639 existing projects, down 11 per cent ​​in the number of projects and up 2.3 per cent in capital over the corresponding period last year.

There were also 2,720 instances of capital contribution and share purchases by foreign investors, with $2.81 billion, down 43.4 per cent in number and 43.4 per cent in capital on-year.

In the first eight months of this year, total disbursed FDI hit $11.58 billion, up 2 per cent on-year.

According to the World Bank, though FDI inflows into Vietnam have been affected by the health crisis, the capital has “proven resilient compared to the rest of the world, suggesting continued confidence in Vietnam’s economic potential.”

Since early May, manufacturing and services activities have been increasingly hamstrung by targeted lockdowns to contain community transmission of the virus. In mid-July, mobility restrictions widened, with the southern part of the country, Ho Chi Minh City, and then Hanoi, placed under strict quarantine, affecting economic activities.

In the meantime, the economy also faces the risk of increased competition in its external markets as competitors who are ahead in vaccinations are restarting their production and could recapture some of the market shares they lost to Vietnam due to pandemic-related production disruptions in 2020.

“Therefore, the economy could be at risk of losing both its domestic and external drivers of growth if the current outbreak is not rapidly contained,” the World Bank warned.

However, one of the reasons behind Vietnam expected to see a surplus in its current account this year is its expanded exports on the back of global economic recovery.

“Going forward, Vietnam’s exports should continue to expand due to the country’s solid competitiveness in international markets and the decision to continue the diversification of trading partners, and therefore economic opportunities, as recently signalled by the signing of the massive Regional Comprehensive Economic Partnership,” said Dorsati Madani, senior economic expert from the World Bank in Vietnam.

“It is also expected that the country will be able to reopen gradually to international visitors in 2022–2023,” Madani added. “With respect to the financial account, FDI inflows are expected to recover to pre-pandemic levels, boosted by the revamping of global value chains and the demand by many governments and multinationals to diversify their sources of production.”