Protracted restrictions put main growth drivers at risk

September 09, 2021 | 09:00
A continued trade deficit over the past few months and an expected drop caused by the global health crisis in inflows of foreign investment are unlikely to weaken Vietnam’s external position this year.

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.

Protracted restrictions put main growth drivers at risk

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.”

Risks loom on the horizon

While the near-term outlook is still bright, Vietnam could become a victim of its own success as existing resources are stretched, pushing up costs and eroding the economy’s competitiveness.

Vietnam has a strong need to improve the level of human capital in the country, with skills training being paramount. The government aims to ascend the manufacturing value chain in an environmentally sustainable way according to the release of its 5-year plan for the 2021-2025 period, with a focus on high-tech growth. The country currently is attracting foreign direct investment in low value-added manufacturing segments such as electronics assembly and apparel. This is mainly due to an abundance of low skilled labour but an industry-recognised shortage of suitably skilled labour in Vietnam to undertake higher value-added manufacturing. The government is aware of this problem and has also outlined its intention to undertake reforms to improve education and labour skills in its 5-year plan.

That said, education reform can only deliver results over a decade, which still risks bottlenecks in labour availability and upside wage pressures during the interim, as well as this being a factor hindering the government’s aspirations to move the country up the value chain. Furthermore, Vietnam faces an urgent need to accelerate transport infrastructure development. The influx of foreign investment into Vietnam from China, especially into the export manufacturing sector, has put significant strain on Vietnam’s existing transport and logistical infrastructure. This caused congestion on roads and at the ports during the 2018-2019 period at the height of the US-China trade war, leading to long delays. Similarly, this is an issue the Vietnamese government is cognisant of and has put in place policies such as its Law on Public-Private Partnership Investment which took effect from January in the hopes of stimulating private investment into infrastructure projects to expedite the process. While we hold a cautiously optimistic view on the outlook for transport and logistical infrastructure development over the coming years as a result of this law, we continue to flag a number of risks to project implementation.

Land acquisition continues to face challenges, causing delays to project timelines. Meanwhile, COVID-19 will continue to challenge project progress, given that lockdowns will likely cause work to stop temporarily, while travel restrictions and risk of COVID-19 contagion will hamper access of much-needed foreign experts and key company personnel. Source: Fitch Solutions

By Thanh Dat

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