Shoring up the economy with recovery programme

Andrew Jeffries - Country director for Vietnam Asian Development Bank

The high vaccination rate allowed the government to abandon harsh and disrupting containment measures. This timely shift of the pandemic containment strategy helped restore economic activity and reduce uncertainty in the business environment. A General Statistics Office survey of business trends in processing and manufacturing showed that 81.7 per cent of respondents believe the production and business situation will be better in 2022. The economy grew by 5.03 per cent in Q1 of 2022, up from 4.7 per cent in the same quarter last year. On January 11, the National Assembly endorsed combined monetary and fiscal measures estimated at $15 billion to implement the ERDP in 2022 and 2023.

The programme’s $11.5 billion in fiscal measures include tax reductions; exemption policies; support for healthcare, infrastructure development, and social security; and an interest rate subsidy for firms and household businesses. The ERDP’s monetary measures will provide additional liquidity to the economy through an expected reduction in the lending rate by 0.5-1.0 per cent by credit institutions over this year and next and the continued implementation of measures until 2024. The State Bank of Vietnam set the 2022 target growth rate for credit at 14 per cent, and reaching the target will be aided by interest rate cuts and revived credit demand from businesses.

A recovering labour market and other stimulus measures will spur industrial growth by a forecast 9.5 per cent in 2022, contributing 3.6 percentage points to GDP growth.

The sector got off to a strong start this year. The manufacturing purchasing managers’ index rose to 53.7 in January (over 50 indicating expansion) and to 54.3 in February from 52.5 in December, the fourth straight month of growth. Agriculture output is forecast to grow by 3.5 per cent this year, contributing 0.4 percentage points to GDP growth on revived domestic demand and rising global commodity prices. The government’s tourism-reopening policy implemented in March and the lifting of pandemic controls are expected to boost services, with the sector forecast to grow by 5.5 per cent and contribute 2.3 percentage points to GDP growth this year. Accelerated disbursements will drive construction and related economic activities.

The ERDP will speed up public investment, stimulating domestic demand. Improved coordination between the central and local levels of government and restored labour mobility will increase domestic and foreign investor confidence in Vietnam’s recovery.

Foreign direct investment disbursement in the January-March 20 period of 2022 increased by 7.8 per cent over the same period last year.

External trade will remain robust this year. The Regional Comprehensive Economic Partnership, which came into effect January 1, is expected to accelerate trade and the recovery once the pandemic passes by forming stable and long-term export markets for Vietnam and creating a legally binding foundation for expanding trade.

Merchandise exports are forecast to rise by 8-10 per cent this year. Imports will rise on increased demand for capital goods and manufacturing inputs, and rebounding domestic consumption. The recovery of tourism and sustained remittances will support a current account surplus, forecast at 1.5 per cent of GDP this year and 2.0 per cent in 2023.

Vietnam’s recovery is clouded by major near-term downside risks. High COVID-19 infections since mid-March could obstruct the economy’s return to normalcy this year. A slowing global recovery and a surge in global oil prices from the Russia-Ukraine conflict would directly affect Vietnam’s external trade and domestic oil prices, which would affect inflation.

Moreover, uncertainties in the global financial markets and the withdrawal of monetary and fiscal accommodation by advanced economies would weaken the local currency, rendering imports more costly and putting additional upward pressure on inflation.

Slower growth in China would slow Vietnam’s exports and recovery. Rising non-performing loans (NPLs) are another medium-term risk. Adding in the restructured loans that have retained the classification category, Vietnam’s potential gross NPL ratio is estimated at 8.2 per cent of total outstanding loans. In addition to rapidly rising costs of construction materials, complex procedures for disbursing public investment could delay the implementation of Vietnam’s ERDP, diminishing its desired impact on growth, as discussed in the policy challenge.

The government launched two fiscal and monetary support programmes in April 2020 to July 2021 to tackle the economic impact of the pandemic. In response to its resurgence in 2021, the legislative body in January passed a resolution for new monetary and fiscal measures to accelerate the implementation of the ERDP this year and next. The programme’s effective implementation will be critical for Vietnam to revive its growth momentum. But the ERDP’s timely delivery faces several policy challenges.

Infrastructure development is one of the ERDP’s most significant components and this has been allocated a budget of about $5 billion for 2022 and 2023. The timely implementation of the infrastructure programme may be at risk because Vietnam has a systemic problem in project preparation, approval, and disbursement caused by complex and rigid public investment procedures.

This is especially so for land acquisition, resettlement, and procurement. Timely implementation will require radical simplification and changes in public investment regulations and policy coordination.

Interest rate subsidisation totalling about $1.7 billion, a major fiscal component of the ERDP, is expected to spur aggregate demand. But because creditworthiness and capacity to recover are key conditions for firms to be able to tap these loans, small- and medium-sized enterprises may not be able to meet the criteria because their balance sheets and capacity have been weakened by the pandemic.