Sustained growth can be achieved through reforms

The World Bank last week announced its “East Asia and Pacific in the time of COVID-19” report, which stated that while prospects remain favourable for the Vietnamese economy in the medium term, GDP growth will be affected negatively by the coronavirus outbreak, now a global pandemic. “Preliminary estimates suggest that the rate of expansion of the economy could decline to about 4.9 per cent in 2020, which is about 1.6 percentage points lower than our previous forecast,” read the report.

However, the World Bank also showed its strong belief that over the medium term, growth is projected to rebound back to 7.5 per cent in 2021 and converge at around 6.5 per cent in 2022, “reflecting an improved external demand and a firming of the services sector, as well as a gradual recovery in agricultural production. The economy will also rebound from the global coronavirus pandemic,” said World Bank country director for Vietnam Ousmane Dione.

Global analyst FocusEconomics last week told VIR that it projects the Vietnamese economy to expand by only 5.2 per cent in 2020, down 1.3 percentage points from last month’s forecast, and 7 per cent in 2021. Notably, the firm’s February forecast of 6.5 per cent was lower than the previous month’s projection of 6.6 per cent.

It is the first time FocusEconomics has issued consecutive downward revisions of Vietnam’s economic growth projections in years, due to the fast and dangerous spread of COVID-19, which has been badly affecting almost all sectors in the economy.

“Growth is seen slowing markedly this year due to the impact of the coronavirus. Nevertheless, fundamentals remain solid and the economy should still perform favourably compared to ASEAN peers. A possible worsening of the viral outbreak and domestic banking vulnerabilities pose downside risks to the outlook,” said the statement.

Under FocusEconomics, Vietnam is projected to remain one of the ASEAN’s top performers in 2020 thanks to strong domestic demand.

Specifically, the analysts reported, the growth rates this year for Asia will be 2.9 per cent, against the ASEAN (3.4 per cent), Indonesia (4.5 per cent), Laos (6.4 per cent), Malaysia (2.8 per cent), Myanmar (6.8 per cent) the Philippines (5.2 per cent), Singapore (-0.2 per cent), and Thailand (0.8 per cent).

Meanwhile, Fitch Solutions under Fitch Ratings, one of the world’s three largest rating firms, has also just cut its projections for Vietnam’s growth this year.

“In light of the worsening global outbreak, we are revising our 2020 growth forecast for Vietnam down to 6.3 per cent, from 6.8 per cent previously,” the group said in a statement.

It explained that a disruption of supply chains in the region will result in slower manufacturing growth, due to an inability to secure inputs from and export to China, a key trade partner. Moreover, a cutback in tourist arrivals from the country’s top three markets – China, South Korea, and Japan – will weigh on tourism and by extension the services industry.

However, according to Fitch Solutions, Vietnam’s 2020 growth will likely be higher than that of many regional nations, like Indonesia (4.8 per cent), the Philippines (6 per cent), Singapore (1 per cent), and Thailand (2 per cent). All these nations have also been hit hard by COVID-19.

According to these data rating agencies, the reasons behind Vietnam’s expected better performance is that the country is pushing up its economic restructuring, making it a more business-friendly destination for investors and firms. Especially, free trade agreements have also been making Vietnam more attractive.

“In February, the EU Parliament approved the EU-Vietnam trade deal, paving the way for it to come into force later this year and boding well for the external sector in the medium-term,” FocusEconomics added.

Meanwhile, as per the International Monetary Fund as of March 3 for Vietnam under COVID-19, the country may grow 5.8 per cent this year if the pandemic reaches its peak in late April. A second scenario posits that the economy may increase by 4.8 per cent if the situation lasts longer, with grave impacts on global demand if the pandemic expands on a larger scale within the country.

The Vietnamese Ministry of Planning and Investment (MPI) stated in a report, “In order to control the pandemic well and ensure the safety of people, it is a must to sacrifice some economic benefits.”

Vietnam’s economy grew 3.82 per cent on-year in the first quarter of 2020, the lowest first-quarter growth rate since 2009 (see box).

Prime Minister Nguyen Xuan Phuc has repeatedly stressed that all resources must be mobilised to put paid to the virus and that Vietnam “stands ready to sacrifice some economic benefits in order to eradicate the pandemic.”

The government expects that the growth rate will be 6.8-7 per cent this year. Previously, PM Phuc ordered that despite difficulties from COVID-19, Vietnam should not change its growth target, and all efforts must be made to reach it.

According to an updated scenario by the MPI, if the outbreak ends in the second quarter of 2020, GDP will grow only 5.96 per cent this year.