Vietnam’s Covid-19 outbreak poses setback to recovery

Vietnam’s Covid-19 outbreak poses setback to recovery. Photo: Unsplash

Fitch Ratings asserted Vietnam’s rating at ‘BB’ in April and revised the outlook to positive from stable on the back of Vietnam’s growth and public finances.

The Vietnamese authorities had succeeded in keeping the number of COVID-19 cases low prior to the latest outbreak. The economy expanded by 5.6 per cent on-year in H1/2021, accelerating from 2.2 per cent in the previous year, but the restrictions to control the spread of the disease continue to weigh on economic activities in the third quarter and could persist if the outbreak is not controlled soon.

"This poses significant risks to our current forecast that growth will average 6 per cent in 2021," stated Fitch Ratings. However, the organisation still expect Vietnam’s GDP performance over to be the strongest among Fitch-rated sovereigns in ASEAN. Some lost growth momentum may also be made up in subsequent quarters as output and social activities normalise, although the risk of further outbreaks will linger as Vietnam’s vaccination rate remains low.

Public finances will also be affected. Officials have indicated plans for a relief package worth roughly $5 billion (around 1.4 per cent of GDP), focused on reducing taxes and fees for small- and medium-sized enterprises. However, Vietnam’s public debt-GDP ratio is expected to remain well below the median for ‘BB’ sovereigns in 2021-2022.

Exports have been an important support for Vietnam’s economy during the crisis. Tourism’s share of GDP fell to 3.5 per cent in 2020 from 9.3 per cent in 2019, and the sector's earnings will remain at very depressed levels well into 2022 as a result of the pandemic.

However, goods exports have been strong, with merchandise exports rising by 26.2 per cent on-year in the first seven months of 2021. Some factories producing for export have been disrupted by the recent outbreak, but the impact on output could also be temporary.

In April, Fitch Ratings said that a material reduction in risks posed to the sovereign balance sheet from weaknesses in the banking sector could be a trigger for a sovereign rating upgrade. However, the adverse effects of the recent outbreak could reduce the likelihood of this, at least in the near term.

"A loosening of credit policy designed to cushion the impact of the pandemic may have been one of the factors supporting import growth. Financial system credit rose by 15.2 per cent on-year in H1/2021, faster than nominal GDP growth of 6.7 per cent. This trend is expected to be sustained in H2/2021 as the authorities guide banks towards lower lending rates and accept faster system credit growth," stated Fitch Ratings. "Nonetheless, it is not clear if market forces will put upward pressure on the VND in the near term. Strong import growth in recent months has already reversed the record trade surplus in 2020; in 2Q21, Vietnam posted its largest quarterly goods trade deficit since 2011."