Winners set apart by sturdy survival plans

Ken Atkinson, founder and senior board advisor at Grant Thornton Vietnam

For 99 days we in Vietnam lived in a bubble, but then that bubble was suddenly pricked. So what does the new outbreak mean for business and the economy, and how can companies protect themselves during these tough times?

Of course it is too early to come to any firm conclusions as we do not know the full extent of the outbreak and how long it will take to return to a scenario of no community spread.

What we do know is that, in the first half of 2020 the economy grew at 1.81 per cent, much lower than the same period of 2019, but did record the fifth-highest growth worldwide and the highest in the ASEAN and Asia-Pacific. Prior to the new outbreak, GDP growth was expected to be in a range of 2.8 per cent to 4 per cent for 2020, making us one of the stand-out economies.

Industrial production was bouncing back from major contraction in April, and in June the Manufacturing Purchasing Managers Index posted 51.1 per cent – the first time it was above the no-change mark of 50 per cent in five months. The domestic sector remains weak with 32,700 companies halting operation in the first seven months and 26,700 enterprises no longer operating from their registered address and nearly eight million workers having lost their jobs or being on reduced hours.

The worst hit sectors have been tourism and hospitality, transportation, logistics, and garments and footwear. International visitor arrivals have the worst numbers, down 61.6 per cent on-year in the first seven months and with little hope of recovery this year. With the exception of garments and footwear many export industries have held up relatively well, particularly smartphones and electronics, which have benefited from the new world order of working from home.

In the first seven months of 2020, Vietnam recorded a trade surplus of $6.5 billion with exports increasing 0.2 per cent on-year, to $145.8 billion, whilst imports for the corresponding period fell 2.9 per cent to $139.3 billion. Foreign direct investment (FDI) in the first seven months of 2020 hit $18.8 billion of newly-registered, newly-added, and stake acquisition.

Now we are faced with a new outbreak, which is mostly concentrated in the central region and Danang in particular. While it is too soon to be able to evaluate the extent of the impact, we know that there will certainly be some negative fall-out.

We already see a significant decline in domestic travel. Locations close to Ho Chi Minh City and Hanoi, which were seeing high levels of weekend visitors, for example saw a fall of 50 per cent in average occupancy from one week to the next. And when the outbreak occurred, air travel was also severely hit. Bars have closed and restaurants are having to revert to social distancing measures, but there is now a reluctance of people to dine out and shopping malls are again sparsely populated.

The worst-case scenario would of course be a spread broad enough to force a shutdown or partial shut-down of manufacturing industries and infrastructure and construction, which would certainly throw the economy into recession, so companies need to plan for the worst and hope for the best.

Companies need to develop a plan on how to survive with much lower levels of business than pre-pandemic for at least another 6-12 months. To put the situation into perspective, in April during strict social distancing the authorities estimated that 30 million Vietnamese workers or approximately half the labour force were affected through layoffs or reduced hours.

It was also estimated that urban unemployment rose 33 per cent in the second quarter of 2020 compared to a year earlier, whilst income per worker reduced by 5 per cent.

In a recent report the World Bank commented that whilst the economy has been seriously impacted by COVID-19, it remains resilient and is poised to bounce back. However, this was before the latest outbreak. The bank projected that the economy would rebound in the second half of 2020 with a growth rate of 2.8 per cent for the year but with less favourable external conditions the economy would only expand by 1.5 per cent in 2020 and – of greater concern – only 4.5 per cent in 2021.

According to the report, the big challenge that Vietnam is facing is the need to find new drivers for growth in order to consolidate the recovery. The World Bank considers it unlikely that the country’s traditional sources of growth – foreign demand and private consumption – are unlikely to return to pre-crisis levels anytime soon.

The report released recently suggests three complementary measures that the government should act upon to avoid the COVID-19 “economic trap” and return to the former growth trajectory.

Firstly, it should consider removing some of the mobility restrictions on international travel gradually, safely, and carefully to balance with safety concerns, as Vietnam is still dependent on foreign visitors and investments.

Secondly, to accelerate the existing public investment programme, the domestic demand must be enhanced. In fact, July saw a disbursement of public investment of $1.97 billion up 51.8 per cent from July 2019.

Thirdly, the government needs to consider targeted support to the private sector, particularly those hardest hit like tourism and hospitality businesses, as well as export manufacturing companies.