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[ASEAN ISSUE #4] Effect of COVID-19 on Vietnam’s Economy and Future Prospects

2020.4.24.

Effect of COVID-19 on Vietnam’s Economy and Future Prospects

 

Vietnam, one of the key partners under the New Southern Policy of the Republic of Korea is also the country with most exchanges with Korea among the 10 ASEAN Member States. In fact, Vietnam makes up the largest share of trade (40%), investment (47%) and people-to-people exchanges (35%) in ASEAN-Korea relations. Last year, the two recorded 62 billion USD in trade volume, 4.5 billion USD in FDI to Vietnam and 4.85 million in reciprocal visits. More than 6,000 Korean companies have branched out to Vietnam, and over 200,000 Vietnamese, including 50,000 workers, are actively engaged in economic activities here in Korea.

 

In view of the close economic relationship between the two countries, this week, the ASEAN Issue will focus on the impact of COVID-19 on Vietnam’s economy and some of the efforts launched by its government in response.

 

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While Vietnam may not be a country equipped with state-of-the-art healthcare system, nevertheless the country has, so far, been relatively successful in containing the corona virus, in part, by adopting strong preventive measures. However, even the most successful preventive measures have been unable to stop the negative effects of COVID-19 on the economy. In fact, the very measures that are trying to stop the spread of the virus-such as movement restrictions and border control-are also crippling the economy. Perhaps that is why the Vietnamese government recently decided to make exceptions to the entry of employees of some of the major Korean investors such as Samsung and LG. Because without the companies in motion, the Vietnamese economy could be significantly affected. As such, the Vietnamese government, as many others in the region and the world, is struggling to strike the right balance between safeguarding the health of its people and preventing a free-fall of its economy.

 

■ Vietnam’s Economy Faring Relative Well amid COVID-19 Crisis

 

Vietnam estimated its economy to grow 3.82% in the first quarter of 2020. This, of course, is a significant drop from last year’s growth rate of 6.8% and would be the worst performance since 2009. But in comparison with some of the other countries that are expected to record negative growth, Vietnam’s economy appears to be faring relatively well. However, conditions may be worse on the ground because those who are hardest hit by the pandemic, the mom-and-pop stores, including small restaurants and beauty shops, are usually not included in the statistics.

 

As a matter of fact, 35,000 businesses closed in the first quarter of 2020. According to a recent survey by JETRO and the Japanese Chamber of Commerce and Industry in Hanoi that asked 1,000 Japanese companies operating in Vietnam, 60% of the respondents experienced 10 to 50 percent decrease in their sales in March. More than 70% of the respondents expected even greater blow in the coming months. 36% of the respondents foresaw a 20% to 40% decrease in annual sales while 5% of the more pessimistic respondents were concerned that sales will fall more than 50%.

 

In its March report, The Economic Impact of the COVID-19 Outbreak on Developing Asia, the Asian Development Bank (ADB) estimated 0.41% decline in Vietnam’s GDP as a result of the COVID-19. The report concluded that Vietnam’s economy too would be affected by the pandemic as domestic consumption in China and other countries declines, investments slow down, and traveling comes to a halt. Spill-over effects into other areas will further complicate the economy as supply disruptions undermine production lines and global trade.

 

However, in a subsequent report released on April 3rd entitled Asian Development Outlook 2020, the ADB took a more positive tone. The bank concluded that based on the resilience of the fundamentals of Vietnam’s economy, the country could grow by 4.8% this year - highest among the ten ASEAN member states. If the pandemic is successfully controlled within the first half of 2020, then, according to the report, Vietnam’s economy will bounce back in 2021 with a 6.8% growth rate.

 

■ And Yet, Vietnam’s Domestic Institute Predicts Negative Growth

 

Contrary to ADB’s outlook however, Vietnam’s internal assessment is not as positive. The Vietnam Institute for Economic and Policy Research (VEPR) recently released three possible scenarios for the country’s post-COVID-19 economy.

 

The first scenario assumes normalization of economic activities by the end of the second quarter of 2020. In view of the current situation, this assumption does not look very likely. Nevertheless, in this case, agriculture, forestry and fisheries sectors will see 2-3% decline in growth and the mining industry will also be negatively impacted. The service sector-transportation, warehousing, accommodation, catering service, arts and entertainment-will be more severely affected with 20-50% decline in growth. Others in the service sector such as health services, media and financial institutions (banks, insurance companies) are expected to fare comparatively better. The manufacturing sector would be normalized by the third quarter and overall Vietnam would be able to achieve 4.2 positive growth in 2020. In other words, even under the best of scenarios, VEPR estimated a lower growth rate for Vietnam than ADB.

 

The second scenario presumed continuation of the COVID-19 situation until the end of August in which case normalization of economic activity would be possible only by the end of the year. In this case, Vietnam would record negative growth for the second and third quarters, -4.9% and -1.1% respectively, but still an overall positive growth of 1.5% for the entire year.

 

The third scenario saw the virus being contained by end of November and the economy starting to recover from the middle of the fourth quarter of 2020. In this case, Vietnam’s economy will be making a huge dip with growth rates dropping down to -5.1% and -5.3% for the second and third quarters respectively. The country, under this scenario, will end the year with an overall -1% growth rate.

 

Based on these analyses, the VEPR argued that the government will need to create the best possible environment, with tailor-made benefits, in order to minimize the shock for the companies. For example, those businesses that have been affected, but are still operating, should be allowed extensions or exemptions regarding payments for social insurance, land lease, interest on loans, VAT and corporate income tax (CIT) among others. Preferential loans should be considered for the more viable business projects likely to survive the pandemic. Furthermore, those companies that have made successful transitions and are now producing protective masks for export should be given incentives to increase production.

 

VinaCapital (Economist’s Note / April 6th) also modified its outlook on Vietnam’s economic growth for 2020-from 7% to 4%-and argued that the containment policy was having an adverse effect on the country’s economy. Specifically, the report calculated 1.5%p decrease from 50% reduction in tourists, 1%p decrease from slowdown in manufacturing, and 0.5%p decrease from contraction in domestic consumption. The report saw growth dropping with 3.8% in the first quarter, hitting bottom with 0% in the second quarter, then beginning to recover with 5% growth in the third quarter and returning to normal by the fourth quarter with a 7% growth.

 

■ Timely and Effective Response by the Vietnamese Government

 

The Vietnamese government is responding quickly to minimize the impact of COVID-19 on its economy. In February 2020, the Central Bank of Vietnam asked the commercial banks to lower their interest rates, after lowering its own interest rate by 0.5-1%p and abolishing all transaction fees. Subsequently, commercial banks announced plans for a 12.4 billion USD financial support package for companies that are affected by the pandemic. Specifically, the HDBank reduced its transaction fees by 50%, lowered interest rate on loans, discounted fees for letter of guarantee for those companies supplying medical devices and medicines. The ABBank also announced plans for a loan package worth 172 million USD.

 

Following these measures, the Vietnamese government announced Directive 11 on March 4th. The Directive laid down guidelines for ▲extension of social insurance payments, ▲exemption of fees and charges imposed by the local governments to those businesses affected by COVID-19, ▲prohibition of price increases on raw materials during the first two quarters of 2020, ▲management of the supply of raw materials by the Ministry of Industry and Trade, ▲support for vocational training and for those who have lost their jobs, and ▲the course of action regarding foreign workers in Vietnam.

 

And on April 8th, the government announced more detailed support measures via Decree 41. They included five-month extension of deadlines for VAT, CIT, and land-lease payments. In sum, the measures come up to a 1.16 billion USD worth of relief that is expected to benefit over 700,000 enterprises. The government also extended payment deadlines for VAT and income tax to individuals and business owners to December 31st. In sum, the Vietnamese government appears to have adopted all possible policy measures, except for emergency relief grants to individuals.

 

■ Resolving Supply and Demand Issues will be the Key

 

While the government’s countermeasures seem to be effective in some aspects, we still need to wait and see how they can offset the widespread impact of COVID-19. The reason being that disruptions are occurring on both sides of the supply and demand curve.

 

 

First, market conditions of US and Europe, major export destinations for Vietnam, are quickly deteriorating. According to CEL Consulting based in Ho Chi Minh City, Vietnam’s exports declined 70% since the outbreak of COVID-19, due to sharp decreases in consumption of clothing, shoes, mobile phones, home appliances, automobiles, tools, etc. in importing countries including the US. As orders from the US and Europe are canceled, the total volume of export has dropped dramatically. Should this trend continue, the Vietnamese export freight forwarding industry estimates Vietnam’s export in the first quarter to be reduced by more than 20%.

 

 

In terms of supply, Vietnam is highly dependent on China for raw materials. According to a CEL survey conducted in March, 83% of companies in the supply chain, such as retailers, forwarders, traders, and manufacturers, have experienced supply interruptions in the past two months. Of these, 47% had problems with suppliers from China. In addition, Vietnam’s long geographical feature, which is vulnerable to the current suspension of air and rail transport, led the country to depend solely on road transport. The country is now even facing delay and setback in supply due to the lack of long-haul trucks.

 

CEL's survey also found that if, in the longer term, countries seek to re-localize the current global supply chain, Vietnam’s goals be become a global manufacturing hub could be severely undermined. If consumers in developed countries become more sensitive to health and environmental factors and preferences for locally manufactured products increase, these countries will reduce dependence on overseas supplies and begin to re-build their own local supply chain. In fact, a survey done in April indicated that 84% of French citizens wanted less imports from Asia and more local products.

 

There are contrary views as well. As COVID-19 and the US-China trade war accelerates relocation of production facilities to Southeast Asia, many argue that Vietnam will emerge as a popular destination for investors and manufacturers.

 

According to Jones Lang LaSalle (JLL), a global real estate consulting firm, multinational manufacturers have relocated their production facilities to Vietnam in the past two years to avoid US tariff imposed on Chinese products. This is also evidenced in the U.S. Census Bureau statistics which show that in 2019 the U.S. imports from Vietnam increased by 35.6%, while imports from China decreased by 16.2%. While the numbers may be slightly distorted this year due to the virus-induced disruptions in the global supply chain, the trend of relocation of production facilities from China to Southeast Asia is expected to continue in the long term.

 

According to this view, Vietnam will be a preferred region for global manufacturers because of its proximity to China, its FTA networks, and the government’s enthusiasm for becoming a manufacturing hub in Southeast Asia. While many relocation projects have been postponed due to the virus outbreak, the general view is that once the health crisis is subdued, relocation efforts will resume. VinaCapital also claims that the ultimate victor of COVID-19 will be Vietnam. The disruption in the global supply chain caused by COVID-19 is causing multinational companies to diversify the location of their production facilities and many will likely move to Vietnam. The future will tell whether Vietnam, by successfully defending the health of its people and the economy, will be able to have its cake and eat it too!

 

vReferences

 

참고자료ASEAN Development Outloolk 2020, ADBEconomist’s Note, VinaCapital(2020.4.6.)

 

신문기사: Supply chains in Viet Nam disrupted by COVID-19, Vietnam News (2020.4.8.)VEPR examines scenarios for economic growth during COVID-19 outbreak, Vietnam News (2020.4.14.)70 pct of Japanese firms in Vietnam face revenue losses due to pandemic, VN Express International (2020.4.17.)VN remains attractive destination to investors and manufacturers, Vietnam News (2020.4.20.)

 

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