VIETNAM ECONOMY READY FOR STRONG RECOVERY

Vietnam’s GDP growth is forecast at 6.5% in 2022 and 6.7% in 2023 - a rebound made possible by Vietnam’s high COVID-19 vaccination coverage, the shift to a more flexible approach to controlling the pandemic, continued trade expansion, and the government's economic recovery and development program (ERDP).

This is the statement by the Asian Development Bank (ADB) in its Asian Development Outlook (ADO) 2022 recently released in Hanoi.

Many driving forces for economic development

The renewed COVID-19 outbreak hindered Vietnam’s economic recovery, tightened the labor market, and disrupted manufacturing and supply chains in 2021, said ADB Country Director for Vietnam Andrew Jeffries. The high vaccination rate enabled the government to abandon harsh containment measures. This timely shift of the pandemic containment strategy helped restore economic activity and reduce bottlenecks in the business environment.

Mr. Nguyen Minh Cuong, Chief Country Economist of the ADB in Vietnam, expected a recovery in the labor market, along with monetary and fiscal stimulus measures of the government’s economic recovery and development program, which will spur industrial growth by a forecast 9.5% in 2022. Agriculture output is forecast to grow 3.5% this year on revived domestic demand and rising global commodity prices.

In addition, the re-opening of international tourism in mid-March and the lifting of pandemic controls are expected to boost services, with the sector forecast to grow by 5.5% this year. Accelerated public investment disbursements will drive construction and related economic activities. In addition to the economic revival and the uncertainty of global oil prices, inflation is expected to accelerate to 3.8% in 2022 and 4% in 2023.

Improved coordination between the central and local levels of government and restored labor mobility will increase domestic and foreign investor confidence in Vietnam’s recovery. The Regional Comprehensive Economic Partnership (RCEP), which came into effect on January 1, 2022, is expected to accelerate trade recovery once the COVID-19 pandemic passes by, forming stable and long-term export markets for Vietnam.

However, ADB also forecast that Vietnam’s recovery is clouded by major near-term downside risks. High COVID-19 infections since mid-March may 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 will directly affect Vietnam’s external trade and domestic oil prices, which will affect inflation. Moreover, uncertainties in the global financial markets and the withdrawal of monetary and fiscal accommodation by advanced economies would weaken the Vietnamese currency, thus rendering imports costlier and putting additional upward pressure on inflation. By the end of the first quarter of 2022, average inflation had increased to 1.9% from 0.3% in the same quarter of 2021. Inflation is forecast to accelerate to 3.8% in 2022 and 4% in 2023

Besides, slower growth in China would slow Vietnam’s exports and recovery. Rising non-performing loans are another medium-term risk. Adding in the restructured loans that have retained the classification category, Vietnam’s potential gross nonperforming loan ratio is estimated at 8.2% 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.

Policy challenges in ERDP deployment

The government launched two fiscal and monetary support programs, from April 2020 to July 2021, to tackle the economic impact of the COVID-19 pandemic. In response to COVID-19’s resurgence in 2021, the National Assembly, in January 2022, passed a resolution for new monetary and fiscal measures to accelerate the implementation of the ERDP this year and next year. The program’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 VND113 trillion budget (about US$5 billion) for 2022 and 2023. The timely implementation of the infrastructure program 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 subsidization totaling VND40 trillion (US$1.7 billion), a major fiscal component of the ERDP, is expected to spur aggregate demand. But because creditworthiness and capacity recovery 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 COVID-19 pandemic. Another concern is that the interest rate subsidy program could be vulnerable to subsidized loans being misused for other purposes, including investing in risky sectors, such as stocks or property. This happened with a similar program in 2009. To guard against this happening again, clear guidelines and close coordination between concerned agencies will be crucial to strengthen the monitoring of the ERDP’s implementation.

Another critical fiscal component of the ERDP is a 2% value-added tax (VAT) reduction for products and services in 2022, currently subject to a 10% VAT rate. The total value of the tax cut is approximately VND49 trillion (US$2.1 billion). The VAT reduction could generate substantial pass-through and broad-based impacts if successfully implemented. But the eligibility criteria and procedures are complicated and could limit the access of firms to the VAT reduction. Therefore, ADB believed that clearer eligibility criteria and procedures are needed to support a speedy implementation of the VAT reduction policy.

Source: VCCI