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VEPR forecast two scenarios for Vietnam’s GDP growth in 2021

The most recent resurgence of COVID-19 has been brought under control in short order, with no new breakout expected for the best part of this year. Thanks to that, domestic economic activities will continue to recover and comply with the new normal of the global economy, where sporadic, small-scale resurgences are expected by the VEPR.

Consequently, the impact of COVID-19 will be felt less serious across economic sectors than in 2020, resulting in an estimated GDP growth rate of 5.6-5.8 per cent.

However, under a more pessimistic scenario, the local economy will see larger disruptions by the health crisis, resulting in slower economic growth of 1.8-2 per cent. The scenario includes continued travel restrictions and prolonged difficulties for catering and accommodation services.

The VEPR’s policy recommendations warned Vietnam not to follow other nations’ macro policies such as loosening monetary policy to mitigate prolonged budgetary deficits. Furthermore, preventing COVID-19 and ensuring social welfare are also setting a burden on national budgets.

However, the current priority should remain to assure social security, stabilise the business climate, lessen the pressure on businesses which have temporarily halted operations, and support those that are still operational.

In particular, social security policies should provide more support for labourers working in the informal sector because this group makes up a sizeable portion of the population and are more vulnerable to the crisis, while also having the hardest time accessing welfare packages.

The Hanoitimes – An expert suggested local authorities take the pro-active approach to review and streamline the approval process for foreign-invested projects in order to attract the next FDI wave.

A stronger push for the administrative reform, among other solutions, would help Vietnam achieve a 5% GDP growth rate for this year, significantly higher than the 2.7% estimation of the International Monetary Fund (IMF) for Vietnam, according to Mai Tien Dung, minister-chairman of the Government Office.

Overview of the conference. Photo: VGP.

“The government is moving towards digital transformation with paperless office,” Dung informed at a conference discussing measures to help the business community recover from the Covid-19 pandemic on May 26.

Dung noted the national public service portal, after being launched five months ago, has so far integrated 408 public online services, of which 170 are for citizens and 238 for enterprises.

According to Dung, the portal has received 39 million visitors, 150,000 registered accounts and nearly 8.5 million documents have been processed.

Minister of the Governmetn Office Mai Tien Dung expected administrative reform to help Vietnam achieve the 5%-GDP growth target. Photo: VGP.

Since May 12, the portal has been integrated with six additional public services to better support people and the business community, Dung added.

“Public online services are estimated to save nearly 18 milion working days per year,  equivalent to VND6.49 trillion (US$298 million),” Dung stressed.

Economist Can Van Luc backed Dung’s view that a 5% GDP growth target is feasible, for which one of the main pillars is administrative reform.

According to Luc, such a reform would help free up the resources of people and businesses from complying with unnecessary procedures, while creating a healthy and efficient business environment

Moreover, a stronger administrative reform could reduce the state’s overseeing costs as well as compliance costs of people and businesses, Luc said, adding there are also opportunity costs, or expenses arising from the asking-approving mechanism that could be significantly reduced thanks to the efforts.

Fred Burke, a representative of the American Chamber of Commerce (AmCham), urged the government to continue building a robust online application system.

Burke expected the authorities to take the pro-active approach to review and streamline the approval process for foreign-invested projects in order to attract the next FDI wave into Vietnam.

He raised the issue that major shources of FDI such as the US, UK, EU, Japan, Singapore, Hong Kong, are still under lockdown, and obtaining legalized documents and wet signatures from these countries have become a challenge. As a result, this has delayed submissions in Vietnam for two months on average.

While this is not Vietnam’s problem, it has become a huge problem for foreign investors and foreign invested companies in Vietnam due to the fact that Vietnamese administrative authorities are not flexible to waive or simplify these administrative formalities, Burke added.

In addition to that, different authorities responsible for various aspects of the licensing procedures do not have a sufficient central database or a streamlined method for communication among them. The authorities still communicate with each other through post services, and physical mail exchange between provinces can take up to one to two weeks during the Covid-19 pandemic.

Last but not least, the provincial administrative authorities have adopted the approach of obtaining in-principle written approvals from various ministries prior to granting Investment License, which can prolong approval for a project to four to six months, or even longer, Burke asserted.

The Hanoitimes – The top priority at this time is ensuring social security, keeping the macroeconomic environment stable, and supporting businesses that are still in operation.

In case the Covid-19 pandemic is put under control and the global economy returns to its recovery trend, Vietnam’s economic growth in 2021 could be in range of 5.6-5.8%, lower than the government’s target of 6.5%.

Production of VSmart ventilators by Vingroup at Hoa Lac hi-tech park. Photo: Thanh Hai.

Vietnam Institute for Economic and Policy Research (VEPR) made the forecast in its latest Vietnam macro-economic report.

“However, in a less likely scenario, when the spread of new Covid-19 variant turns more serious, domestic economic activities could be disrupted and keep the GDP growth even at a lower rate compared to last year,” warned the VEPR.

Under a second scenario, the hospitality and catering services remain the hardest-hit sector without the return of foreign tourists and domestic demands are limited due to Covid-19 restriction.

The business community, especially the private sector, would see their resilience against Covid-19 weakened as the pandemic stays for the second year. In this circumstance, public investment would continue to be the main force for growth, and keep the GDP growth at 1.8-2%, 0.91 percentage points lower than the growth rate from last year.

Future risks

A GDP growth of 2.91% year-on-year in 2020 put Vietnam among best performing economies, mainly thanks to the government’s effective measures against the pandemic; the signing of new trade agreements (EVFTA, RCEP, UKVFTA); waves of investment movement to disperse risks from US-China trade war and take advantage of investment incentives in Vietnam; and a stable macroeconomic environment with moderate inflation, creating good conditions for the implementation of growth support policies.

However, Vietnam is also facing many risks and challenges in an unstable world economic environment, said the VEPR.

The recurrence of Covid-19 in many countries is accompanied by blockade measures could extend the disruption of the supply chain in 2021, it added, while geopolitical conflicts between large countries can put an open economy like Vietnam into a disadvantage situation.

Besides, the weakness of Vietnam’s economy also comes from internal issues such as high fiscal deficit, low development investment budget; the insufficiently improved health of the banking – financial system; the heavy dependence of growth on the FDI sector; low labor quality; and the stagnated privatization process of SOEs.

Keeping macroeconomic stability stays key

From the beginning of the year to the end of September 2020, the SBV has three times lowered interest rate, the moves which have encouraged commercial banks to provide cheaper loans.

Besides, the VND250 trillion (US$11 billion) credit support package is still being deployed by commercial banks.

“However, the room remained limited to Vietnam to maneuver its policies to such extend for this year, resulting in limited impacts on economic development and protection of social welfare,” stated VEPR’s report.

Due to limited fiscal resources after years of budget deficit, coupled with monetary policy bound to inflation and exchange rate targets, Vietnam cannot pursue macro policies in a similar manner to other countries in the world, namely a large-scale monetary easing, stated the VEPR.

In addition, the Covid-19 pandemic prevention and social security subsidies are also putting great pressure on the state budget.

“The top priority at this time is ensuring social security, keeping the macroeconomic environment stable, and supporting businesses that are still in operation,” suggested the VEPR.

Social security policies still need to be a top priority and need to be implemented quickly, towards the right people, it urged. In particular, the policy implementation needs to pay more attention to workers in the informal sector, those are severely affected by the pandemic and faces many difficulties to access supportive policies.

Meanwhile, the policies to support businesses also need to continue to be quickly implemented, well-targeted to the right subject, closely following the needs of businesses.

The freezing/suspension, exemption or reduction of financial costs for businesses such as loan interest, land rental should continue to be implemented, besides, it is necessary reduce all possible burdens for businesses, said the VEPR.

Even if the pandemic is fully under control domestically, many export-oriented manufacturing and services sectors may face long-term difficulties as Covid-19 has not completely been contained worldwide.

“Therefore, promoting public investment should remain a key measure to support economic growth,” said the report.

In all situations, inflation, interest rates, and exchange rates need to be maintained stably, securing the foundation for economic recovery after the pandemic.

The VEPR suggested the necessity to diversify export/import markets to avoid heavy dependence on some major economic partners.

As Vietnam is looking to move on from the pandemic, VEPR suggested the country should gradually build a fiscal buffer to prevent future shocks.

The Hanoitimes – Manufacturing could be the main driving force that helps Vietnam to become one of the fastest growing economies in Asia in 2021.

Vietnam’s GDP growth is set for a strong rebound to 7.8% in 2021 from last year’s economic growth of 2.9%, according to Standard Chartered.

A garment factory at Dong Anh district. Photo: Chien Cong

Manufacturing could be the main driving force that helps Vietnam to become one of the fastest growing economies in Asia in 2021, stated the UK-based bank in a report.

Standard Chartered’s Economist Tim Leelahaphan suggested the country’s economy had been on the recovery path since the third quarter of last year, saying he expected the trend would continue in the coming time.

Meanwhile, high growth in services and public investment could serve as a boost for the economy, noted the bank.

According to the Standard Chartered, thanks to a series of effective measures against the Covid-19 pandemic, Vietnam has become more attractive in the eyes of investors as an ideal investment destination globally.

In the immediate future, Vietnam would continue to benefit from the US – China trade and technological tension, which is expected to linger under the Joe Biden’s administration. Under this context, the slow recovery of global demand and cautious sentiment from investors could weigh on the FDI inflows.

However, Standard Chartered stated the foreign capital inflow into Vietnam would remain positive in 2021.

Higher competitiveness is seen as a factor forcing Vietnamese firms enhance product quality and efficiency in their respective supply chains, as the country aims to become a hi-tech production hub.

However, this would require significant improvements in productivity, education, and technology transfer, added the bank.

Standard Chartered’s report also referred to the Regional Comprehensive Economic Partnership (RCEP) as an opportunity for small and medium firms in Vietnam to further integrate into global value chains.

Companies in China, South Korea and Japan could seek to cut production cost by moving part of their production chains to countries in ASEAN with lower labor costs, asserted the bank.

HSBC’s forecast for Vietnam growth this year is in line with that of HSBC at 7.6%, but higher than the Asian Development Bank (6.1%), and International Monetary Fund (6.5%).

Among local research centers, the Central Institute for Economic Management (CIEM) and the National Center for Socio-Economic Information and Forecast (NCIF) gave their respective predictions of 6.46% and 6.72%.

The government aims for an economic growth of 6.5% for 2021, 0.5 percentage points higher than the target set by the National Assembly.