COVID-19 outbreak to accelerate relocation wave from China to Vietnam

While COVID-19 will have a negative impact on Vietnam's economic growth in 2020, it will boost the relocation of manufacturing facilities from China to Vietnam.

covid 19 outbreak to accelerate relocation wave from china to vietnam

Despite a negative impact on the economy, VinaCapital foresees COVID-19 will boost the relocation of manufacturing facilities from China to Vietnam

Specifically, COVID-19 will have a negative impact on Vietnam's economic growth in 2020 due to the blow it has dealt to the tourism sector (circa 12 per cent of GDP), and the manufacturing sector (circa 20 per cent of GDP).

That said, the epidemic – much like the trade war – will ultimately be a powerful catalyst for the migration of factories from China to Vietnam, and a Moody’s report published last week predicts that this will ultimately boost Vietnam's annual GDP growth by 2 percentage points.

In addition, the negative impact of COVID-19 on Vietnam's stock market will be tempered by massive liquidity injections by the world's central banks. Recall that in 2017, the European Central Bank’s $1 trillion of quantitative easing in the lead-up to the French and Italian elections (in addition to $1 trillion from the rest of the world’s major central banks) helped drive a near 50 per cent increase in the VN-Index because about half of the ECB’s newly printed money left Europe, and much of it flowed into frontier and emerging market stock markets.

VinCapital’s experts believe the Vietnamese government can easily offset some of COVID-19’s economic impacts on the country by ramping up infrastructure spending which is essential for the country’s long-term economic growth. This type of spending would provide an immediate boost to the economy, although it has been moribund for the last 1-2 years due to certain endogenous issues.

With regards to the eventual benefit of COVID-19 to Vietnam, the report pointed out that much has been made over the last year about the fact that the US-China trade war is prompting companies to move their factories from China to Vietnam.

We believe that once COVID-19 concerns subside (most likely in the second quarter of 2020), it will serve as an even more powerful catalyst than the trade war in prompting companies to move their factories to Vietnam, because of the stronger psychological impact that supply chains will have on corporate executives.

In the case of the trade war, the imposition of tariffs has forced corporate executives to make assessments about how much of the costs attributable to the new tariffs can be passed on to the end consumers of their products, how much suppliers can be asked to cut the prices of inputs they supply to the firm, and how much profit the firm itself will ultimately need to sacrifice because of tariffs.

 

That is a painful decision, but not as agonising as companies not being able to source sufficient inputs to actually produce their products. Last week, Apple Inc., which is arguably one of the best-run companies in the world, essentially guided that it does not know when it will be able to ramp up the full production of its products again.

Our view – that while COVID-19 will cause significant economic impact in Vietnam this year, it will ultimately be beneficial to the country's economic development – is not widespread yet. Investors, policymakers, and local businesspeople are currently (and understandably!) focused on the immediate impact of this medical outbreak.

However, there are some signs that others are starting to take notice of this possible outcome. Two weeks ago, a senior fellow at the influential Milken Institute commented that the crisis will “underscore to all of China's trading partners the value of diversification away from China”, and he went on to say that COVID-19 is speeding up the dismantling of US firms’ sourcing from China even faster than the trade war did.

Finally, we mentioned that Moody's expects a 2 percentage point boost to Vietnam's annual GDP growth rate, which is attributable to firms moving their factories from China to Vietnam, prompted by both the trade war and the COVID-19 outbreak, although the analyst who authored the report acknowledged that it is not clear how long it will take for enough factories to move from China to Vietnam in order to make that significant boost to Vietnam's annual economic growth. VIR

This writing is a collection of excerpts from a report by VinaCapital, written by Michael Kokalari and Huyen Tran

* Michael Kokalari is CFA Chief Economist and Huyen Tran is research manager at VinaCapital

 
 

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