Steadying the economic ship

Despite numerous challenges making dents in all trade and investment activities, Vietnam’s economic growth quality has seen significant improvements over the past five years in general,

 eliciting praise from the National Assembly Standing Committee and high-profile international organisations.

Steadying the economic ship
Labour productivity rates in Vietnam increased 6.2 per cent on-year in 2019. Photo: VIR

Moody’s Investors Service on March 18 reaffirmed the Vietnamese government’s long-term issuer and senior unsecured ratings at Ba3 and changed the outlook to positive from negative.

The drivers of the positive outlook include signs of improvements in fiscal strength and potential improvements in economic strength that may strengthen Vietnam’s credit profile over time. Sustained fiscal consolidation has led to improvements in fiscal and debt metrics, which Moody’s expects to be only briefly interrupted by the pandemic.

Moreover, Vietnam’s economic strength may benefit from global shifts in production, trade and consumption following the coronavirus pandemic and support Vietnam’s economy. Over time, indications of higher fiscal and economic strength may point to improving policy effectiveness, also putting upward pressure on Vietnam’s credit profile.

Meanwhile, Moody’s has determined that the drivers of the previous negative outlook assigned in December 2019 have receded. The negative outlook, which followed a review for downgrade, related to the risks posed to Vietnam’s credit profile from administrative failures leading to payment delays on government guaranteed debt. In Moody’s assessment, the government has enhanced administrative scrutiny on forthcoming payments.

The affirmation of the Ba3 rating is underpinned by ongoing credit strengths and weaknesses, including a large, diversified economy with high growth potential offering resilience to shocks, and increasing capacity in the domestic financial system to finance government borrowing at low costs. At the same time, ongoing risks stem from persistent governance weaknesses related to the lack of transparency of the management of state-owned enterprises and lingering risks in the banking system. Source: Moody’s Investors Service

About two weeks ago Standard Chartered Bank hosted an investment webinar on Vietnam’s Investment Landscape for 2021, drawing the participation of clients based in Vietnam and overseas who are seeking opportunities in the country.

The presentations focused on giving clients the latest information about the investment landscape in real estate, stocks, fixed-income, and funds in Vietnam in the context of a post-pandemic era and the strategies they can devise to capitalise on the prospects.

“Standard Chartered Global Research forecasts that Vietnam’s economic growth will get back to 6-8 per cent in 2021 and onwards. Given its economic prospects, advantages of social stability, and success in managing the pandemic along with profitability of the local stock market and real estate market, which is growing at a higher pace than that of ASEAN, Vietnam continues to offer exciting investment opportunities,” said Harmander Mahal – consumer, private, and business banking head for Vietnam and Asia Cluster Markets at Standard Chartered Bank.

The bank’s acknowledgement of Vietnam’s economic prospects and attractive investment climate is not irrational as since 2016 the economy has been weathering numerous difficulties to reap impressive growth achievements, with growth quality increasingly improved and a rise in investors’ confidence like Standard Chartered.

The 11th session of the 14th National Assembly, scheduled to be wrapped up on April 8, officially will elect the new state president, vice president, prime minister, deputy prime ministers, chair of the National Assembly, deputy chairs of the National Assembly, members of the cabinet, chief justice of the Supreme People’s Court of Vietnam, and prosecutor general of the Supreme People’s Procuracy.

At this session, the National Assembly will use half of a day to consider and approve the revised Law on Preventing and Fighting Drugs.

Deputies will also discuss the report on the NA’s 14th term and summary reports of the state president, government, National Assembly Standing Committee, Ethnic Council, the National Assembly’s Committees, Supreme People’s Court, Supreme People’s Procuracy, and State Audit of Vietnam.

Striking attainments

In the last government tenure (2016-2020), the Vietnamese boat has been riding out economic storms and since early 2020, COVID-19 has been sabotaging the global economy with aftermaths yet to be calculated.

“In the last tenure and amid the ongoing pandemic, the government and the prime minister have taken timely solutions to remove difficulties for domestic production and business, boosting public investment, ensuring social security and order, and recovering the economy in the new normal,” Prime Minister Nguyen Xuan Phuc told the National Assembly (NA) last week.

Vietnam’s GDP in 2020 increased 2.91 per cent, making it the sole economy amongst Southeast Asia’s six largest economies with positive growth.

Vietnam’s average annual growth in the 2016-2019 period hit 6.8 per cent, higher than the 5.91 per cent of the 2011-2015 period, belonging to the world’s group of nations with the highest economic growth.

“Thanks to accumulated incomes and significant improvements in the fiscal space, especially during 2016-2019, great contributions have been made to helping the whole economy and the public to weather difficulties caused by the pandemic,” PM Phuc said. “According to many international rating organisations, Vietnam’s rank has been on the rise. On March 18, Moody’s raised Vietnam’s economic outlook to ‘positive’ from ‘negative’ (see box 1). This shows that Vietnam has a solid foundation for further growth which continues being improved even during COVID-19.”

Vietnam has taken advantage of new-generation free trade agreements to develop export markets and partner networks. Its total export-import has risen by seven times, from $328 billion in 2015 to $545 billion in 2020, with five consecutive years of increased trade surplus.

Analysis from the Ministry of Planning and Investment (MPI) showed that the economy’s growth quality has significantly improved over the past few years. Specifically, the industrial-construction sector and the service sector are occupying over 76 per cent of GDP, and creating 95 per cent of the economy’s growth in 2019.

Meanwhile the ratio of the total-factor productivity (TFP) in the economy’s growth rose from 33.6 per cent on average in the 2011-2015 to 44.5 per cent on average in the 2016-2019 period, exceeding the strategic goal of 35 per cent earlier set for the 2011-2030 period. This has helped the economy improve its competitiveness.

“Science and technology have been playing a very important role in the economy’s growth,” said MPI Minister Nguyen Chi Dung.

 

The economy’s productivity was calculated at $4,790 per labourer in 2019, up by $272 against 2018, while labour productivity increased 6.2 per cent on-year in 2019.

Moreover, the economy’s incremental capital output ratio (ICOR), which is the additional capital required to increase one unit of output, has also clearly improved. The ICOR was 6.25 in the 2011-2015 period to 6.14 in the 2016-2019 period. In 2020, due to COVID-19, the ICOR rose to 14.28, leading to an average ICOR of 7.04 in the 2016-2020 period. 

Major praise

The NA Standing Committee has praised the great efforts, responsibility of, and impressive achievements created by the government in the 2016-2021 tenure.

“Amid difficulties, the government has increasingly renewed itself, with strong reforms which have accomplished all goals and duties set out in resolutions of the Party and the NA, making important contributions to the national socioeconomic achievements,” said a committee statement on assessing the work of the government in the 2011-2016 tenure.

Global analysts FocusEconomics last week told VIR that it highly values the government’s efforts to drive the economy forward.

“Economy activity has likely gained further momentum in the first quarter of the year. Vaccination of frontline workers began in early March, although difficulty in sourcing sufficient doses could hamper the campaign to vaccinate the wider population,” the analysts said.

“This year, economic activity is forecast to accelerate rapidly, with growth set to outstrip regional peers on improving domestic and foreign demand dynamics. Our panelists expect GDP to expand 7.4 per cent in 2021, and 6.9 per cent in 2022.”

Fitch Solutions under global rating firm Fitch Group also told VIR that one of the key drivers for Vietnam’s economic growth in 2021 will be a climb in public investment initiated by the government and foreign direct investment.

“In 2021, we forecast state budget expenditures to grow by 16.6 per cent as a rebound of economic activity as well as government exorts to expedite public capital expenditure should drive rapid growth in expenditures,” said the statement. “We forecast real GDP growth to recover to 8.2 per cent in 2021, from 2.91 per cent in 2020, although we do flag some downside risks to our 2021 forecast from persisting economic challenges brought about by the pandemic.”

Meanwhile, the World Bank attributes Vietnam’s good economic performance to the government’s good management and resilience of both its domestic economy and external sector.

“Beyond the containment of the pandemic by bold, early, and innovative measures, the government has also used its fiscal and monetary policies to provide breathing space to the private sector and jumpstart the recovery. For example, public spending started rising again after three years of fiscal consolidation. The first nine months of 2020 saw a 40 per cent year-on-year increase in the disbursement of the public investment program,” said a World Bank report recently released. “Looking ahead, Vietnam’s prospects appear positive as the economy is projected to grow by about 6.8 percent in 2021 and, thereafter, stabilise at around 6.5 per cent.”

A few weeks ago, Standard Chartered also released its fresh forecast for Vietnam’s 2021 GDP growth, saying that with its bright economic outlook, Vietnam’s GDP growth will largely come from manufacturing and help the country outperform the rest of Asia.

“The economy emerged from the worst of the downturn in the third quarter of 2020, and we think recovery remains intact. Vietnam has been one of the best-performing economies for the past decade, and we expect this to continue,” said Tim Leelahaphan, Standard Chartered economist for Thailand and Vietnam.

VIR

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