Economy expected to top ASEAN until next year

Thursday, 2021-07-22 12:13:26
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Despite massive lingering risks caused by the health crisis, the Vietnamese economy is projected to see highest growth in the region until 2022
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NDO - The ongoing COVID-19 pandemic, which is becoming increasingly complex, is expected to continue creating a grey economic picture in the region. However, Vietnam is still believed to be a leader in regional economic growth, despite some risks remaining.

The Asian Development Bank (ADB) has just lowered Vietnam's economic growth projection for this year from 6.7% in April 2021 to 5.8% its freshly-released Asian Development Outlook (ADO) 2021 Supplement: Renewed Outbreaks and Divergent Recoveries.

However, such a figure is still higher than the average growth forecast of the whole Southeast Asian region (4%), including Indonesia (4.1%), Malaysia (5.5%), the Philippines (4.5%), Singapore (6.3%), Thailand (2%).

The GDP growth in Vietnam accelerated from 1.81% in the first half of 2020 to 5.64% in the same period this year as global recovery boosted exports, and despite disruption caused by a new wave of COVID-19 starting in late April, according to the ADB.

Mobility restrictions drove the composite Purchasing Managers' Index (PMI) down to 44.1 in June 2021, the lowest reading since May 2020.

Meanwhile, the ADB supposed that vaccination delays and an extended social distancing in the country's largest growth area may restrict mobility and limit economic activity in 2021.

The ADB has forecast that Vietnam's economic growth will climb by 7% in 2022, the highest rate in the region. Next year, the average growth rate of the entire Southeast Asian region is projected to be 5.2%, with Indonesia (5%), Malaysia (5.7%), the Philippines (5.5%), Singapore (4.1%), and Thailand (4.9%).

Standard Chartered also remains bullish over the Vietnamese economy's outlook this year. It continues to expect Vietnam to have strong growth this year and next, with forecast for 2021 at 6.5%, slightly lower than the previous forecast of 6.7%. The bank maintains its 7.3% growth forecast for 2022, continuing to expect a post-COVID economic acceleration. The current COVID outbreak may pose downside risks to the forecast.

"We believe Vietnam is moving towards its goal of becoming a regional supply-chain hub, a modern industrial economy and a high-income country in the future. Vietnam managed the COVID-19 situation well in 2020, further enhancing its appeal to foreign investors. The country has already benefited from the ongoing supply-chain shift in recent years. In the short term, the country's pandemic management will be crucial to the outlook," said Tim Leelahaphan, economist for Thailand and Vietnam at Standard Chartered.

In addition, according to global analysts FocusEconomics' latest forecast, Vietnam's
GDP is projected to grow at the fastest pace in the region this year, with a rebound in domestic activity driven by a strong manufacturing sector and improved foreign demand boosting exports.

"However, the impact of the recent surge in daily COVID-19 cases on the already-subdued tourism sector remains a key downside risk to the outlook. Our panellists expect GDP to expand 6.4% in 2021, which is down 0.5 percentage points from last month's forecast, and 6.9% in 2022," said a report from FocusEconomics sent to Nhan Dan Online.

The report said that Vietnam's GDP growth accelerated in the second quarter of 2021, clocking the fastest rate of expansion since the fourth quarter of 2019.

"The print was once again driven by strong growth in the manufacturing sector, in the most part powered by a continued improvement in foreign demand dynamics, as indicated by surging goods exports," said FocusEconomics.

According to the General Statistics Office (GSO), despite COVID-19, the Vietnamese economy in general has been bouncing back, with year-on-year growth rates of 3.68%, 0.39%, 2.69%, and 4.48% in the first, second, third, and fourth quarters of 2020, respectively. In the first and second quarters of this year, the rate touched 4.48% and 6.61% year-on-year.

In terms of industrial production, after growing 6.29% year-on-year in the first three months of this year, it witnessed positive growth of 11.45% in the second quarter of 2021, compared to only 1.1% in the same period last year.

In the first six months of this year, the rate was 8.91% year-on-year, in which the growth rate of the manufacturing and processing sector - which creates 80% of industrial growth - climbed 11.42%, compared to the 5.06% in the corresponding period of 2020.

Taking caution

Last November, the National Assembly (NA) set an economic growth target of 6 percent for 2021. In January, the government set a target of 6.5 for the entire year.

Despite international organisations' optimism about the Vietnamese economic outlook, the government has reported to the NA two cautious updated scenarios for economic growth in this year, based on the 5.64% growth rate in the first half of 2021, which was 0.58 percent lower than the target set out in the government's Resolution No.01/NQ-CP released on January 1, 2021, on tasks and solutions for implementation of socioeconomic development and state budget estimation in 2021.

Specifically, the government said that in the first scenario, to reach the growth target of 6 per cent for 2021 - which is 0.5 per cent lower than the target set out in Resolution 01, the economy must grow 6.2 per cent in the third quarter - which is 0.5 per cent lower than the target prescribed in Resolution 01, and 6.5 per cent in the fourth quarter - which is 0.2 per cent lower than the target carved in Resolution 01.

In the second scenario, for the economy to climb 6.5 per cent for this year as outlined in Resolution 01, the economy must climb 7 per cent in the third quarter - which is 0.3 per cent higher than the target mentioned in Resolution 01, and 7.5 per cent in the fourth quarter - which is 0.2 per cent lower than the target highlighted in Resolution 01.

These scenarios are expected to be approved by the legislative body soon.

"Whether these two goals will come true will depend on the country's control of COVID-19 nationwide, especially in big cities and provinces home to strong economic development, with industrial parks and economic zones," said Minister of Planning and Investment Nguyen Chi Dung.

At the government's recent meeting with localities nationwide on six-month economic development, Prime Minister Pham Minh Chinh also said that based on these two scenarios, localities must also formulate their own growth scenarios for implementation.

"We must be persistent and patient in implementing our dual target of economic development and pandemic fighting simultaneously, even though it is a very difficult choice in economic macro-monitoring," the prime minister said.

Challenges ahead

PM Chinh noted that it will be a difficult task to make the economic growth targets possible, but the targets will not be changed now.

"In the context of the increasingly complicated COVID-19 situation, we must be well aware that challenges will be far bigger than opportunities. Efforts are to be made to weather all storms to reach the targets," he stressed.

According to the World Bank, looking ahead, close attention should be paid to the evolution of industrial production and retail sales as both could be further affected by the fourth outbreak of COVID-19. Exports may also suffer from the slowdown of activities in some industrial parks.

"If the current outbreak is not contained quickly, the government may wish to consider adopting a more accommodative fiscal stance to support affected people and businesses and to stimulate domestic demand," said the World Bank bulletin for Vietnam in June.

According to the World Bank, while the economy appears to have fared relatively well in light of the fourth outbreak, several signs suggest slowdown in economic activity if the pandemic is not contained in the short term.

"The country's external position may have also eroded slightly, with a decline in merchandise exports and lower FDI commitments. These developments will require close monitoring over the next few weeks," read the bulletin.

Standard Chartered's economists anticipate domestically oriented sectors such as retail sales are likely to be the hardest hit if the current COVID wave persists.

"The focus now is on whether the impact on the industrial sector will be temporary or more long-lasting. While the global pandemic has weighed on Vietnam's economy via reduced tourism, supply-chain disruptions and weaker overseas demand, external indicators are showing a strong recovery," Standard Chartered said in a press release on July 21.

However, Dhiraj Nim and Khoon Goh, economists at ANZ, commented "We remain constructive on Vietnam as far as its regional standing goes. Amid a broader resurgence of the pandemic in Asia, Vietnam's growth prospects still look better in a relative sense. After averting contraction in 2020, its expected pace of recovery in 2021 implies that it will be among one of the first economies to narrow, or even close, its negative output gap in the region. In addition, the medium-term prospects are solid, amid expectations of rising exports and foreign direct investment."