Economic growth continues to backed by FDI, but risks remain

The Vietnamese economy saw a relatively positive growth rate in the first six months of this year, with a rise in foreign investment as one of the key pillars in defiance of concerns over the fourth wave of COVID-19.

The Vietnamese economy’s growth is gradually recovering, but challenges caused by the COVID-19 pandemic will persist until the year’s end
The Vietnamese economy’s growth is gradually recovering, but challenges caused by the COVID-19 pandemic will persist until the year’s end

According to the General Statistics Office (GSO), despite COVID-19, the Vietnamese economy in general has been bouncing back, with a year-year growth rate of 3.68, 0.39, 2.69, and 4.48% in the first quarter, second, third, and fourth quarter of 2020, respectively. In the first and second quarter of 2021, the rate hit 4.48 and 6.61% year-on-year.

Last November, the National Assembly set an economic growth target of 6% for 2021. In January, the government set a target of about 6.5% for the entire year.

The Ministry of Planning and Investment (MPI) has reported its two economic growth scenarios for the second half of this year to the government. In the first scenario, so as to hit the growth target of 6% for 2021, the economy must grow by 6.2% in the third quarter, and 6.5% in the fourth quarter.

In the second scenario, for the economy to climb 6.5% for 2021, the economy must increase 7% in the third quarter, and 7.5% in the fourth quarter.

“Based on these two scenarios, localities must also devise their own growth scenarios for deployment. We must be patient in implementing our dual targets of economic development and COVID-19 containment at the same time, though it is a very difficult choice,” said Prime Minister Pham Minh Chinh at the government’s recent meeting with localities nationwide on six-month economic development.

One of the key drivers of Vietnam’s economic growth over recent years has been the development of the manufacturing and processing industries which create 80% of industrial growth.

The GSO report that after growing 6.29% on-year in the first quarter, industrial production in the second quarter of 2021 saw positive growth of 11.45% as compared to only 1.1% in the same period last year.

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

Also in the first two quarters, agro-forestry-fishery made up 12.15%, industry and construction 37.61%, and services 41.13%.

The government has just ordered ministries, agencies, and localities to review and remove all obstructions for businesses and investors to perform their business and investment activities, with specific tasks needed to be implemented immediately. All results must be reported to the government.

Optimistic FDI landscape

According to the MPI, one of the key contributors to Vietnam’s industrial production in particular and the country’s economic growth in general is foreign investment, with foreign-invested enterprises (FIEs) continuing to consider the nation a good investment location in a region where many nations are being ravaged by the health crisis.

In January-June 20, 2021, foreign investors registered US$15.27 billion in Vietnam, 97.4% of that of the corresponding period last year, according to the MPI.

Of which, US$9.55 billion was in 804 newly-licensed projects, a year-on-year rise of 13.2%. Meanwhile, US$4.12 billion was added into 460 operational projects, up 10.6% year-on-year. Foreign investors also used US$1.61 billion for capital contribution and share acquisition in Vietnam.

Also during January-June 20, 2021, FDI disbursement hit US$9.24 billion, up 6.8% year-on-year.

Among the 18 sectors with FDI, manufacturing-processing wooed the highest registered FDI volume at US$6.98 billion or 45.7% of the total registered investment, followed by electricity production and distribution with US$5.34 billion or almost 35% of the total.

As of June 20, 2021, Vietnam was home to 33,787 foreign-invested projects registered at US$397.89 billion, of which US$241.1 billion, or 60%, had already been disbursed.

Similar to last year, Asian nations represented the lion’s share of FDI into Vietnam. Singapore led the list, accounting for almost 36.9% of total investment capital, a year-on-year increase of 3.6%, followed by Japan with 16% and the Republic of Korea, responsible for nearly 13.4%, a year-on-year climb of 43.6%.

In terms of foreign-invested projects, the Republic of Korea topped the list, followed by Japan, Singapore, Taiwan, and Hong Kong.

FIEs have also made great contributions to Vietnam’s trade picture. In the first six months of this year, despite the pandemic and factory shutdowns, FIEs’ export revenue climbed 32.2% year-on-year to US$116 billion including crude oil exports being responsible for 74.1% of the nation’s total export turnover. Without crude oil exports, FIEs’ export turnover hit US$115.3 billion, a year-on-year rise of 32.6%.

Exports to the US in the first half of 2021 increased 42.6% to US$44.9 billion, contributing to GDP gains. Vietnam’s overall exports swelled 28.4% to US$157.63 billion. While smartphones exports were strong, exports of garments, shoes, and other goods to the EU also grew thanks to Vietnam’s free trade agreements including the recently implemented EU-Vietnam Free Trade Agreement.

Meanwhile, FIEs’ total import turnover in the first half of this year reached US$102.6 billion, up 38.7% year-on-year. As a result, FIEs created a trade surplus of US$13.4 billion including revenue from crude oil exports.

Challenges linger

In fact, GDP and FDI figures have been well maintained, but challenges remain as the fourth wave of the epidemic has been disrupting economic activities.

Despite these figures, investors are facing challenges due to the COVID-19 pandemic, border closures, strict work permit requirements, and quarantine measures as well as factory shutdowns that have been hurting both business and production.

According to the MPI, mergers and acquisitions (M&As) continue to be affected due to travel limitations as investors are unable to travel, hold meetings physically and inspect sites and businesses.

In the first half of this year, Vietnam saw a total of 1,855 contribution capital and stake purchase deals valued at US$1.61 billion, down 55% in quantity and 54.3% in quality year-on-year.

The Vietnamese government has constantly promoted the dual task of COVID-19 containment and socioeconomic development by maintaining production where possible.

However, this will be a challenge. While cases in the northern provinces of Bac Giang and Bac Ninh are falling, Ho Chi Minh City and many provinces in the Mekong Delta are still reporting a high number of cases every day while implementing one of the strictest lockdowns since last year.

While the government has now prioritised Ho Chi Minh City residents for vaccines, just over 3% of the country’s population is vaccinated. If vaccine procurement lags, this could dent economic growth and prevent the country from a full-scale reopening of the economy.

Trade, transport, and tourism activities continue to be significantly affected by the pandemic. IHS Markit notes that while Vietnam was able to control the pandemic last year, the latest flare-up makes the country vulnerable to a protracted wave. While GDP grew and exports improved, the fourth wave led to a decline in manufacturing activity in June. The Purchasing Manufacturers Index (PMI) shows a decline to 44.1 in June from 53.1 in May (a score of 50 or more indicates expansion).