A positive outlook for Vietnam’s economy

WB said Vietnam's GDP would rebound to 5.5 percent growth in 2022

With the easing of mobility restrictions, Vietnam’s services sector is expected to partially recover as consumers and investors rebuild their confidence. Foreign tourism is also expected to resume gradually from 15 March onward, helping support the recovery of the tourism sector. Manufacturing exports will respond to the U.S., EU, and Chinese demand for Vietnamese exports.

At least in the first part of 2022, the WB said the rebound of Vietnam’s economy would be supported by a more accommodating fiscal policy. This program could include:

First, tax policy measures such as tax breaks for small and medium-sized enterprises for the entirety of 2022 or a reduction of the value-added tax (VAT) for 2022 to prop up domestic private demand are good short-term options.

Second, expenditure measures: short-term actions could include the implementation of recovery programs in health and education that have been highly penalized by the pandemic. For instance, the authorities could consider the distribution of tablets or digital tools to students or schools to promote online education. To ensure better targeting of the benefits to affected businesses and households, the government will need to start developing an integrated social protection database for the further expansion of social services. In parallel, streamlining public investment management should be a priority to add flexibility to (re) allocating unused funds in case of urgency. Further clarity should be brought to the allocation of responsibilities between the central and local governments, including on regional initiatives such as in the Mekong Delta Region or cross-province transport projects.

Such an accommodating fiscal policy could be implemented without a major impact on the fiscal and debt balances, which should remain sustainable in the short to medium term. Part of the suggested increase in public spending could be funded by cash reserves accumulated by the government, without additional borrowing. For this reason, the fiscal deficit is projected at around 4.4 percent in 2022. Debt is not expected to increase substantially in real terms as the government still has cash on hand, has carryover funds, and so will have relatively moderate additional funding needs. As in recent years, most of these needs could be met by borrowing on the domestic markets.

"The accommodative monetary policy implemented in 2020–21 to help businesses during the crisis is expected to be unwound starting in mid-2022. The return to a more prudent monetary policy will be justified by the greater use of the fiscal instrument and by the need to manage the increasing risks within the financial sector as commercial banks are exposed to an increase in non-performing loans in their portfolios. In fact, the authorities should ensure that banks are ready to implement an effective and early resolution to non-performing loans so that confidence in the banking system is not affected by the expiry of the forbearance measures. Monetary authorities are also expected to revert to a prudent policy to manage inflation as the nominal monetary aggregates have increased two to three times faster than the real economy since the beginning of the COVID-19 crisis, suggesting a correction in prices in the longer run", said WB.

Inflation is expected to remain within the target of 4 percent set by the SBV, said WB. Recent global price increases reflect some pandemic-related supply-demand mismatches and higher commodity prices compared to their low base a year ago. These price pressures are expected to subside in 2022. The pandemic-related price increases are expected to dissipate in the coming year, as production disruptions are resolved. While some of the recent global commodity price increases, such as the price of petroleum, may continue in the medium term, domestic demand is expected to improve gradually in 2022, only recovering fully in 2023, thus countering inflationary pressures. “The authorities will need to monitor the rise of NPLs and bank asset quality to ensure banking sector health and to push for adoption of the Basel II capital rules for all operating banks”, WB said.

In the medium term, in WB’s view, full recovery of the economy to a pre-COVID growth path is only expected in 2023, with full recovery of the services sector and barring new shocks. On the global front, beyond 2022, global growth is projected to moderate to about 3.2 percent over the medium term. Advanced economies output is forecast to exceed pre-pandemic medium-term projections—largely reflecting sizable anticipated further policy support in the United States that includes measures to increase potential growth. This could translate into further manufacturing exports in 2023 onward for Vietnam since the United States is Vietnam’s main export market.

The WB said the current account would be expected to register small surpluses in the medium term thanks to strong export performance and resilient remittances. Given the strong dependence of Vietnamese exports on imported inputs, this surplus will be modest, at about 1.5-2 percent of GDP in the medium term. Remittances are expected to contribute a steady US $18 billion to US $20 billion to the current account. The financial balance is expected to benefit from a steady FDI inflow, which has shown resilience during the pandemic and is expected to recover to pre-COVID levels. The attractiveness of Vietnam’s market as an investment destination is boosted by the myriad free trade agreements and by the post-COVID-19 changes in global value chains and the demand by many governments and multinationals to diversify their sources of production.