Defending against external risks

During the Global Financial Crisis, Vietnam saw the largest current account deficit of 11% of GDP. That said, its ability to weather external shocks has strengthened over the years. It is clear that a significant improvement in Vietnam’s current account position shift coincided with its emerging significance in global trade. Even in the first year of the pandemic, it registered a record high current account surplus of 5.5% of GDP, thanks to export outperformance and an unusual import compression. However, trade fundamentals have shifted since the Delta variant wave from May. Vietnam saw the largest quarterly current account deficit of 6.7% of GDP in 2Q, as the trade balance turned from surplus to deficit. While current account data in 2H21 are not yet released, available trade data imply that the current account in 3Q was likely in negative territory.

In addition, the services deficit continued to be a drag. Prior to the pandemic, booming tourism generated substantial receipts, pushing Vietnam’s perennial services deficit to a historic low of only USD1.5bn in 2019. However, as tourism collapsed, the services deficit widened almost ten times, reaching USD10bn in 2020. “The situation has not turned any better in 2021, implying that the services deficit this year would be no less than that of 2020. While it is encouraging to see Vietnam’s first step in re-opening its border to foreign visitors in five selected destinations from November, a confluence of factors such as the absence of Chinese tourists and a delayed resumption of international flights suggests that a short-term V-shaped recovery in tourism is unlikely in 2022. As such, the services deficit will likely remain a drag, though likely a smaller one, on the current account”, Mr.Yun Liu said.

That said, it is not all gloom and doom. A consistent injection of remittances, thanks to a large population of Vietnamese migrants overseas, is one of the green shoots. Despite the pandemic, Vietnam is estimated to be Asia’s third-largest remittances recipient in 2021, with inflows worth USD18bn, just after mainland China and the Philippines. In times like now, persistent remittances provide invaluable support to Vietnam’s current account position.

Meanwhile, Vietnam’s trade balance will likely regain a surplus position in 4Q, as the economy re-opened from 1 October. Exports in November rose 18.5% y-o-y, led by strong growth in smartphones (up 23% y-o-y) and machinery shipments (up 29% y-o-y). While favorable base effects partly explained the surprisingly high growth, the level of exports nonetheless returned to the pre-Delta variant level. Among the most affected sectors, textiles have gradually recovered (up 25% y-o-y), but the footwear industry is still impacted (down 14% y-o-y). In October and November, the trade balance returned to an accumulative surplus of USD2.8bn, after two consecutive quarters of deficits, successfully pushing Vietnam’s YTD trade balance to a marginal surplus of USD0.9bn. However, Mr.Yun Liu said, even if we may see a trade surplus in 2021, the magnitude is unlikely to offset the primary and services deficits. As such, we expect to see a small current account deficit, possibly around 0.5% of GDP, before returning to a modest surplus of 2.3% of GDP in 2022. Still, one word of caution is warranted, as to how quickly Vietnam can restore its supply chain largely hinges on how quickly it can contain the current COVID-19 wave, which we will discuss in detail in a later section.

On a related note, consistent FDI inflows have been a firm pillar to support Vietnam’s core balance. Despite pandemic-induced uncertainties, net FDI has been consistently accounting for 6% of GDP, an amount similar to that before the pandemic. “This is key to Vietnam, as the influx of foreign investment into productive manufacturing sectors has changed Vietnam’s current account landscape. That said, recent severe supply chain disruptions raise questions on Vietnam’s investment prospects. Large garment and footwear names, such as Crocs and Lululemon, are reported to move some of their productions out of Vietnam”, Mr.Yun Liu emphasized.

There is indeed short-term volatility, as Vietnam is still battling another surge in daily infections and facing a significant labor shortage. However, Mr.Yun Liu, believes FDI decisions depend on an economy’s medium- to long-term potential. There are still good reasons to remain positive on Vietnam’s fundamentals, given its comparative advantage in labor cost-effectiveness, improving infrastructure, existing industry clusters, and multiple free trade agreements. New FDI inflows still grew almost 4% y-o-y as of November 2021, half of which was thanks to additional capacity in the manufacturing sector. Tech giants, including Samsung and LG, have previously announced investments to expand their production capacity.

Ultimately, the priority for policymakers is to put growth back on track and reassure foreign investors. The most urgent task is how to contain the current fifth COVID-19 wave and introduce viable incentives and arrangements to lure migrant workers back to factories in a safe and sustained manner.