Scenarios for Vietnam economy by end-2021

GDP growth could be in the range of 5-5.5% under HSBS's scenario 1.

The GDP growth forecast for the year from HSBC Global Research was 7.1% and there was renewed confidence across the economy that this was eminently achievable. What no one had predicted was that the Covid virus would continue to mutate and mutate in a way that would make it far more virulent.

Negative impacts from COVID-19

Along came the Delta variant – a variant that spread so fast that it made it much harder to control. The impact of this variant as it spread across the country and in particular the economic heartland of Vietnam in the south, meant a swift re-introduction of lockdowns and travel restrictions. These in turn led to a decline in FDI into the country. FDI in registered capital declined 11.1% y-o-y in the first seven months of 2021 (a decline of 53.8% in July alone). 

However, on a more positive note, inflows of implemented capital were up 3.8% y-o-y in the January-July period. The majority of the investment continued to be in the processing and manufacturing sector followed by electricity production and distribution. 

Another impact of the lockdowns was that consumption took a significant hit. Retail sales fell by 19.8% in July, the most since April 2020. Car sales dropped with passenger vehicle sales declining by 15.9% y-o-y in June and commercial vehicle sales also dropped 1.8% y-o-y. 

The impact on the manufacturing sector intensified further in August and the ongoing restrictions lead to the temporary closure of certain businesses, while the social distancing

measures and travel restrictions resulted in further declines in output, new orders, purchasing, and ultimately employment. This in turn led to unprecedented supply-chain disruptions which were exacerbated by challenges around transportation and pressure on capacity at the

country's ports. As a consequence, industrial production declined for the first time in five months, due to weaker manufacturing output.

The current challenges are predominantly in the footwear and garment sectors, as it is the southeast region that has been hardest hit by the Covid wave that is a major global manufacturing hub. Key global brands have seen challenges in their production, which is ultimately likely to affect Western consumers amid the holiday season. 

Unsurprisingly, the most recent August data reveals the pain that Vietnam’s economy is facing. The impact is significantly more severe than that during the 3-week national lockdown in April 2020. On the domestic front, private consumption saw a substantial hit, as mobility fell by as much as 60% on average from the pre-pandemic levels. 

Preparation for the future

After a faltering start, Vietnam has been able to obtain significant volumes of vaccines despite supply constraints impacting the world as production struggles to keep up with demand. The authorities are already talking about a gradual opening up of the economy and we forecast that this will start to gather pace from October onwards. We are considering two scenarios for Vietnam’s economy until year-end:

Scenario 1: GDP growth in the range of 5-5.5%, depending on the speed and effectiveness of the vaccination rollout, the re-opening of the economy, and the recovery and resumption of major export markets given the challenges posed by Delta variant.

Scenario 2: If the vaccination program is not fast enough and lockdown and social distancing continue to be lengthened, there will be a more adverse impact to the economy and there will be increased pressure on supply chains and GDP may only reach 3.5-4%.

In either scenario, the economy needs to be re-opened, though in a cautious and systematic way. As in other markets, there tends to be a strong bounce back in economic activity at the time of reopening and we anticipate a similar outcome in Vietnam.

As the economy starts to reopen, supply chain challenges should subside, orders will resume and FDI should resume its cadence given stable government with consistent policies, hardworking/resilient workforce, large number of Free Trade Agreements, and a commitment from the government to spend c. 7% of GDP on continuing to develop infrastructure.

Despite the current environment, Vietnam remains a highly attractive investment destination in the medium term. This is based on the country’s robust fundamentals which many investors will look through the present Covid volatilities.

Strong foreign currency reserves coupled with a stable currency, inflation being under control, continued strong FDI inflows with an emphasis on the manufacturing sector all position Vietnam will for the future. As a result, HSBC is forecasting GDP growth of 6.8% in 2022 with a bullish outlook for the mid and long term.