Supply chain pains: A tough battle

Despite hard lockdowns in major cities across Vietnam, the Delta wave continued to rage in August. Daily cases have consistently jumped over 10k since 19 August, leading to a tripling of total cases in a month’s time. As a result, the authorities have further tightened restrictions, with military deployment in the hardest-hit areas. Residents in Ho Chi Minh City are required to “stay where they are” under Directive 11 since 23 August while six surrounding provinces have extended their curbs until mid-September.

All non-essential services have been closed while factories are only allowed to operate when they meet coronavirus prevention requirements and limit   the number of workers on site. As a result, some factories have operated at 30-50% of their designed capacity, and even others have had to accept to suspend operations. At the same time, Hanoi, Da Nang and other southern provinces also ban the public transports, intercity bus service and closed most non-essential businesses.

Unsurprisingly, August data speaks for itself in revealing the pain Vietnam’s economy is facing. The impact is much more severe than that during the 3-week national lockdown in April 2020. On the domestic front, private consumption saw a big hit, as mobility fell as much as 60% on average from the pre-pandemic level. This translated into an almost 40% y-o-y fall in retail sales, with August’s level even 10% lower than last April’s. But the indicator points to even worse situations in the hard-hit areas: HCMC’s mobility fell close to 90%, leading to a 51% y-o-y slash in retail sales.

However, what is more alarming for Vietnam is a sharp U-turn in its manufacturing resilience, given the persisting lockdown measures. August PMI fell to a 16-month low of 40.2, with key indices signalling gloomy prospects for its recovery. Meanwhile, industrial production fell 11% y-o-y in August, a substantial downturn from its solid growth of 12% y-o-y in 1H21. In particular, HCMC’s IP slumped by 51% y-o-y, with significant hits to electronics and textiles sectors.

“The August data speaks for itself: Vietnam’s recovery has stalled. The Delta surge has intensified, prompting tougher lockdowns in Ho Chi Minh City and its surrounding areas. Unsurprisingly, this represents a substantial hit to consumption. But even more alarmingly, the external growth engine has lost steam. Exports turned south meaningfully for the first time in a year, while several industries have seen severe supply chain disruption, if not a virtual halt of their production”, Mr. Yun Liu said.

Per GSO data, export value dropped 6.0% mom (-5.4% yoy) to about US$26.2bn in Aug 2021. This is the first time since May 2020 that Vietnam’s export value witnessed a year-on-year decline (excluding the seasonal factor). Export activities were hit last month as some seaports in Southern Vietnam had to limit   their operation as required while other transports were tightly controlled. For 8M21, export value climbed to US$212.6bn (21.2% yoy).

Among Vietnam’s export products, the items that recorded the positive growth rate in Aug 21 include petroleum (172.9% yoy), steel (107.0% yoy), pepper (72.6% yoy), cassava and cassava products (54.4% yoy) and chemicals (47.5% yoy). On the other hand, some products saw a strong decline, including crude oil (-75.5% yoy), footwear (-38.5% yoy), bags and suitcases (-37.9% yoy), non-wooden furniture (-37.2% yoy and rice (-30.4% yoy).

Basing on the actual performance of manufacturing sector during Jun – Aug, VNDirect lowered its forecast for 2021F Vietnam’s export value growth to 15% yoy from the previous forecast of 16.6% yoy.

As for imports, Vietnam’s import spending rose 21.2% yoy to US$27.5bn in Aug 2021 (slower than an increase of 31.8% yoy in the previous month). For 8M21, import value climbed to US$216.3bn (33.8% yoy), and Vietnam net imported US$3.7bn in 8M21 (vs. a trade surplus of US$8.7bn seen in 8M20), according to GSO. Among Vietnam’s key import products, the items that witnessed the strong import growth rates in Aug 2021 include rubber (137.6% yoy), fertiliser (90.7% yoy), cotton (64.4% yoy), chemical products (62.2% yoy) and steel (51.8% yoy).

Due to the negative impact of the fourth outbreak on manufacturing sector and export activities, VNDirect forecasted Vietnam's trade surplus would drop sharply in 2021 to US$0.3bn, from a trade surplus of US$18.9bn in 2020.