Vietnam's economic outlook for 2022: Domestic demand as a fulcrum

A revival of tourism is expected after international flights have been licensed for commercial purposes from 4Q21F, leading to a strong rebound in travel, entertainment, accommodation, and catering services. 

The service sector contributed the largest share to Vietnam's GDP, accounting for 41.6% of nominal GDP in 2019. Unfortunately, the outbreak of the COVID-19 pandemic caused a slowdown in people’s income and consumption demand in the 2020–2021 period. Total gross retail sales of consumer goods and services dropped 8.7% YoY in 9M21 from a decline of 0.7% YoY seen in 9M20 (vs. a strong increase of 11.5% in 9M19). Due to lower domestic consumption, the service sector fell 0.7% year on year in 9M21 (vs. 1.4% year on year in 9M20 and 6.9% year on year in 9M19).

However, VNDirect believed that the service sector would recover and enjoy a higher growth rate from 2022 onwards, mostly driven by the reopening of non-essential services and the recovery of consumption. Specifically, it expects all service activities, including tourism, transportation, and entertainment, to be allowed to operate at full capacity from 2Q22 after Vietnam achieves a target of vaccinating over 70% of the population. It also expects consumption to bounce back strongly, with gross retail sales of consumer goods and services expected to increase 10–12% YoY in 2022F thanks to strong catalysts, including:

First, it is real income growth, as VNDirect expects Vietnam’s GDP to grow by 7.5% YoY while inflation is expected to increase by 3.45% YoY in 2022, well below the government’s target of 4.0%.

Second, a revival of tourism is expected after international flights have been licensed for commercial purposes from 4Q21F, leading to a strong rebound in travel, entertainment, accommodation, and catering services. Vietnam has piloted to welcome foreign tourists under package tours from mid-November 2021 through charter flights to several destinations such as Phu Quoc (Kien Giang), Khanh Hoa, Quang Nam, Da Nang, and Quang Ninh. This marks the beginning of Vietnam's tourism industry after nearly 2 years of being closed to foreign visitors. It is noted that tourism contributed over 9.5% of Vietnam’s GDP in 2019. However, due to the impact of the COVID-19 pandemic, the contribution of the tourism industry has decreased to 2.3% of GDP in 9M21.

Third, VNDirect believes that the government could release more fiscal stimulus packages to support economic recovery, focusing on cash subsidies for people negatively affected by the COVID-19 pandemic, tax reduction (value-added tax, corporate income tax), and increasing the value of public investment in transport infrastructure and social-housing projects development. These policies aim at recuperating domestic demand and consumption.

Fourth, the rising affluence and tech-savviness of the younger population. This statement is supported by the fact that sales of technology and electronic products in Vietnam have increased significantly in recent years, notably smartphones, laptops, robot vacuums, and smart TVs.

Fifth, rising urbanisation should continue to boost consumption demand in large urban centres. According to the Ministry of Construction, Vietnam’s urbanization rate has increased rapidly from 30.5% in 2010 to 40.4% by mid-2021. Vietnam also aims to raise the urbanization rate to 45% by 2025 and to about 50% by 2030. Urbanization is an important driver of economic growth, raising people's incomes and serving as a catalyst for shifting consumption trends from traditional channels to modern retail channels.