Reaching growth momentum in 2021

Growth is set to rebound faster than for ASEAN peers in 2021, as the government managed to keep the pandemic under control in 2020 and unveiled a COVID-19 relief fiscal support package (3.6% of GDP) in April 2020 in order to support the economy. Despite sluggish global external demand, the economy has experienced an increase in exports of steel, electronics, and personal computers, as the global workforce has been working from home due to the pandemic. Furthermore, the recent free trade agreement ratified with the EU - a top trade partner (accounting for 18.4% of total exports in 2019) - in August 2020 should further boost exports (75% of GDP). The economy has also been benefiting from supply-chain shifts from China as firms seek to avoid U.S.-China trade war tariffs. This led to a surge in exports to the U.S. and fuelled a trade surplus that reached record highs, prompting the U.S. administration to launch an investigation into Vietnam, which led to a preliminary anti-subsidy tariff on vehicle tires from Vietnam (6%-10% tariff range) due to an undervalued currency, and potentially more tariffs could come. Vietnam has been placed on the U.S. Treasury’s currency manipulation watch list since 2019 given its undervalued currency against the dollar, the current account surplus, and the trade surplus with the United States.

Foreign direct investment (FDI) dropped by 19% in the first nine months of 2020. It should bounce back with the pandemic under control, and thanks to foreign investors seeking diversification and moving out businesses from China. Tourism, which accounted for less than 10% of GDP in 2019, took a toll as international borders were closed from March 2020 onwards. Domestic tourism supported by government incentives could partly offset the impact, as social distancing rules have been eased since May 2020. Household consumption (53% of GDP), supported by a recovery on the labor market (unemployment dropped to 2.5% in September 2020 after peaking in June), will recover gradually since restrictions on movement were quickly removed. Inflation could get closer to the 4% target in 2021 (but remain below it), which would allow the State Bank of Vietnam (SBV) to implement further monetary easing, in order to continue supporting the growth momentum.

Fiscal deficit set to narrow on the back of stronger growth

The fiscal deficit will narrow slightly in 2021 thanks to stronger fiscal revenue collection supported by a continued economic recovery. That said, it will not return to its pre-crisis level. Expenditures should continue to grow faster than revenues, as the government is seeking to accelerate disbursements for public investments on major infrastructure projects, which only met 57% of the target set by the Prime Minister in the first nine months of 2020. The pandemic, combined with difficulties between local authorities and landowners in reaching agreements on land handover, delayed infrastructure projects. The public debt-to-GDP ratio should decrease slightly, favored by the growth momentum and a contained budget deficit. However, the debt remains exposed to currency risks as 46% of the public debt is denominated in foreign currency.

The trade balance (and current account) surplus is likely to narrow because of a still weak global demand, although partially offset by a shift in global value chains from China and the recent trade agreement with the EU. Imports should continue to strengthen due to the revival in consumption and investment demand. FDI will largely continue to finance the deficit. Foreign exchange reserves remain adequate, equalling 3.8 months of import as of July 2020.

A leadership reshuffle to be expected

The Communist Party of Vietnam (CPV) has maintained a unitary government, which has centralized control over the state, media, and military. The CPV should expect a leadership reshuffle in March 2021 during the 13th National Congress, with seven members of the current Politburo set to retire. Given that such discussions are opaque in Vietnam, as media is run by the state, it may be difficult to predict the shift in political figures. Externally, tensions with China over the South China Sea dispute recently eased, as Vietnam is calling for talks while China has launched military exercises, including drills near the Paracels islands. Both are seeking further cooperation this year, marking the 70th anniversary of diplomatic relations between the two countries.