According to the Asian Development Bank's (ADB) Asian Development Outlook (ADO) 2020 Update, released on September 15, the gross domestic product (GDP) of developing Asia will decline by 0,7% in 2020, before rebounding to 6,8% in 2021.
However, the Vietnamese economy is still projected to grow at 1,8% in 2020 amidst the COVID-19 pandemic and increase to 6,3% in 2021. The robust economic growth in 2020 is largely due to the government's success in controlling the spread of COVID-19.
During the launch of the 2020 Asian Development Outlook (ADO) Update, ADB Country Director for Vietnam, Andrew Jeffries, noted that declining domestic consumption and weakening global demand due to the COVID-19 pandemic have impacted the Vietnamese economy more than anticipated.
However, Vietnam's economic growth will remain robust in 2020 thanks to the contributions of many factors.
Regarding support from within the country.
The biggest factor is the government's success in controlling the spread of COVID-19. This is coupled with support from Vietnam's macroeconomic stability, increased public spending, and ongoing reforms aimed at improving the business environment.
In addition, our participation in a large number of bilateral and multilateral trade agreements will also contribute to the recovery of the Vietnamese economy. Most recently, this includes the signing of the Vietnam-EU Free Trade Agreement (EVFTA).
Read more: The export sector is off to a bumper start with the Free Trade Agreement (EVFTA).
Regarding the impact from the external environment
Vietnam is also likely to benefit from the current shift of supply chains to lower-cost countries, particularly from the ongoing relocation of manufacturing from China to Vietnam.
Besides the positive impacts, major factors remain, such as the prolonged global COVID-19 pandemic, which continues to be the biggest risk to Vietnam's growth prospects this year and next.
The global recession and weakening domestic conditions, particularly worsening unemployment and significantly reduced consumption, have damaged the economy more severely than expected. The ADB believes that the economic outlook is further threatened by the increase in new COVID-19 cases since the end of July 2020. Based on this, the ADB has revised its growth forecast for 2020 downward from 4,8% in the ADO 2020 Report and 4,1% in the June Supplementary ADO Report, to 1,8% in this report.
The report also identifies other threats such as global trade tensions, leading to increased protectionism, and financial risks that could be exacerbated by a prolonged pandemic.
In the context of the pandemic and the global economic downturn, which led to a sharp decline in private investment, the Vietnamese government adopted a "wise" solution by promoting public investment to support economic growth.
There are still many challenges as disbursement progress is affected by project implementation stages such as impact assessment, land clearance, and some tasks are more difficult due to the pandemic, but this year's disbursement progress is still higher than in some previous years.
“The ADB is committed to working with its Vietnamese partners to more effectively implement public investment projects in the future,” said Andrew Jeffries.
According to the ADB, inflation could be pushed up by rising commodity prices and increased liquidity due to accelerated public investment. However, inflation will remain low in 2020, below the 4,0% target, due to the continued low growth and spending.
The Asian Development Bank (ADB) predicts that lending activity will remain weak despite support measures implemented by the State Bank of Vietnam. Banks, for their part, may be reluctant to loosen lending standards to accept weaker corporate balance sheets, fearing an increase in bad debt at the end of loan restructuring periods. Demand for credit from businesses is also declining, coupled with low demand for business products and services. Therefore, bank credit is projected to grow by only 10% this year, significantly lower than the State Bank of Vietnam's target of 14,0%.
With tax revenues declining due to lower income and export earnings, increased healthcare and social security spending, and the potential for additional budget support packages in 2020, the fiscal deficit is projected to increase to the equivalent of 6,0% of GDP in 2020 and decrease to 3,5% in 2021. Disbursement of public investment in the first six months of 2020 was slow but is expected to accelerate in the last six months, helping the economy to continue to sustain itself.
ADB's Chief Economist, Mr. Nguyen Minh Cuong, analyzed foreign investment as follows: In 2021, investment will be boosted thanks to improved public investment disbursement, the continued shift of manufacturing activities from China to Vietnam, the recovery of the Chinese economy, and the implementation of the free trade agreement with the European Union to liberalize trade.
The Japan External Trade Organization (JETRO) has announced a list of 15 Japanese companies that will be relocating their manufacturing operations from China to Vietnam. The majority of these companies will be producing medical equipment, while the remainder will manufacture semiconductors, phone components, air conditioners, or power modules.
Vietnam needs to change its approach to attracting investment, no longer relying heavily on incentives and low costs as before, but rather on quality and efficiency in terms of quality, labor productivity, and logistics.
"The important thing is whether those investors meet the standards, transfer technology, comply with environmental standards, and create conditions for domestic businesses to connect," Mr. Nguyen Minh Cuong recommended.
