Prospects for Vietnam’s Economy Amid the COVID-19 Pandemic

Vietnam’s exceptional COVID-19 response has placed the country in a relatively strong position to resume economic growth in the second half of 2020. As of June 22, 2020, the country has counted just 349 total cases, nine active cases, and zero deaths. In April, the International Monetary Fund (IMF) projected that the country’s $260 billion economy would experience reduced growth from the pre-crisis level of 7% to 2.7% for the year, while others within Vietnam now anticipate a significantly smaller drop in output.

Government Response

The Vietnamese government has passed numerous fiscal stimulus packages. These include interest rate cuts on March 17 and May 13, which brought the refinancing rate down to 4.5% from 5% and decrease the discount rate to 3% from 3.5%. In April 2020, the country announced $7.78 billion in tax reductions in addition to accelerating existing infrastructure investments. Then on June 8, the government approved a trade deal with the EU that should significantly boost output in export-related industries. While the COVID-19 pandemic will create significant stress within certain sectors of the economy, the trade deal will bring about new opportunities for growth in the years ahead.

Vietnam’s Auto Industry

The domestic Vietnamese automobile industry may face significant risks in the future. The per-capita GDP of Vietnam, at roughly $3,500, has surpassed the $3,000 middle-income threshold at which countries typically begin to purchase more cars. However, the industry declined by 36% during the first 4 months of 2020, as the COVID-19 pandemic restrained general consumption. As of mid-2020, domestic production accounts for roughly 70% of the market, while imports account for the remaining 30%. The country is expected to import more foreign-produced cars in the future as incomes increase.

Vietnam’s Tourism Industry

The tourism industry in Vietnam has also faced significant challenges as a result of the COVID-19 pandemic. In the past, the industry has accounted for roughly 9% to 12% of Vietnam’s GDP. However, international travel has decreased sharply with a 98% drop in arrivals to Vietnam for both April and May year on year. The number of domestic travelers reached 85 million last year, but they spend less on average than international travelers and the number of domestic travelers may decrease significantly for 2020 as a whole. The country anticipates adopting a staggered approach, in which tourists from a given country are only allowed to visit Vietnam once their home country has met a given standard for domestic COVID-19 transmission reduction. This could lead to the establishment of travel “bubbles” in which a number of countries establish normal travel relations once these standards have been met.

Vietnamese Trade with the EU

The June 8 trade deal with the EU, dubbed the European Union Vietnam Free Trade Agreement (EVFTA), should come into effect in July and lead to significant growth for Vietnam in the medium term. Trade between Vietnam and the EU totaled $67 billion in 2019. The deal will immediately eliminate duties on 71% of exports from Vietnam and 65% of exports from the EU. Tariffs on 99% of goods traded would be eliminated within seven years after the deal begins to take effect. The deal should bring about particularly strong growth in Vietnam’s apparel and footwear industries, which account for one-fifth of the country’s total exports. Overall, the deal is expected to raise Vietnam’s GDP by roughly 2.4% and exports by 12% by 2030.

It remains to be seen how various industries in Vietnam adapt to the new normal in relation to COVID-19. Looking ahead to the medium to long-term, however, the country is well-placed for export growth in the years ahead.

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