A Robust Economic Rebound For Vietnam Will Be Driven By Exports, Fitch Says | Vietcetera
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Jan 27, 2022

A Robust Economic Rebound For Vietnam Will Be Driven By Exports, Fitch Says

Major ratings agency projects rapid economic growth of 7.9% this year and doubts big shocks from the pandemic are looming. 
A Robust Economic Rebound For Vietnam Will Be Driven By Exports, Fitch Says

Source: Tin Phung for Vietcetera

Widespread factory closures in the wake of the COVID-19 eruption last summer in Vietnam gave the country a black eye as orders for shoes and clothing went unfilled and retail giants like Nike and Adidas scrambled to meet holiday consumer demand.

But the temporary supply chain disruptions in the third quarter have not diminished prospects for economic growth in Vietnam or for export-related foreign investment. In fact, according to a new report by Fitch, the major global credit ratings firm, exports will underpin strong economic growth of 7.9% this year.

“Vietnam’s export sector should remain a regional outperformer, benefitting from its cost competitiveness, diversion of trade from China and a variety of key trade agreements,” said the Fitch forecast.

America’s trade war with China in recent years has led numerous companies to move their manufacturing operations from China to Vietnam. Evidence of the diversion can be seen in the burgeoning trade between the US and Vietnam, which rose to about $97 billion in 2021 from around $38 billion in 2016, according to Fitch analysts.

Of course, the forecast is just that, a forecast. The ratings agency in April projected a robust 7% economic growth for Vietnam in 2021. But the surge in infections hobbled the economy, which limped out of 2021 with a meagre 2.6% increase.

Fitch this week noted that “the evolution of the pandemic remains subject to uncertainties, in particular as daily cases have trended higher in recent months.” Still, Fitch analysts included a graphic of Johns Hopkins University data showing how Vietnam’s vaccination rate, abysmal in the first half of 2021, now surpasses rates in the United States, Asia and the world.

“Improving levels of vaccination should reduce the risk that the recovery is set back by further Covid-19 outbreaks,” the forecast said.

alt In addition, when the government in September shifted its policy from trying to vanquish COVID-19 to one of safely living with the pathogen, the likelihood of widespread lockdowns in response to an outbreak decreased significantly. “Further pandemic-related shocks, while possible, are unlikely to be so severe,” Fitch said.

Fitch’s forecast of a 7.9% jump in gross domestic product is higher than several other projections released recently. Forecasts from the likes of banking giant HSBC, The World Bank and the Asian Development Bank ranged from GDP growth of 6.5% to 7.5%, with predictions of strong foreign investment in manufacturing boosting exports. Fitch predicts such a big leap in growth because the base of 2021 was so low, and it expects that “economic activity will gradually normalize because of higher vaccination rates that should support domestic demand,” Sagarika Chandra, director of Fitch’s Asia-Pacific sovereigns team, told Vietcetera in an email. Fitch expects the recovery to continue in 2023, with an economic growth of 6.5%.

“Vietnam has also had less economic scarring than many emerging markets, as it is one of the few countries that did not experience an annual contraction in GDP amid the pandemic shock,” the forecast said.

The growth will be led by exports, which rose by 19% in 2021, Fitch said. The ratings agency wasn’t worried about the load of public debt Vietnam added when it passed this month a $15 billion-plus pandemic-relief package. The bailout includes support for individuals and businesses, including a 2% cut in the value-added tax (VAT), and loads of infrastructure spending.

The forecast, calculated before the parliament passed the bailout, put Vietnam's debt-to-GDP ratio over the next two years at around 41%. Even with the added government debt, Vietnam’s debt-to-GDP ratio will remain below the 56% median of its peers, Fitch said.