At the beginning of 2021, Vietnam was looking forward to a “breakout moment”, with its hitherto successful containment of the coronavirus expected to facilitate strong economic recovery. However, the country now appears to be missing this opportunity due to the ongoing fourth wave of Covid-19 infections.
The fourth Covid-19 outbreak, which started in late April, is Vietnam’s worst since the beginning of the pandemic. As of 10 August, the outbreak had caused 229,000 new infections. Ho Chi Minh City, Vietnam’s main economic hub, is the hardest hit, with more than 131,000 cases.
At the beginning of the fourth wave, Vietnamese leaders still expected to implement the “dual goals” of controlling the pandemic while achieving strong economic growth under the “new normal”. This strategy was still maintained even after Ho Chi Minh City started to implement a partial lockdown in early June.
However, as the number of cases continued to rise and the healthcare system began to become overstretched, Vietnamese leaders were forced to rethink their strategy. They started to prioritise public health over economic growth. For instance, together with Ho Chi Minh City, 18 other southern provinces were put under full lockdown since mid-July, even when the number of infections in some of these provinces was still rather low. This shift in strategy implies that tight restrictions will likely be extended until the outbreak is fully controlled, putting immense downward pressure on the economy.
Vietnam’s Purchasing Managers Index (PMI) has stayed below 50 for the second consecutive month since June, reflecting the economy’s contraction. Although the index has increased from the low of 44.1 in June to 45.1 in July, this does not represent a “recovery”. Instead, it indicates manufacturers’ low expectations for future manufacturing activities and their pessimistic assessment of the economy’s short-term prospects.
The low inflation rate is another indication of the economic downturn. In the first seven months of 2021, the consumer price index (CPI) increased by just 1.64 per cent year on year, the lowest rate since 2016. The low inflation despite the surge in prices of food and essential goods due to Covid-19 restrictions is a negative rather than positive sign as it indicates weak aggregate demand and the lack of economic activities. It may also lead to low inflation expectations for the coming months. Activities at retail and recreation venues, parks, workplaces and transit stations in Ho Chi Minh City, for example, dropped between 85 and 90 per cent in July 2021 compared to the base period of 3 January – 6 February 2020. As Ho Chi Minh City is Vietnam’s most important economic hub, this situation will generate serious and long-term negative implications for the national economy.
Supply chain disruption is another major source of concern. Cat Lai Terminal, one of the most important ports of the country, has stopped accepting certain cargoes until 16 August due to congestion as trucks cannot dispatch containers to intended recipients due to road transport restrictions. Carriers and forwarders in Vietnam are facing container shortages in the coming weeks due to disrupted shipping schedules, trucking delays, and factory closures.
Vietnam is now facing the real risk of going through a “breakdown moment”, especially if it makes further policy mistakes, such as prematurely reopening the economy.
As a result, the export sector, one of the key drivers of Vietnam’s economic growth, is likely to suffer. The services sector, which has enjoyed impressive growth in recent years thanks to the burgeoning domestic consumption, is also hard hit. The tourism and airlines industries are in particularly bad shape. By June 2021, the short-term debt of three major airlines, Vietnam Airlines, VietJet Air and Bamboo Airways, was estimated at 36 trillion dongs (US$1.56 billion), and there have been calls to bail out the industry. With international borders remaining closed and domestic travel continuing to be restricted, the prospects for the tourism and airline industries are particularly worrying.
Vietnam’s fourth Covid-19 wave and the serious ensuing economic disruptions underline the great uncertainty generated by the pandemic and expose a major problem facing Vietnam as well as other developing countries: the weak healthcare infrastructure and patchy social safety net, which makes it extremely difficult for them to deal with major pandemic outbreaks. Due to these problems, both the Asian Development Bank (ADB) and the International Monetary Fund (IMF) have lowered their economic growth forecasts for Asian developing economies. Meanwhile, developed economies might tighten their monetary policy earlier than expected due to inflation concerns, which, as warned by the IMF, may increase debt burdens, trigger capital outflows, and lead to the tightening of financial conditions in emerging markets.
The current bleak picture of the Vietnamese economy is in stark contrast with the optimistic outlook at the beginning of the year when the country was expected to enjoy a “breakout moment” built on its hitherto successful control of the virus and Asia’s economic recovery. Instead of a “breakout moment”, however, Vietnam is now facing the real risk of going through a “breakdown moment”, especially if it makes further policy mistakes, such as prematurely reopening the economy.
That said, on the bright side, the country seems to be moving in the right direction in its fight against the pandemic. Despite its slow start, the vaccination programme is gathering pace with nearly 10.3 million doses administered as of 10 August, and over 10 per cent of the population having been administered at least one dose. Vaccine supplies are expected to increase significantly in the coming months through foreign donations, commercial contracts, domestic production, and technology transfers. The government is aiming to increase the vaccination rate among people aged 18 and above to at least 50 per cent by the end of this year and over 70 per cent by the end of the first quarter of 2022.
If Vietnam is successful in its vaccination efforts, the country may be able to overcome the current fourth wave and reverse its economic fortunes within the next six months. For now, however, Vietnam’s “breakout moment” appears to have been just a short-lived one.
Tuan Ho is Senior Lecturer in Finance and Accounting at the University of Bristol.