Vietnam’s Economic Reopening: Finding the Right Balance
As Vietnam slowly eases social restrictions amid the Covid-19 pandemic, the challenge is to find the right balance between opening up the economy and protecting the health of the people.
Southern Vietnamese cities, which have been the epicentre of the recent spike in Covid-19 infections, have started to ease restrictions and slowly resumed socio-economic activities since 30 September. Yet two contrasting images underscore the country’s bid to come to grips with the coronavirus. In Ho Chi Minh City, people are queuing up at noodle shops, which is a sign of economic recovery. Yet, thousands of migrant workers have fled the city as soon as the lockdown eased, causing serious labour shortages for many businesses.
While Prime Minister Pham Minh Chinh insists that Vietnam must prepare to ‘live safely with the virus’, there is evidence that many provinces still want to maintain a prudent approach, at least for the foreseeable future. The tight measures they prefer are tantamount to the ‘zero Covid’ strategy rather than a strategy of living with endemic Covid-19. For example, although having one of the highest vaccination rates in the country, Hanoi has still delayed the reopening of Noi Bai Airport despite desperate calls from businesses and industry experts.
This presents Vietnam with the challenging task of ‘finding the right balance’ in its economic reopening process. On the one hand, Vietnam needs to ease social distancing measures as much as possible to revitalise the economy, which has been hard hit by the fourth wave of Covid-19 since late April. Vietnam’s GDP contracted 6.2 per cent in the third quarter, the largest quarterly decline recorded since 2000. The Asian Development Bank (ADB) has lowered Vietnam’s GDP growth forecast to 3.8 per cent in 2021, a drop of 2 percentage points from a previous estimate made in July. Nguyen Kim Anh, the deputy governor of the State Bank of Vietnam, has warned that banks’ non-performing loans could reach between 7.1 and 7.7 per cent of total outstanding loans, almost twice the estimate of 3.8 per cent at the end of 2020. Further delays to full reopening will impede economic recovery and put further stress on the banking system.
On the other hand, there remain epidemiological issues that worry the central as well as local governments. Although the number of daily cases has dropped to around 3,500, the lowest since July, there are concerns that children and unvaccinated elderly people may be infected. The tide of migrant workers streaming home may lead to new outbreaks in other provinces. Given these provinces’ lower vaccination rates and less extensive healthcare capacity, these are valid concerns.
In a recent meeting with a constituency in Hanoi, General Secretary Nguyen Phu Trong highlighted the dilemma facing the country: the country needs to remain cautious with the virus, yet promoting economic recovery should also be a key priority. However, finding the right balance between economic reopening and protecting public health is difficult, especially given that pandemic control performance can affect provincial leaders’ political prospects. Hanoi’s hesitance to reopen Noi Bai Airport can be seen as an example of the need to juggle between the two conflicting goals.
While government officials are still trying to find the right balance, challenges to the economy persist. Supply chain disruptions have led to manufacturing orders being rerouted away from Vietnam. Companies in the apparel and footwear industry have been subject to contractual penalties for delays in delivery, and the risk of order cancellation or reduction in 2022 is significant.
Recent developments suggest that Vietnam is likely to adopt a prudent and gradual economic reopening approach, which may offer the right balance from the perspective of many Vietnamese leaders.
There are also new risks to businesses: The exodus of migrant workers has led to widespread labour shortages and prudent economic reopening policies may lead to fresh lockdowns. It is estimated that half of the migrant workers have left Ho Chi Minh City after the recent exodus. At the same time, it will be challenging for businesses to meet the requirements for operating safely under the new healthcare guidelines. For example, Mai Huu Tin, president of the U&I Group, a major private firm based in Binh Duong Province, recently shared his concern that factory owners could try to keep their factories and transportation arrangements safe, but they could not make sure that all their workers live in ‘green zones’, which refer to Covid-free areas, as the current guidance stipulates. Ho Chi Minh City has also raised concern that it is very difficult for the city to meet the criteria for factory reopening recently proposed by the Ministry of Health. The city has therefore made an alternative suggestion that places a focus on reducing the number of deaths and serious Covid-19 cases rather than preventing new infections.
Recent developments suggest that Vietnam is likely to adopt a prudent and gradual economic reopening approach, which may offer the right balance from the perspective of many Vietnamese leaders. This approach will make high GDP growth forecasts for 2022, such as the 8 per cent forecast by Singapore’s DBS Bank, over-optimistic. Still, Vietnam may be able to maintain a GDP growth rate of above 6.5 per cent next year if it can launch a significant fiscal stimulus programme and accelerate vaccination rates.
Nguyen Thien Nhan, a former Politburo member and currently a member of the National Assembly, has recently proposed to increase public debt by 6.5 per cent of the GDP. This would raise the debt ceiling from the current 60 per cent of GDP sanctioned by the National Assembly to 65 per cent of GDP. If this measure is approved, a possible additional funding of US$22 billion can be pumped into the economy to support its recovery. This proposal is also supported by some other economic experts, including the Asian Development Bank’s Principal Country Economist Nguyen Minh Cuong. National Assembly Chairman Vuong Dinh Hue has also suggested that there should be larger monetary and fiscal stimulus packages to support economic recovery. Whether these suggestions will be adopted and realised effectively remains to be seen. In the meantime, finding the right balance between public health and economic reopening is still a tricky task for Vietnamese officials. There is no precise formulation here; but as the saying goes, Vietnam, like other countries navigating into endemic Covid-19 territory, will be feeling the stones underfoot to cross the river.
Tuan Ho is Senior Lecturer in Finance and Accounting at the University of Bristol.