Vietnam: successfully navigating the pandemic
March 10, 2021
Despite COVID-19, Vietnam’s economy has remained resilient, growing 2.9% in 2020 – one of the highest growth rates in the world – and growth is expected to be 6.5% in 2021, thanks to strong economic fundamentals, decisive containment measures and well – targeted government support, according to the latest annual assessment of the country’s economy.
Going forward, it is imperative that policymakers limit the permanent economic legacy and support a robust recovery, while laying the groundwork for reforms aimed at boosting productivity and reducing economic dualism.
The following graphics illustrate Vietnam’s experiences during the pandemic and the political priorities ahead.
- The pandemic has hit the economy hard, but Vietnam has taken decisive action to limit the health and economic fallout. The rapid introduction of containment measures, combined with aggressive contact tracing, targeted testing and isolation of suspected COVID-19 cases, has helped to keep recorded infection and death rates at particularly low levels per inhabitant. Successful containment, coupled with timely political support, also helped to limit the economic fallout and the size of the emergency response package. In 2020, the Vietnamese economy grew by 2.9%, one of the highest growth rates in the world, supported by the early rebound in domestic activities and strong export performance, especially exports of high-tech electronic products because people all over the world were working from home.
- Vietnam entered the pandemic with solid economic fundamentals and policy cushions, although some structural challenges remain. Since the advent of the market-oriented “Doi Moi” reforms in 1986, Vietnam has grown from one of the poorest countries in the world to a lower middle income country. The structural transformation of agriculture to a modern economy based on foreign direct investment in manufacturing and the emphasis on “leaving no one behind” has improved living standards. Strong foreign investment and current account surpluses have strengthened external resilience. The health of the banking system has improved, with higher profitability, liquidity and fewer NPLs than in the past, although weaknesses remained. And the country made considerable progress in consolidating public finances before COVID-19. Putting in place these fiscal, external and financial buffers before the pandemic made Vietnam more resilient to the shock.. However, despite these favorable results and the structural reforms underway, much remains to be done to boost productivity and improve economic resilience.
- Macroeconomic policies will need to remain favorable in 2021 to ensure a resilient and inclusive recovery. The Vietnamese labor market was hit hard in the second quarter of 2020, especially the large informal sector with limited access to social insurance. While a subsequent rebound in informal employment has occurred, the weakness persists. Short-term policies should focus on maintaining employment while promoting a reallocation of resources. This can be achieved, for example, by using hiring subsidies and active labor market policies to encourage vocational training. The coverage of the existing social safety net must be continuously extended and its effectiveness improved. Over time, policies should aim to reduce the informality of work by improving the skills of the workforce and lowering the costs of recruiting / firing formal workers, and by encouraging the formalization of enterprises.
- A sustained recovery also requires safeguarding financial stability. Vietnamese companies entered the crisis with relatively weak balance sheets, especially small and medium enterprises which dominate the hardest hit sectors. COVID-19 further deteriorated their liquidity and solvency positions, raising financial stability concerns through bank exposures. The monetary, fiscal and financial policies implemented by the government have helped to mitigate the immediate risk of a spike in business failures and massive layoffs. This support should be better targeted at illiquid but viable businesses until the recovery is on firmer ground. Ongoing and rigorous supervision, along with timely efforts to resolve lending issues and strengthen regulatory and supervisory frameworks, will help address financial system risks.
- More decisive reforms are needed to make the most of Vietnam’s considerable growth potential. This would require tackling the sources of widespread low productivity. Priority should be given to improving the business environment and ensuring a level playing field for small and medium-sized enterprises, with reforms aimed at reducing the regulatory burden faced by enterprises, improving their access resources, improve governance and access to technology and innovation, and reduce skills mismatches. Reforms in these areas would also help Vietnam gain more from its participation in global value chains in the post-pandemic world.