Swift economic rebound expected, supported by export boom and low dependency on tourism
TRIS Rating forecasts Vietnam?s real gross domestic product (GDP) to grow by 5.6% in 2022, rebounding from a historic low of 2.6% last year caused by the Delta variant outbreak, which prompted the Vietnamese authorities to implement lockdown measures in major cities including Ho Chi Minh City (HCMC) and Hanoi in the third quarter of 2021 (Q3/2021). The swift recovery outlook reflects Vietnam?s two key economic fundamental strengths. First, Vietnam has increasingly integrated itself into the global value chain for high value-added products including computers, smartphones, and machinery & equipment. Second, Vietnam?s economy depends much less on foreign tourist receipts compared with neighboring countries like Cambodia and Thailand.
The principal economic driver in 2022 should come from the continuing global economic recovery, which will boost exports and foreign direct investor (FDI) inflows, the two main economic engines. Meanwhile, recovery of the domestic economy will largely depend upon the course of the pandemic. Emergence of the Omicron variant has heightened economic downside risks. The prospect of city lockdowns, as in 2021, may convince the government to maintain strict social distancing measures, which would constrain consumer and business sentiments and impede overall economic recovery.
Vietnam has benefited from global economic disruption in recent years. Supply chains have been relocated from China in the wake of the 2019 United States (US)-China trade war while global demand for smart gadgets and computers has surged to support changing lifestyles induced by the Coronavirus Disease 2019 (COVID-19) pandemic. In 2021, Vietnam?s total exports increased by 19% to reach USD336.31 billion, after recording an 8.2% growth rate in 2020. The key product drivers were telephones, computers, and machinery & equipment. Vietnam?s exports of these products reached USD57.54 billion, USD50.83 billion and USD38.34 billion, respectively, representing growths of 12.4%, 14%, and 41% from 2020. We expect this trend to continue in the post-pandemic era, strengthening Vietnam?s overall export profile.
The risk of slowing global economic momentum is reflected in the decelerating economic paces of the US and China since the second half of 2021. The two largest global economies are also Vietnam?s biggest export markets. Demand in the US is expected to face headwinds from faster-than-expected rising consumer prices, whereas the downturn in China?s property sector is likely to impact consumer and business sentiments. In 2021, export to the US grew by 24.9% from 2020 to reach USD96.29 billion, or equivalent to 28.6% of total export value; the share of the US rose significantly from 19.5% in 2018. Meanwhile, exports to China, the second biggest market, increased by 18% to reach USD56.01 billion, or 16.7% of total export value in 2021
Vietnam has increasingly engaged with the manufacturing supply chains of key global economies. Exports of the top three product categories represented more than 40% of total exports to key global manufacturing economies including the US, China, South Korea, Germany, and the Netherlands in 2021. The recent manufacturing export boom, especially to advanced economies, is likely to continue to attract more FDIs into the country, which, in turn, will establish Vietnam as a key global manufacturing hub.
Machinery & equipment exports to the US, Germany, and the Netherlands have witnessed rapid growth recently, increasing to 18.5%, 17.4%, and 16.3% of the respective country?s total export value in 2021, from 8.2%, 6.5%, and 7.8% in 2019. Telephone exports to China have also increased, to 27.1% in 2021 from 20% in 2019.
FDI inflows should continue to support Vietnam?s economic growth toward the medium term, supported by a large labour pool with competitive wages, growing middle class, and trade privileges with more than 50 economies including the US and European Union (EU). Development plans to upgrade the structure of key economies including the US, China, and Germany will further support supply chain relocation to Vietnam. The global pandemic outbreak in 2020 disrupted FDI inflows into developing worlds; net FDI inflows into Vietnam registered at USD15.8 billion, a drop from USD16.12 billion in 2019. Nonetheless, Vietnam experienced relatively low impact compared with ASEAN-4 peers (Indonesia, Malaysia, Philippines, Thailand) who encountered a marked decline in net FDI inflows and even registered a net outflow in case of Thailand, over the same period. Vietnam has recorded relatively high and stable net FDI inflows to GDP compared with its ASEAN-4 neighbours. During 2016-2020, net FDI inflows to GDP never dipped below 4.5%. The key investors were Singapore, South Korea, and Japan. Manufacturing is the most attractive sector and is expected to continue to draw the lion?s share of FDIs in the future. In 2021, manufacturing sector accounted for 58.2% of total registered FDIs. Energy production and distribution ranked as the second-most attractive sector with 18.3% of total registered FDIs.
We expect FDI inflows to rebound further in 2022 following the lifting of lockdown measures that impeded recovery in 2021. However, uncertainties surrounding the emergence of new virus variants remain high, while insufficient local engineers and infrastructure deficits remain key bottlenecks to FDIs.
Moderate external flexibility due to moderate external debt stock but low foreign currency reserves
At the regional level, Vietnam?s external flexibility looks moderate due to its moderate external debt stock to GDP, but low foreign currency reserves in relation to current account payments. Vietnam?s external flexibility in 2020 was fundamentally improved from 2016, attributed to exceptionally strong export and economic performance and high FDI inflows. We expect Vietnam?s external flexibility will continue to increase gradually in the medium term due to improving economic fundamentals.
Vietnam?s external debt to GDP stood at 36.7% (USD125.05 billion) at the end of 2020, down from 41.7% (USD77.83 billion) at the end of 2016, a moderate level compared with ASEAN peers. The debt was mainly composed of long-term debt at 80% of total external debt.
Vietnam?s foreign currency reserves stood at USD95.45 billion at the end of 2020, up significantly from USD36.91 billion in 2016. The fast accumulation was supported by improving economic fundamentals including a current account balance surplus, stable and high FDI inflows, and a decline in outflows of residential deposits abroad. However, it was equivalent to only four months of current account payments, a low figure when compared with regional peers. We forecast Vietnam will have the 2021 foreign currency reserve level at 3.4 months, due to current account balance deterioration, and will recover to 3.8 months in 2022.
Current account expected to turn surplus in 2022 but facing downside risk from new pandemic developments
Vietnam?s current account performance outperformed ASEAN peers in 2020 at 4.4% of GDP, due to the pandemic boosting export demand combined with effective pandemic containment. Nonetheless, Vietnam, in 2021, eventually encountered a severe outbreak of COVID-19 which disrupted nationwide production and contributed to an import surge. We expect the trade surplus to register at only 1.1% of GDP in 2021, shrinking dramatically from 9% in 2020. The service account balance was also aggravated by skyrocketing container freight costs and unrecovered tourism. We expect the situation to ease from the second half of 2022 onwards. Nonetheless, any new pandemic developments could bring further deterioration of the service balance. TRIS Rating forecasts a current account surplus of 1.3% of GDP in 2022, up from an estimated deficit of 4.2% in 2021.
Improving economic fundamentals strengthening balance of payment surplus
TRIS Rating projects the balance of payment (BOP) of Vietnam to reach a surplus of 2.6% of GDP in 2021, with stable and high net FDI inflows cushioning any deterioration of the current account balance. Net FDI inflows are one of the key factors supporting the BOP surplus and foreign currency reserve accumulations. Vietnam?s strong export competitiveness plus strategic geography helps attract FDIs to its economy. We forecast the FDI balance to register a surplus of USD15 billion in 2021, equivalent to 4.1% of GDP, down slightly from USD15.42 billion in 2020, due to the COVID-19 outbreak in Q3/2021. In 2022, we expect FDI inflows to recover to USD16.2 billion, supporting a surplus of 3.7% in the BOP position in 2022.
Another supporting driver is a decline in outflows of non-bank residential deposits since 2015. In 3Q/2021, outflows of non-bank residential money and deposits abroad stood at USD2.32 billion, dropping significantly from USD9.73 billion in 2015. The downward trend of outflows has coincided with the domestic asset price boom. Additionally, inflows from the banking sector, which registered USD2.6 billion for 3Q/2021, contributed to an appreciation of the Vietnamese dong in 2021.
With the rising interest rate trend in the global context, the risk of financial market volatility is likely to increase in 2022 due to market correction.
Pandemic pressuring fiscal position, with growing budget deficit in the near term
TRIS Rating projects the Vietnamese government budget deficit (including principal repayments) will reach 5.8% of GDP in 2022, narrowing from a 7% deficit in 2021. We see the government revenue shortfall during the pandemic as being the main driver of the deficit. Prior to COVID-19, the Vietnamese government?s budget balance deficit to GDP was declining thanks to strong economic performance.
In our view, the recovery of revenues in 2022 is still likely to face headwinds from the Omicron variant and the depth of economic fallout, which would delay the overall recovery of the economy and constrain the government?s ability to implement new tax collection measures. The need of the government to revitalize the economy is likely to continue to pressure the expenditure side. Nonetheless, we expect public external debt to increase at a slow pace due to the country?s large domestic financing sources. Vietnam?s public external debt to GDP ratio was low and declining prior to the pandemic. We project that external public debt will decline to 13.4% of GDP, equivalent to USD53 billion, by the end of 2022.
Bank credit growth expected to remain high to foster economic recovery
TRIS Rating expects the overall bank credit growth rate in Vietnam to remain high at 13%-14% at the end of 2022 to foster economic recovery. We forecast Vietnam?s bank credit outstanding to the private sector to stand at USD458.43 billion at the end of 2021, or equivalent to 125.1% of GDP, up 14.3% from USD395.48 billion, or 116% of GDP in 2020, as the State Bank of Vietnam (SBV) extended the debt moratorium in support of the economy. The bank credit growth rate has remained high with a 14.5% average annual growth rate during 2016-2020 as banks are a main player in the domestic private debt market. Meanwhile, corporate bonds outstanding represented 7% of Vietnam?s GDP at the end of 2021, increasing sharply from under 2% prior to the pandemic. High bank credit outstanding was backed by ample domestic liquidity made up mainly of local currency deposits, while dollarization in Vietnam was 8% of total liquidity in 2020.
We project an inflation rate of 2.6% in 2022, rising from 1.8% in 2021, with upside risk driven by the supply side, mainly food and energy price developments.