Emerging

Strong performances

st  
Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
9
VIETNAM  
STRONG PERFORMANCES  
The Covid-19 epidemic was well controlled last year and lockdown was swiftly eased. Productive activity has re-  
bounded vigorously since May, notably driven by a solid recovery in exports. Fiscal support measures have been  
moderate, primarily based on the accelerated implementation of already-planned investment projects. In the end,  
economic growth and macroeconomic balances were only moderately and temporarily affected in 2020. However,  
there remains a weak link in the economy: banks are insufficiently capitalised while corporates, especially state-  
owned enterprises, are excessively indebted. Some of these institutions could be severely weakened when monetary  
support measures come to an end in 2021.  
HEALTH CRISIS CONTAINED  
FORECASTS  
Vietnam posted economic growth of 2.9% in 2020, making it one of  
the strongest performers in the world. The Covid-19 epidemic was  
particularly well-managed, thanks to strict case-tracking. Lockdown  
measures were introduced gradually from the end of January, building  
up to a strict lockdown, that lasted just three weeks, in April. These  
restrictions were gradually phased out from the end of April, with  
adjustments then made in certain provinces, depending on the health  
situation. As a result, after it slowed to 0.4% year-on-year (y/y) in Q2  
2019  
2020e  
2021e  
2022e  
Real GDP growth (%)  
7.0  
2.8  
2.9  
3.2  
7.0  
3.5  
6.9  
3.9  
Inflation (CPI, year average, %)  
Budget balance / GDP (%)  
-3.3  
43.4  
3.8  
-6.0  
46.9  
3.2  
-4.5  
46.9  
3.5  
-4.0  
46.4  
3.8  
General government debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
2
020, real GDP growth bounced back to 2.7% in Q3 and 4.5% in Q4.  
35.6  
78.3  
3.6  
36.3  
90.0  
4.0  
34.4  
103.0  
4.1  
32.0  
115.0  
4.1  
Mobility indicators have now returned to close to normal levels. Yet  
international tourism continues to be banned.  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate VND/USD (year end)  
By mid-January, Vietnam had had only 1,515 Covid-19 cases and  
23 170  
23 150  
23 070  
23 000  
3
5 deaths for a population of 98 million. A clinical trial of a locally  
e: ESTIMATE & FORECASTS  
TABLE 1  
produced vaccine began last month, and the first delivery of European  
vaccines has just been announced.  
SOURCE: BNP PARIBAS ECONOMIQUE RESEARCH  
EXPORTS: A SOLID DRIVER OF ECONOMIC GROWTH  
STRONG PERFORMANCE OF VIETNAMESE EXPORTS  
The Covid-19 shock hit a very buoyant economy, which had grown by  
an average of 7% per year between 2015 and 2019, and still enjoyed  
growth of 7% y/y in Q4 2019. This momentum was fuelled in particular  
by the export-oriented manufacturing sector, which has attracted  
substantial Foreign Direct Investment (FDI) and gradually moved up  
the value chain. Exports of goods accounted for 80% of nominal GDP  
in 2019, from 64% in 2014. They now consist primarily of phones,  
USD, bn, 12mms  
25  
USD, y/y % change, 3mma  
5
4
3
2
0
0
0
0
Trade balance (RHS)  
Imports  
Exports  
20  
15  
10  
5
World exports  
1
computers and other electronic goods , for which global demand has  
10  
0
surged since the beginning of the health crisis. As a result, exports have  
been a solid driver of the economic growth rebound after the shock  
in S1 2020 (chart 1). After a 7% y/y contraction in Q2, exports have  
bounced back rapidly, posting growth of 6.5% over the full year (vs.  
0
-10  
-5  
-10  
-15  
-
20  
8
.4% in 2019). Vietnam further strengthened its world market share,  
accounting for 1.6% of global exports in the first nine months of 2020  
from 1.4% in 2019 and 0.8% in 2014).  
-30  
2
011 2012 2013 2014 2015 2016 2017 2018 2019 2020  
(
The export sector has proved able to adapt to changes in global  
demand in 2020. Moreover, it has also taken advantage of Sino-  
American tensions over the past three years, via the substitution of  
certain Chinese products by Vietnamese products and the relocation  
CHART 1  
SOURCE: GENERAL STATISTICS OFFICE  
emerged in December, when the US officially designated Vietnam as  
a ‘currency manipulator’ . This decision could result in a degree of  
tension with the US, which is the destination for around a quarter of  
Vietnamese exports.  
3
2
of factories to Vietnam . These trends are likely to persist in 2021 and  
2
022, with the country well-placed to attract investors and continue  
to expand its export base. One dark cloud on the horizon, however,  
1
In 2019, phones and components accounted for one-fifth of Vietnam’s exports (vs. 16% in 2014), and other electronic and IT goods for 14% (vs. 8% in 2014). Textile and shoes remained  
at 19% of the total, whilst oil, agricultural and fisheries products declined to less than 8% from 20% in 2014. Foreign groups produced two-thirds of the goods exported, a share that has  
fallen slightly over the past three years.  
2
3
One recent example is Apple, which began to assemble some of its products in Vietnam in May 2020.  
This decision is the consequence of a bilateral trade surplus of more than USD 20 bn, Vietnam’s current account surplus of more than 2% of GDP and forex market interventions of more  
than 2% of GDP.  
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0
We estimate that Vietnam’s current account surplus was 3.2% of GDP  
in 2020, from 3.8% in 2019. The increase in the trade surplus was  
partly offset by the deterioration of the balance in services (collapse  
in tourism) and a drop in workers’ remittances. Despite the reduction  
in foreign capital inflows, Vietnam continued to accumulate foreign  
exchange reserves, which reached USD 89 billion in September,  
meaning that they cover more than four months of imports of goods  
and services. The dong has appreciated slightly against the dollar since  
mid-2020.  
MONETARY SUPPORT  
4
3
3
2
2
1
1
0
5
0
5
0
5
0
5
0
14  
12  
Credit to the private sector, y/y % change  
Policy discount rate % (RHS)  
1
8
6
4
2
0
0
A MODEST SLOWDOWN IN DOMESTIC DEMAND  
In 2020, the manufacturing sector grew by 5.8%, down from 11.3% in  
2
019, and the service sector grew by 2.3% vs. 7.3% in 2019. Although  
sectors linked to tourism (6% of GDP) continued to struggle, services  
activities that depend on domestic demand have either held steady  
during the lockdown (IT & communications, healthcare) or recovered  
well since May (most notably in the retail sector). In fact, after a  
contraction during the lockdown period (-27% y/y in April), retail sales  
volumes have rebounded once lockdown was loosened, and posted a  
small decline of less than 1% in 2020.  
2
011 2012 2013 2014 2015 2016 2017 2018 2019 2020  
CHART 2  
SOURCE: STATE BANK OF VIETNAM, IMF  
The fiscal support package was modest – estimated at around 3% of  
GDP – and the fiscal deficit is unlikely to have exceeded 6% of GDP in  
020. It is projected to decline from 2021.  
The government has been able to cover its financing requirements  
without difficulty, both on the local bond market and by using its fiscal  
reserves. Government debt remains moderately high, estimated at  
nearly 47% of GDP at end-2020 (from 43% in 2019, according to IMF  
data). It is projected to stabilise in 2021.  
Vietnam’s labour market and households have been hit less hard than  
those of other countries in the region by the Covid-19 shock, given the  
rapid recovery in productive activity from Q2 2020. According to the  
World Bank, only 3% of workers lost their jobs last year because of  
the pandemic. Nevertheless, 33% of households suffered a reduction  
in income (compared to 79% in Indonesia for example), inequality  
increased, and the financial support provided by government proved  
to be weaker than expected. Meanwhile, households have benefited  
from slower inflation in consumer prices (1.4% y/y in Q4 2020 vs. 3.7%  
y/y in Q4 2019).  
2
A MAJOR TEST FOR THE BANKING SECTOR  
019. It is likely to rebound vigorously over the coming months, but not  
Private consumption growth stood at 0.6% in 2020, down from 7.4% in  
There is a major weak link in the Vietnamese economy: banks are un-  
dercapitalised and lack a buffer to protect them from shocks, while  
corporates, particularly in the public sector, are excessively indebted  
2
to return to pre-crisis levels in 2021. The slowdown in investment was  
much more modest (4.1% in 2020 vs. 7.9% in 2019). On the one hand,  
the loss of vigour in private investment was contained, notably thanks  
to the still strong prospects for exports. In particular, FDI has proved  
more resilient in Vietnam than in the rest of the region. According to  
balance of payments data, FDI inflows dropped by only 4% y/y over  
the first nine months of 2020 and had already regained their Q3 2019  
levels in Q3 2020. On the other hand, public investment was stepped  
up last year. The accelerated implementation of investment projects  
(
credit to the economy represented 145% of GDP in 2020).  
Some of these institutions could therefore find themselves severely  
weakened, in turn creating a threat to public finances. Granted, the  
performance of the banking sector improved in 2018-2019, notably  
thanks to a strengthening of the regulatory framework, a more solid  
funding base and an improved quality of new loans. In addition, since  
the beginning of the health crisis, the easing of monetary conditions  
(
through interest rate cuts, liquidity injections and a loosening of  
(
most of which were already under way or in the planning stage)  
macro-prudential rules) and the support provided to banks and their  
customers (rescheduling of loans) have helped reduce the pressure  
represented the biggest share of the fiscal support package. Whilst  
total government spending increased by 8% y/y in the first nine months  
of 2020, investment spending (a quarter of the total) rose by 40%.  
(
chart 2). However, some corporates have been weakened and are  
experiencing cash-flow constraints, particularly those in the tourism  
and transport sectors. Non-performing loans on bank loan books  
have started to increase. This trend is likely to accelerate when  
support measures are phased out over the course of 2021. Against this  
background, certain small private banks, lacking capital and stable  
sources of funding, could face significant difficulties.  
A TEMPORARY SHOCK TO PUBLIC FINANCES  
Public finances had been consolidated over the five years prior to the  
Covid-19 crisis, leaving the government a small degree of latitude to  
absorb the shock and support activity. Thanks to greater discipline in  
managing expenditure, the partial privatisation of some state-owned  
enterprises and strong economic growth, the government registered  
a steady reduction in its deficit from 2014 to 2019 (from 5% of GDP to  
Completed on 11 January 2021  
3
.3%) and a reduction in its debt between 2016 to 2019 (from 47.6% of  
Christine PELTIER  
GDP to 43.4% according to IMF data). This positive trend was interrup-  
ted last year, but this interruption is expected to prove only temporary.  
christine.peltier@bnpparibas.com  
The bank  
for a changing  
world  
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