Eco Emerging

The health shock was more severe in 2021 than in 2020


Vietnam weathered the 2020 health crisis without any major waves of infection, without a contraction in GDP and without a notable deterioration in its macroeconomic fundamentals. In 2021, the situation was much more complicated. In Q3, an upsurge in the number of Covid-19 cases and strict lockdown measures brought the economy to a standstill. The epidemic curve deteriorated further in Q4, but the economy picked up again thanks to the increase in vaccinations and the adjustment of the “zero Covid” strategy. In the manufacturing sector, production and exports rebounded, and growth prospects are still solid. In contrast, private consumption and activity in the services sector remain weak. The government still has some manoeuvring room to boost its fiscal support.

Severe economic contraction in Q3 2021

In 2020, the Covid-19 epidemic was very limited in scope in Vietnam, resulting in a very mild deterioration in its macroeconomic performance. In 2021, new waves of infection had much more severe consequences. The number of Covid-19 cases began rising in May and then soared in July and August, leading the authorities to introduce extremely strict lockdown restrictions and quarantine measures during the summer (chart 1). Economic activity collapsed across the board. Real GDP contracted by 6% year-on-year (y/y) in Q3 2021 (after increasing by 5.7% in H1 2021), the country’s worst performance since the early 2000s.


The health situation is still fragile. After declining in September-October, the number of new cases has skyrocketed since November as lockdown restrictions have been eased. Although mobility indexes were still lower in December than at the beginning of the year, they have continued to improve slowly in recent weeks, despite another upturn in the epidemic curve. The authorities seem to be moving away from a strict “zero Covid” strategy, thanks notably to the rapid advancement of the vaccination campaign recently. By January 7th, 80% of the population had been partially or totally vaccinated, up from less than 5% at the end of June.

Uneven rebound in Q4 2021

In this environment, manufacturing production and exports picked up again as of Q4 2021. Industrial output rebounded by 4.2% y/y in Q4 after contracting by 3.7% in Q3 (vs +10% in H1 2021). Export growth accelerated rapidly from 3.2% y/y in Q3 to 19.1% in Q4, driven by still strong global demand for telephones, computers and other electronic devices, as well as for lower value-added goods such as textiles and footwear.

In the services sector, in contrast, activity is still affected by the effects of the latest epidemic outbreaks. It is constrained by the prudence of consumers, remaining restrictions and the absence of foreign tourists (the direct contribution of tourism to growth was estimated at 6% of GDP in 2019). Retail sales volumes declined by another 9% y/y in Q4 after plunging by 32% in Q3. Activity continued to contract in the hotel, restaurant, transport and leisure services sectors in Q4 2021.

All in all, real GDP growth rebounded to 5.2% y/y in Q4 and reached an average of 2.6% in 2021. Assuming there are no more strict lockdowns, economic growth should continue to accelerate and is projected to exceed 7% in 2022, as it did in 2018 and 2019. Growth should be driven by the gradual recovery in domestic demand and the continued development of the export manufacturing sector. In fact, foreign direct investment (FDI) should continue to support the expansion and upmarket shift in Vietnamese exports.

Temporary return to a current account deficit

Vietnam’s external accounts strengthened significantly in the years prior to the Covid-19 pandemic, thanks to large FDI inflows, steady growth in the export base and current account surpluses, increasing forex reserves, and the stabilisation of external debt ratios at moderate levels.

In 2020, these dynamics were not called into question (chart 2). The export sector was able to respond to growing global demand in the aftermath of the Covid-19 shock and increased its market share (Vietnam accounted for 1.6% of world exports in 2020, up from 1.4% in 2019). The current account surplus strengthened and exceeded 4% of GDP in 2020, thanks to an increase in the trade surplus, and despite the deterioration in the deficit of the balance of services (resulting from the fall in tourism activity). FDI inflows only dipped slightly. Forex reserves continued to rise and the external debt ratio held close to 36% of GDP.

In 2021, in contrast, the current account balance deteriorated sharply, and the full-year deficit is estimated at close to 1% of GDP. However, this current account deficit is not considered to be a major source of vulnerability.

First, it will be temporary. While the deficit in the balance of services continued to widen in 2021, the current account deficit mainly resulted from a major but transitory deterioration in the trade balance, which swung into a deficit in Q2 and Q3 2021. While import growth remained strong, export growth slowed as a result of the lockdown measures, supply-chain disruptions for intermediate goods and transport problems. Once the export engine started up again in October, both the trade and current account balances swung into surpluses again in Q4. This positive trend is expected to continue in the very short term, even though it may remain hampered by shortages still plaguing the region’s industries.

Second, FDI is resilient. In 2021, net FDI inflows registered in the balance of payments continued to decline slightly, but held close to an estimated 4% of GDP. As a result, Vietnam managed to preserve a positive “basic balance” (current account + FDI), which means it did not have to resort to new debt to cover its external financing needs. The country also continued to accumulate forex reserves, which now exceed USD 100 bn and cover four months of imports. These dynamics also contributed to the dong’s slight appreciation against the US dollar.

Vietnam is well positioned to continue to attract foreign investors and expand its export base in the short and medium term. We expect its current account surplus and its external liquidity and solvency position to consolidate in the future.