Vietnam economy which was expected to grow at the rate of 2.7 per cent in 2020, as per IMF reports, is showing signs of better recovery in the post COVID 19 phase.
Prime Minister Nguyen Xuan Phuc has stated that the economy will grow at the rate of 4 to 5 per cent this year, completely exceeding the predictions that have been made by the IMF in April 2020. This would mean that the acceleration that the economy has achieved after successfully defeating the COVID-19 virus is on its way to recover faster than many Asian economies in the region.
In the revised estimates of the IMF released in May 2020 it was stated that Vietnamese economy will grow at the rate of 7 per cent next year but given the encouraging signs of the economic momentum, it might surpass the projected economic growth. The slow demand from the European and US markets has impacted the exports from Vietnam, and this might adversely affect its projected growth of 6.8 percent this year but even achieving a growth of five per cent would be laudable. Going by the resurgence in manufacturing, and the possible alternative to the Chinese exports in few niche markets, Vietnam might be reaping the benefits of early recovery. Nevertheless, this economic growth has also led to rising inflation and is likely to reach more than 4 per cent during this year.
In the second quarter, the economic development indicators are promising. As per the Bloomberg report, it is stated that Vietnam has posted its trade surplus of US dollars 500 million in June 2020 while it had suffered a trade deficit of US dollars 900 million in May 2020. The US market has also been showing signs of recovery, and the US-Vietnam trade is expected to touch US dollar 80 billion in coming years. This has happened because of bilateral trade agreement between US and Vietnam signed in the year 2000.
Further, the FTA between Vietnam and EU has facilitated better trade avenues for Vietnam. It is expected that the EU Vietnam trade agreement would facilitate tariff free entry of more than 71 per cent of Vietnamese goods to Europe while more than 65 per cent of European goods would get tariff free entry into Vietnamese market.
Even though many market analysts have predicted that the US might be shifting its supply chain which has been overly dependent on China to other alternate countries, Vietnam might not be the immediate beneficiary of such a shift. There might be few multinational corporations shifting base to Vietnam or other Southeast Asian countries having cheap labour but this will happen only in the long run.
Vietnam has been witnessing rise in foreign direct investment from European and the US companies because of improvement in legal aspects and better business facilitation environment. President Donald Trump has indicated that many countries which have a huge economic potential in Asia are lagging in promoting globalization, liberal trade values and effective financial architecture. Taking cognisance of these aspects the political establishment has bene making tectonic changes in economic sphere. The US and Vietnam trade relations is the fact that the trade deficit (Vietnam having positive trade surplus) between the two countries has already reached US dollars 40 billion last year. This issue has been raised by the concerned US authorities. So in order to capture US market, Vietnam would have to increase its trade basket and also start importing products from the US such as automobiles, bikes and other consumer products. This would mean that the US and Vietnam can work together to bring about balance in trade while at the same time expanding the commodities basket.
There are certain positives which have emerged because of the COVID -19 phase. This includes the active intervention of the political establishment to address inherent lacunae and anomalies in the Vietnamese economy. This includes rationalizing tax structure, improving infrastructure, addressing business challenges, public sector reforms and bringing in better banking standards. The weak banking system and financial architecture have impacted the growth of the Vietnamese economy. Also it has been seen that the Vietnamese currency Dong has been kept within a certain range so as to bring about more foreign exchange and avoid currency fluctuations in international market.
The relativelylow labour cost in Vietnam as well as the growth of small and medium enterprises (SMEs) would be beneficial for foreign direct investors to create an economic ecosystem which can provide employment to many. As already Vietnam has one of the lowest unemployment rates in the Asian region. In the year 2019 its unemployment rate was 2.2 per cent of the total working population. Vietnam is a highly literate nation and it is working hard to build a new education system to provide skilled workers and language experts to lure the foreign firms to invest in the country. Better vocational training institutes, effective industry specific skill training centres and improvement in higher education has been the prime focus of Vietnamese political establishment which would bring about necessary changes required for promoting foreign direct investment in the country. One of the biggest achievements that the country has done in the last one decade has been perceptible decline in corruption across the country.
As already discussed, Vietnam economy is primarily consisting of small and medium enterprises in the field such as textiles, metal forging. plastics, paper, tourism, agriculture and telecommunications. The potential of services in the economy needs further impetus in areas such as education, medicine, tourism and telecommunications. The country has been making significant inroads in sector such as automobiles, electronic and software technologies.
Vietnamese Prime Minister Nguyen Xuan Phuc has approved aUSD 9.3 billion tourism project by Vingroup. This is seen as one of the biggest investment by the largest private conglomerate of Vietnam. The project would be completed in the year 2031 and is located south of the Ho Chi Minh City. Vietnam political establishment is also making due efforts in bringing about more foreign direct investment from Asian and European countries so as to boost its manufacturing, and also develop its industries in high technology sectors. Vietnam might reap the benefits of post COVID economic growth due to the swiftness of structural reforms and trade facilitating measures. The country can emerge as the perfect example for the global south.
By Prof. Pankaj Jha.
Pankaj Jha is faculty with Jindal School of International Affairs, O P Jindal Global University, Sonepat. He can be reached at pankajstrategic[at]gmail.com.