Fitch Solutions has revised down its 2020 real GDP growth forecast for Vietnam to 6.3 percent, from 6.8 percent previously, in light of the worsening global COVID-19 outbreak.
“We believe that the COVID-19 outbreak will heavily impact growth in the first half of the year, mainly due to disrupted supply chains in the region which would weigh heavily on manufacturing and weak tourist arrivals as well as general domestic fears of infection which would drag on services activity,” analysts of the global financial information services provider said in a report released on February 25.
“That said, our forecasts currently factor in our assumption of a gradual subsiding of the virus outbreak in the second half of 2020, which underpins our view for a sharp rebound in trade activity as supply chains and tourism activity normalises.”
Fitch forecast Vietnam’s large manufacturing sector (accounting for 16 percent of the country’s GDP) to come under pressure from supply chain disruptions as a result of the COVID-19 outbreak in China, which is a key source of raw materials and also a major export market for Vietnam.
China is Vietnam’s largest source of imports, accounting for around 28 percent of total imports, and is its second largest export market after the United States (20 percent), accounting for around 17 percent of total exports.
“We believe that the lack of inputs and demand shock from Vietnam-China border closures and multi-city lockdowns in China will weigh heavily on manufacturing growth in the first half of 2020.”
According to Fitch, while some companies such as Samsung are flying in inputs to circumvent the supply chain disruption from China, it believes that many companies, particularly small to medium-sized firms, are likely to struggle in their search for an alternative source of inputs at short notice.
Fitch forecast services (accounting for 42 percent of the country’s GDP) growth would also come under stress from weaker domestic and foreign demand as work disruptions, which would impact wages, and general paranoia of community cross-infection of the coronavirus would see weaker retail activities, which account for about 11 percent of GDP.
Weak domestic demand is likely to also feed through to the rest of the services sector, especially tourism.
“While tourism only accounts for 9.2 percent of total GDP, a shock in this area would nevertheless still impact the overall growth outlook for 2020,” the analysts noted.
However, Fitch believed that support measures by the Government would help alleviate the negative growth shock.
Fitch expected growth to rebound in the second half of 2020, assuming the virus subsides by then.
“We believe that this would be underpinned by a clearing of backlogged factory orders during the first half of the year upon the normalisation of supply chains, and pent up tourism demand following an easing of global uncertainty around the virus’ outbreak.”
In addition, Fitch expected trade is likely to also benefit from Vietnam’s ratification of the EU-Vietnam Free Trade Agreement (EVFTA), which would eliminate tariffs on more than 90 percent of all of Vietnam’s exports to the bloc.