Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
Vietnam was one of the most resilient economies in the
Asia-Pacific region to the shockwaves from the global Covid-19
pandemic during 2020. Strong economic recovery continued in the
first half of 2021, with GDP in the second quarter of 2021 rising
by 6.6% year-on-year.
However, after considerable success during 2020 in containing
daily new domestic Covid-19 cases to low levels, the situation has
deteriorated in May and June 2021, with a significant pickup in
reported daily new cases. With Covid-19 vaccination rates still
remaining very low as a share of the total population, Vietnam
remains vulnerable to a rising and protracted Covid-19 wave. The
latest IHS Markit Vietnam Manufacturing PMI for June 2021 showed a
sharp drop, reflecting the impact of the rising Covid wave.
New COVID wave poses downside risks to Vietnam's
economy
Vietnam has been one of the world's fastest growing emerging
markets in the past decade, boosted by strong foreign direct
investment inflows into its manufacturing sector. The pace of
economic growth slightly exceeded 7% in both 2018 and 2019. Rapid
growth of manufacturing exports and large new inflows of foreign
direct investment have been important growth drivers for Vietnam,
notably driven by rapid expansion in the textiles and electronics
sectors. Total electronic and electrical manufacturing exports
accounted for 33% of total merchandise exports in 2019, with
textiles, clothing and footwear accounting for a further 19.4%.
Total foreign direct investment inflows reached USD 20.4 billion
in 2019, up 6.7% year-on-year, driven by strong investment by
multinationals in establishing new manufacturing production
facilities in Vietnam. Samsung has been a key investor, with total
foreign direct investment into Vietnam of around USD 17 billion in
the decade to 2018. Vietnam has become the biggest foreign
production hub for Samsung Electronics, which booked USD 66 billion
of sales in 2018 out of its Vietnamese operations, which was
equivalent to around 28% of Vietnam's GDP. Around 50% of Samsung's
smartphones and tablets are produced in Vietnam and exported
globally. Samsung Vietnam has also built its largest R&D centre
in Southeast Asia near Hanoi.
However, economic growth momentum moderated significantly in
2020, due to the impact of the COVID-19 pandemic. For calendar
2020, the Vietnamese economy grew by 2.9% y/y, compared with a 7.1%
GDP growth rate in calendar 2019. Despite the moderation in growth
momentum, Vietnam was one of the very few industrial economies in
the Asia-Pacific region that achieved positive GDP growth in 2020.
IHS Markit estimates that the Vietnamese economy will show
improving growth momentum in 2021, expanding at a pace of 5.5%
year-on-year. Disbursed FDI remained resilient in 2020 despite the
pandemic, at around USD 20 billion, down only 2% on 2019. However,
FDI commitments fell more sharply, by 25% y/y, to USD 28.5
billion.
Economic growth momentum has strengthened in the first half of
2021. GDP growth in the second quarter of 2021 up 6.6% y/y,
improving on the 4.5% y/y growth recorded in the first quarter of
2021. A key driver of economic growth momentum has been the rapid
growth of exports, which rose be 28.4% y/y in the first half of
2021. The strong performance of industrial exports also boosted the
industrial sector, with industrial production up 9.3% y/y in the
first half of 2021. FDI inflows in the first half of 2021 remained
resilient, at USD 9.2 billion, up 6.8% y/y.
However, a pickup in daily new COVID-19 cases during May and
June has created risks to the near-term outlook. A key concern is
the low COVID-19 vaccination rate in Vietnam, which leaves the
nation vulnerable to further rises in daily COVID cases until
vaccination levels increase substantially. Only 3.3% of the total
population had received a first vaccination by 27th June 2021,
while the fully vaccinated share was extremely low, at just 0.2% of
the population. As a result of the rising COVID wave, the
government authorities have put in place strict lockdown
restrictions for Ho Chi Minh City for a wide range of activities,
including on public transport and public gatherings, as well as
non-essential business activities.
COVID wave impact on manufacturing sector
The latest wave of COVID-19 cases in Vietnam led to a sharp
decline in business conditions for manufacturers during June. The
IHS Markit Vietnam Manufacturing Purchasing Managers' Index (PMI)
plummeted to 44.1 in June from 53.1 in May, pointing to the most
severe deterioration in business conditions for over a year and
ending a six-month period of growth.
Output and new orders both decreased at the sharpest rates since
the first outbreak of the pandemic in early-2020, while firms
scaled back their employment and purchasing activity accordingly.
The pandemic also impacted supply chains, resulting in a
near-record lengthening of delivery times. For example, four
industrial parks in Bac Giang province in northern Vietnam were
temporarily closed in late May, due to outbreaks of COVID cases,
which also impacted on some manufacturing facilities of Foxconn and
Samsung.
The COVID-19 pandemic, lockdown measures and temporary company
closures were all mentioned by firms participating in the survey as
factors leading to sharp reductions in both output and new orders
during June.
However, despite the deterioration in manufacturing conditions
in June, Vietnam's exports performed strongly during the first four
months of 2021, prior to the escalation of the current COVID wave.
According to Vietnam's General Statistics Office, exports in the
first four months of 2021 are estimated to have risen by 29.6% y/y
to USD 104.9 billion, while imports likely increased 31.8% y/y to
USD 103.3 billion, resulting in a trade surplus of USD 1.6 billion
for the first four months of 2021.
In the near term, Vietnam's exports have shown rapid growth, as
key export markets, notably the US, China and EU, roll out COVID-19
vaccines, allowing a gradual recovery in economic growth momentum.
This has supported a rebound in new orders for key Vietnamese
exports such as garments and electronics. Vietnam's exports to its
largest export market, the US, rose by 48% y/y in the first four
months of 2021, while exports to China rose by 28% y/y over the
same period.
Although Vietnam's merchandise exports were very resilient in
2020 and have rebounded in the first half of 2021, exports of
tourism services have collapsed since March 2020 due to the impact
of international travel bans, including Vietnam's own ban on
international travel. Prior to the pandemic, the tourism economy
had been growing strongly in recent years, with international
tourist visits to Vietnam in 2019 having reached 18 million trips,
up 16% y/y. The protracted disruption of international tourism has
hit Vietnam's service sector exports badly in 2020-21. The impact
on the overall tourism economy has been mitigated by the
significant contribution of domestic tourism to the overall
industry while the domestic pandemic had very low daily cases.
However, with the rising COVID wave and new restrictions, domestic
tourism activity is also being hit.
Electronics Sector hit by global demand
slump
A key factor that has driven the sustained strong growth of
Vietnam since 2010 has been the rapid growth of electronics
manufacturing. The importance of Vietnam's electronics industry has
risen dramatically, with the electronic industry's share of total
GDP rising from around 5% in 2010 to around one- quarter of GDP by
2019, a key factor helping to drive rapid growth of both exports
and GDP.
With electronics now being Vietnam's most important export
sector, the impact of global lockdowns due to the pandemic on the
global electronics industry had been a key shock to the sector
during the first half of 2020. Amid widespread global lockdown
measures aimed at containing the spread of the pandemic, world
demand for electronic goods slumped sharply in the second quarter
of 2020.
However, since the low points in April and May 2020, the IHS
Markit Global Electronics PMI has signalled a very significant
rebound. The latest IHS Markit Global Electronics Purchasing
Managers' Index for May 2021 reached the highest level recorded in
23 years, boosted by buoyant demand in key markets. Rebounding
consumer spending and industrial production in key economies,
notably the United States, mainland China, the European Union, and
the United Kingdom, is helping to drive demand for a wide range of
electronics products.
According to the PMI data, global electronics new orders rose
from a calendar year-to-date low of 34.7 in May 2020 to a level of
63.3 in May 2021. New orders in May showed the fastest pace of
expansion since May 2004 and were the fourth-fastest pace of
expansion since the survey series began 23 years ago.
Vietnam's exports from phones and components were up 30.7% y/y
in the first four months of 2021. Meanwhile exports of personal
computers and related products rose by 18.2% y/y, as the global
shift to remote working boosted demand for personal computers.
Vietnam has significantly increased its share of global exports of
computers in the past five years and is now competing with China in
terms of the total export value of computer products.
Medium term growth drivers
The pandemic is expected to recede during 2022 as vaccination
rollout becomes more widespread across the population of Vietnam.
Over the medium-term outlook for the next five years, a number of
key drivers are expected to continue to make Vietnam one of the
fastest growing emerging markets in the Asian region.
Firstly, Vietnam will continue to benefit from its relatively
lower manufacturing wage costs relative to coastal Chinese
provinces, where manufacturing wages have been rising rapidly over
the past decade.
Secondly, Vietnam has a relatively large, well-educated labour
force compared to many other regional competitors in Southeast
Asia, making it an attractive hub for manufacturing production by
multinationals.
Third, rapid growth in capital expenditure is expected,
reflecting continued strong foreign direct investment by foreign
multinationals as well as domestic infrastructure spending. For
example, the Vietnamese government has estimated that USD 133
billion of new power infrastructure spending is required by 2030,
including USD 96 billion for power plants and USD 37 billion to
expand the power grid.
Fourth, Vietnam is benefiting from the fallout of the US-China
trade war, as higher US tariffs on a wide range of Chinese exports
have driven manufacturers to switch production of manufacturing
exports away from China towards alternative manufacturing hubs in
Asia.
Fifth, many multinationals have been diversifying their
manufacturing supply chains during the past decade to reduce
vulnerability to supply disruptions and geopolitical events. This
trend has been further reinforced by the COVID-19 pandemic, as
protracted supply disruptions from China during February and March
created turmoil in global supply chains for many industries,
including autos and electronics.
For example, the Japanese government has introduced a subsidy
program in 2020 for Japanese companies to help reduce supply chain
vulnerability by relocating production out of China either back to
Japan or to certain other designated nations. The Japanese
government has allocated an estimated 220 billion yen for the
supply chain reshoring program in Japan's supplementary budget for
the 2020 fiscal year, equivalent to around USD 2.1 billion. An
additional 23.5 billion yen were allocated for supply chain
diversification to other selected countries, which includes ASEAN,
India and Bangladesh. Vietnam has been one of the preferred
destinations for Japanese firms choosing to shift their production
to the ASEAN region in the first round of subsidy allocations
announced by the Japanese government.
Free trade agreements
Vietnam is also set to benefit from its growing network of free
trade agreements. As a member of the ASEAN grouping of nations,
Vietnam already has benefited considerably from the ASEAN Free
Trade Agreement (AFTA), which has substantially removed tariffs on
trade between ASEAN member countries since 2010. ASEAN also has a
network of free trade agreements with other major Asia-Pacific
economies, most notably the China-ASEAN Free Trade Area which
entered into force in 2010. This network of free trade agreements
has helped to strengthen Vietnam's competitiveness as a low-cost
manufacturing export hub.
The EU-Vietnam FTA (EVFTA) is a key new free trade agreement
that will boost Vietnam's exports and foreign direct investment
inflows. The EVFTA is an important boost to Vietnam's export
sector, with 99% of bilateral tariffs scheduled to be eliminated
over the next seven years, as well as significant reduction of
non-tariff trade barriers. For Vietnam, 71% of duties were removed
when the EVFTA took effect on 1st August 2020. Vietnam's exports to
the EU rose by 21% y/y in the first four months of 2021. The scope
of the EVFTA is wide-ranging, including trade in services,
government procurement and investment flows. An EU-Vietnam
Investment Protection Agreement has also been signed which will
help to strengthen EU foreign direct investment into Vietnam when
it is implemented.
Vietnam will also benefit from the Regional Comprehensive
Economic Partnership (RCEP) free trade agreement. The 15 RCEP
countries are the ASEAN ten nations, plus China, Japan, South
Korea, Australia and New Zealand. The RCEP agreement covers a wide
range of areas, including trade in goods and services, investment,
e-commerce, intellectual property and government procurement.
US bilateral trade frictions
The U.S. deficit for trade in goods with Vietnam reached USD
55.8 billion in 2019, with the deficit widening by 41.2% compared
to 2018. This was slightly mitigated by the USD 1.2 billion surplus
in favour of the US for trade in services, but still left the
overall bilateral trade deficit at USD 54.5 billion in 2019.
In 2020, the US trade deficit with Vietnam for trade in goods
has further widened, reaching USD 69.7 billion.
Reflecting the persistent large bilateral trade surplus that
Vietnam has with the US, the Office of the US Trade Representative
(USTR) announced on 2nd October 2020 that the US government has
launched an official investigation into acts, policies, and
practices by Vietnam that may contribute to the undervaluation of
its currency and the resultant harm caused to US commerce, under
section 301 of the 1974 Trade Act.
As part of its investigation on currency undervaluation, USTR
consults with the US Department of the Treasury as to issues of
currency valuation and exchange rate policy. The US Treasury has
informed the US Department of Commerce that Vietnam's currency was
undervalued by 4.7% in 2019, partly due to intervention by the
Vietnamese government. In December 2020, the US Treasury named
Vietnam as a "currency manipulator".
USTR has also launched an investigation into Vietnam's acts,
policies, and practices related to the import and use of timber
that is assessed to be illegally harvested or traded.
However, in its April 2021 semiannual Report on Macroeconomic
and Foreign Exchange Policies of Major Trading Partners of the
United States, the US Treasury determined that with reference to
the Omnibus Trade and Competitiveness Act of 1988, there was
insufficient evidence to make a finding that Vietnam manipulates
its exchange rate for either of the purposes referenced in the 1988
Act, and dropped its labelling of Vietnam as a "currency
manipulator".
Nevertheless, consistent with the 1988 Act, the US Treasury
considers that its continued enhanced engagements with Vietnam, as
well as a more thorough assessment of developments in the global
economy as a result of the COVID-19 pandemic, will enable the US
Treasury to better determine whether Vietnam intervened in currency
markets in 2020 to prevent effective balance of payments adjustment
or gain an unfair competitive advantage in trade.
Economic outlook
The Vietnamese economy is expected to show improved annual
growth in 2021, with GDP growth expected to strengthen to a pace of
5.5% y/y. Growth momentum is forecast to strengthen further to 6.8%
y/y in 2022.
However, a key uncertainty in the near-term outlook is the
extent and duration of the current wave of new COVID-19 cases that
is hitting the nation. If the COVID wave escalates further, it
poses a significant risk to the near-term outlook for domestic
demand, with the added risk of disruption to manufacturing output
if COVID-19 cases are detected in major manufacturing facilities or
logistics supply chains. Furthermore, unless Vietnam can
significantly ramp up its vaccination rate in coming months, it
remains vulnerable to new COVID waves.
Despite these near-term risks, over the medium-term economic
outlook, a large number of positive growth drivers are creating
favourable tailwinds and will continue to underpin the rapid growth
of Vietnam's economy. This is expected to drive strong growth in
Vietnam's total GDP as well as per capita GDP.
Vietnam's total GDP is forecast to increase from USD 270 billion
in 2020 to USD 450 billion by 2025, rising to USD 736 billion by
2030. This translates to very rapid growth in Vietnam's per capita
GDP, from USD 2,800 per year in 2020 to USD 4,500 per year by 2025
and USD 7,000 by 2030, resulting in substantial expansion in the
size of Vietnam's domestic consumer market.
Vietnam's role as a low-cost manufacturing hub is also expected
to continue to grow strongly, helped by the further expansion of
existing major industry sectors, notably textiles and electronics,
as well as the development of new industry sectors such as autos
and petrochemicals.
For many multinationals worldwide, significant supply chain
vulnerabilities have been exposed by the protracted disruption of
industrial production in China as well as some other major global
manufacturing hubs during the COVID-19 lockdowns. This will drive
the reshaping of manufacturing supply chains over the medium term,
as firms try to reduce their vulnerability to such extreme supply
chain disruptions. With US-China trade and technology tensions
still remaining high, this is likely to be a further driver for
reconfiguring of supply chains. A key beneficiary of the shift in
global manufacturing supply chains will be the ASEAN region, with
Vietnam expected to be one of the main winners.
Rajiv Biswas, Asia Pacific Chief Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
