COVID-19 distracts from Vietnam’s long-term development plans

Author: Suiwah Leung, ANU

Vietnam began 2021 in a relatively strong position, having successfully kept COVID-19 at bay. The only major impact on domestic economic activity in Vietnam was a reduction in international tourism, while the rest of the global economy was suffering from the effects of rolling lockdowns. Vietnam’s economy was one of few with a positive year-on-year growth of 2.9 per cent at the end of 2020.

This winning streak continued into the first half of 2021, with year-on-year growth registering 4.65 per cent in the first quarter and 6.6 per cent in the second quarter of 2021. The thirteenth Party Congress in February 2021 also saw the re-election of General Secretary Nguyen Phu Trong, the election of Prime Minister Pham Minh Chinh and the handover of the presidency to former prime minister Nguyen Xuan Phuc.

With Trong and Chinh in the key positions, a continuation of strong ‘collective leadership’ at the top is expected. Despite concerns regarding political ‘purges’, the re-election of Trong (known for his anti-corruption efforts) seems to indicate further commitment to anti-corruption and anti-cronyism within the upper echelons of the Vietnamese Communist Party. There is now a view that corruption at high levels would seriously undermine the credibility of the Party and needs weeding out.

The Delta strain of COVID-19 in July 2021, and its ease of community transmission within a largely unvaccinated Vietnamese population, brought an end to the economic stability that Vietnam had enjoyed up to that point. Ho Chi Minh City, the country’s commercial hub, faced serious restrictions affecting public transportation, public gatherings and non-essential services.

More than 100 seafood processing factories and over one-third of textile and garment factories closed. Samsung, whose largest electronics production hub is based in Vietnam, shifted parts of its production facilities along its global supply chain network outside the country. Toyota experienced disruptions to its manufacturing of auto parts in Vietnam. These factors helped sink Vietnam’s GDP in the third quarter of 2021: it contracted by 6.17 per cent, dampened as well by sharp falls in consumer spending, construction activity and lockdowns in the manufacturing industry.

The lifting of many COVID-19 restrictions in October as a result of rising vaccination rates was responsible for much of the economic recovery. In late August, only 3 per cent of the population was fully vaccinated, but this rose to 31 per cent by October and 66 per cent in December. This gave authorities the confidence to lift many of the restrictions.

The outlook for manufacturing seems to be reasonably bright as migrant workers return to cities, resolving labour shortage problem. But supply chain issues persist as Vietnam imports a significant portion of the inputs for its manufactured products.

The outlook for the tourism sector is clouded. Prior to the pandemic, international and domestic tourism constituted some 10 to 12 per cent of Vietnam’s GDP. International border closures meant that foreign arrivals plunged 79 per cent during 2020 and have yet to recover.

Some innovative ideas have begun to be implemented. From November 2021, fully vaccinated tourists are exempt from quarantine provided they are on approved tours and remain in certain designated locations such as the resort island of Phu Quoc. The Omicron variant has disrupted these experiments, but it is hoped that this disruption will prove temporary. As international flights have resumed in January 2022 to meet the demands of overseas Vietnamese visiting for the Lunar New Year, international tourism could well pick up.

Inflationary pressures worldwide, as well as budgetary blow-outs domestically, remain cautious reminders of the possible need for tightening of macroeconomic policies. Vietnam has done well in securing several regional trade deals, such as the CPTPP with countries in the Indo-Pacific and a free trade agreement with the European Union. But the progress to further develop Vietnam’s digital economy (for instance, the cross-border data flows agreed to in the CPTPP) have yet to be implemented domestically. The privatisation of state-owned enterprises has also stalled and needs to be revitalised.

The pandemic in 2021 was a serious distraction. While urgent government policy is needed to manage the public health situation, attention must not be lost towards measures that will bring longer-term growth and prosperity to the Vietnamese people.

Suiwah Leung is Honorary Associate Professor of Economics at the Crawford School of Public Policy, The Australian National University.

This article is part of an EAF special feature series on 2021 in review and the year ahead.

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