Vietnam's economy in 1Q21 grew 4.48 percent YoY, below expectations, owing to the impact of COVID-19 outbreak on consumption and the service sector in early 2021. As a consequence of the outbreaks, the Vietnamese government issued measures to temporarily shut down businesses including restaurants, cinemas and entertainment complexes in both Hanoi and Ho Chi Minh City. In addition, all large gatherings were prohibited, and businesses were forced to reduce their business hours, particularly public transport services. Meanwhile, the government also reduced the issuance of stimulus packages to lessen the fiscal burden that stemmed from the massive economic relief packages that were passed in the previous year, which encompassed reduction of corporate tax, soft loan aids, and cash handouts to those affected by the pandemic. As a result, domestic consumption and economic activity have only seen limited recovery. Likewise, foreign direct investment (FDI) has also experienced a slowdown, particularly investment in new projects. On the other hand, imports of capital goods and raw materials have grown considerably, putting pressure on the trade surplus even though the export sector is expected to expand by 22 percent YoY.
Looking ahead, Vietnam's economic recovery is still set to occur at an accelerated rate for the remainder of this year. Investment in the manufacturing industry is making a strong comeback, which may signal a positive trend for overall investment. Since direct investment in this sector accounted for almost two-thirds of total direct investment prior to the spread of COVID-19, Vietnam's manufacturing industry will likely benefit from China's outward relocation of its production bases, due to lower minimum wages than China. Furthermore, Vietnam's comprehensive trade agreements ensures that a new round of investments will occur as soon as the COVID-19 situation eases. However, domestic consumption may still take a while to fully recover since export growth during the initial stage consisted primarily of electronic products. On the other hand, growth in exports of textiles and garments — which are linked more closely to Vietnamese consumers' purchasing power — may hinge on demand from trade partners, particularly European countries, that continue to be ravaged by the spread of COVID-19.
KResearch maintains its projection of Vietnam's economic growth within the range of 6.8 – 7.3 percent, wherein less-than-expected economic growth during 1Q21 could cause Vietnam's economy to grow at the lower end of the projection. Factors affecting the growth of Vietnam's economy that merit close watch include economic developments of countries in the Eurozone which are currently facing a new wave of the COVID-19 pandemic, as it may potentially cause Vietnam's textile and garment exports to grow below expectations. Additionally, Vietnam's efforts to reopen its border to international travelers should still be closely observed as they may affect not only the tourism sector but also influence FDI flows— particularly among new investors, who are postponing any investment decisions until Vietnam has lifted its travel restrictions.
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