Challenging economic recovery

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Despite the complicated pandemic in many countries, especially in Asia and Southeast Asia, most countries have chosen a flexible easing strategy to support economic development. However, the world economic recovery remains challenging due to global supply chain disruption and international trade stagnation.

GLOBAL ECONOMIC GROwTH FORECAST LOw

China’s economy - one of the two sources for recovery - slowed down in the third quarter and that momentum will be maintained in the fourth quarter. Industrial production index and consumer spending have seen a continuous decrease in recent months. Major risks in financial, real estate and energy sectors exert more pressure on its robust economic recovery observed in the first half of 2021.

The U.S., Germany, Japan and some European countries also revised down their growth forecasts for this year, in particular: U.S. from 7 percent down to 5.9 percent and maybe even lower, Germany from 3.8 percent to 2.5 percent. For Japan, the recovery sees no progress at all.

Global inflation has shown signs of increasing and is likely to persist, threatening economic recovery and GPD growth in the medium term (except for Japan, which is still in deflation). Inflation in the U.S. is expected to reach 4.2 percent this year, while that of UK, Europe and China is approximately 3 percent, 2.5 percent and 4.5 percent, respectively. Although Fed and the central banks in some countries have set long-term inflation targets at 2.2 percent - 2.5 percent, the huge amount that U.S., Europe and Japan have recently injected through economic stimulus and social relief programs (U.S.: 27 percent GDP, Japan: 61 percent of GDP, Europe: 18 percent of GDP) will inevitably exert long-term growing inflationary pressures. In addition, the supply disruption due to shortages of raw materials, means of transport and the recent fuel crisis will also put pressure on cost inflation, which in turn will worsen global cost-push inflation.

Global trade still observes a weak recovery, which is attributed to disrupted supply chains, high transport costs, prolonged transport durations, leading to a shortage of semiconductor chips and sharp increase in raw materials and fuel prices. Global trade growth is expected to hit just 0 percent this year, with modest growth the following year.

In terms of currency and investment, despite the ongoing challenge in economic recovery, many central banks (except Japan) are planning to narrow down their economic stimulus, sharply reducing asset purchases and raising interest rates. Fed is expected to gradually raise the overnight rate from current 0.25 percent to 2.1 percent in 2022. South Korea is the first country to gradually shift to a tight monetary policy and increase interest rates from August 2021. China and many other countries are also expected to raise interest rates from 2022.

Therefore, the USD tends to appreciate significantly while currencies of many developing economies become weaken. This trend could last until 2021-end and begin to change significantly in the second half of 2022. Foreign investment flow into developing countries could be significantly reduced, although a massive capital outflow is unlikely.

In China, the collapse of Evergrande group is also posing significant concerns over its financial market. Despite its insignificant impact on international financial market (foreign investment in Evergrande is less than USD100 million), the Chinese government has to inject CNY100 billion into the banking system to maintain liquidity. In addition, the government’s policy adjustments towards domestic tech giants may also adversely affect foreign investments.

VIETNAM’S GDP PROjECTED AT 2.02.5 PERCENT IN 2021

Vietnam’s economy in 2021 severely suffers during the pandemic, worsened by the disruption of global supply chain. Economic growth saw a

downturn in the third quarter (-6.17 percent), which is expected to continue (or grow slowly) in the fourth quarter. If economic growth is negative for 2 consecutive quarters, Vietnam’s economy will fall into recession.

The sharp economic decline in the third quarter covered most of economic sectors, including industry, trade and services and agriculture (which, on the other hand, saw positive growth of 1 percent). Trade balance witnessed the first deficit in 10 years; foreign direct investment decreased with the number of closed enterprises outstanding the number of the new ones.

However, Vietnam still has several fundamental drivers for economic recovery, specifically:

The macro-economy is quite stable. The budget revenue and expenditure balance and current account are quite positive. This is an important decisive factor for economic recovery in the next few years.

Vietnam has entered into many free trade agreements. This is a great opportunity that domestic and FDI enterprises can capture to quickly restore production, especially in agriculture and processing industries. Vietnamese enterprises are nurturing innovation and actively supporting startup ecosystems. They are ready to overcome challenges and difficulties to recover their production and business. The Government’s policy and financial support, if any, will enable a very quick recovery process.

Vietnam is also accelerating vaccinations towards “living with the pandemic”, which helps facilitate economic recovery faster than many other countries.

How Vietnam’s economy recovers in 2022 depends much on Vietnam’s ability of ‘adaptation, safety and flexibility” to Covid-19 pandemic. This forms a firm ground for selective economic easing strategy to accelerate the recovery.

In addition, the Government should seriously consider obtaining necessary funds for unemployment allowance, maintaining employment for both employed and self-employed, financing major enterprises, and providing loan guarantees to SMEs which are no longer eligible to bank loans. It is even necessary to accelerate investment in key infrastructure projects such as the North-South Expressway, Long Thanh International Airport, etc. by issuing Government bonds, which will be purchased by the State Bank of Vietnam (SBV). Government bonds must be officially booked as public debt, which will be gradually sold by SBV in the next few years. The issuance volume should be as much as 2 percent of GDP (equivalent to USD6.8 billion according to new GDP calculation).

In addition, the Government by its mandate (provided for in the Foreign Exchange Ordinance) can mobilize 1-2 percent of foreign currency reserves for special medical needs such as buying vaccines, special medicines and some necessary modern equipment and technologies for research and manufacture of vaccines and drugs.

If the above requirements are fulfilled, Vietnam can avoid negative economic growth in the fourth quarter (which is not easy compared to 2020 year-over-year growth of 4.48 percent). Economic growth for 2021 can reach 2.0 - 2.5 percent.

Economic growth in 2022 can therefore recover well, projected at about 5 - 5.2 percent. Inflation may increase slightly due to the increase in raw materials and fuel prices in line with the world market and slight recovery of consumer demand (which decreases by over 10 percent in 2021) to approximately 4 percent, due to the slow recovery of cash turnover ratio. The trade deficit is forecast to decrease thanks to the recovery of domestic enterprises. The State budget balance may see a slight deficit. Non-performing loans of the banking system may increase sharply in the months ending in 2022. Some commercial banks may face liquidity problems, interest rates are likely to increase in the second half of the year.