AMRO Forecasts 7% Growth for Vietnam, but Challenges Remain

AMRO has released its annual consultation report for Vietnam and it’s predicting big things for the economy. But there are challenges and risks that go along with AMRO’s optimism. Here are a few key takeaways from the report and what they might mean.

The ASEAN+3 Macroeconomic Research Office (AMRO) released its Annual Consultation Report – Vietnam 2022, last week, the highlight of which is a growth forecast of 7 percent.

This is in line with growth forecasts from the International Monetary Fund and Standard Chartered, which both released their own growth forecasts last week of 7 and 7.5 percent, respectively.

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It’s also in stark contrast to 2021 in which Vietnam’s economy grew by a little under 3 percent. A result largely attributed to COVID-19 outbreaks that saw extensive lockdowns around the country.

With the worst economic impacts of COVID-19 having largely receded and most industries back to business as usual, AMRO’s report paints a somewhat rosy picture for Vietnam’s short-term economic future.

That is not to say Vietnam is out of the woods yet. AMRO’s consultation report not only highlights Vietnam’s key achievements, but also details a number of key challenges that the Southeast Asian nation faces.

Vietnam’s industrial production has rebounded well

“By the middle of 2022, industrial production was more than 25% higher than the pre-pandemic (the 2019 average) level,” the report found.

This is good news. Manufacturers in Vietnam have struggled over the past two years with COVID-19 wreaking havoc on their operations.

During the worst of the COVID-19 outbreaks in Vietnam, thousands of workers left major manufacturing hubs, particularly Hanoi and Ho Chi Minh City, and returned to their home provinces.

Convincing those workers to return as the pandemic subsided and Vietnam reopened was somewhat of a challenge. Still, a 13 percent rise in industrial production, year-on-year, in September of 2022, was reported by the General Statistics Office of Vietnam (GSO). This suggests that challenge may have now been somewhat overcome.

This is also reflected in the number of people currently employed. A total of 51.9 million people were employed in the third quarter of 2022, up from 51.6 million people in the second quarter of the same year.

There is, however, room for improvement, with the report noting that: “Overall, employment and labor force participation rates have not reverted to pre-pandemic levels, and underemployment persists.”

Vietnam’s economic recovery has been uneven

“Tourism and other services are still lagging in their recovery,” the report also notes, even though borders have now been fully reopened.

By October of this year, Vietnam had welcomed just 1.87 million foreign visitors, about 37 percent of its full year target of 5 million. This is also just a small portion of the 18 million foreign arrivals that arrived in Vietnam in 2019.

In the same year, tourism accounted for 12 percent of Vietnam’s GDP.

Vietnam’s exports will continue to grow

Despite the pandemic Vietnam still managed to maintain significant export growth in 2019 of 19 percent. This is expected to continue moving forward with export growth projected to reach 14.5 percent this year, according to the report.

Vietnam also maintained an average inflow of foreign direct investment (FDI) of 4.5 percent over the 2019-2021 period. This is likely to continue with FDI in 2022 predicted to hit 4 percent of GDP.

AMRO also suggests there may even be an uptick in FDI because of “supply chain dislocations”.

Notably, China’s zero-COVID policy has seen several manufacturers adopt a China plus one policy in which part of their supply chains are diversified out of China and into neighboring countries.

Vietnam, as one of China’s closest geographical neighbors, possessing competitively priced labor, and a strong network of trade agreements, is well positioned to be a key beneficiary of this new paradigm.

China’s zero-COVID policy may impact Vietnam’s imports and exports

That said, the zero-COVID policy has created problems at Vietnam’s northern border.

In the first four months of 2022 the Ministry of Industry and Trade (MoIT) recorded an 87 percent drop in the value of goods crossing the border from Vietnam to China.

Though this is concerning for Vietnam’s exports sector, particularly vendors of agricultural goods, this is also impacting Vietnamese manufacturing.

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“China’s dynamic zero-COVID approach is… creating supply bottlenecks for a range of intermediate goods imports,” the report points out.

Vietnam is heavily dependent on intermediate goods from China. In 2019, before the pandemic, imports of intermediate goods from China totaled US$26.6 billion.

However, lockdowns in China have seen industries across the board, from textiles to footwear to electronics to iron and steel manufacturing, impacted by shortages of raw materials.

This has seen an increase in the cost of doing business as domestic manufacturers scramble to find ways to meet manufacturing deadlines. The industrial output numbers mentioned earlier, however, suggest this is only having a minor impact on overall productivity.

The Vietnamese economy has potential

With industrial production up, employment numbers continuing to improve, and a growth forecast of 7 percent, it’s fair to say that the AMRO consultation report has an overall relatively positive outlook for Vietnam.

Yet, the country faces risks to its economic rebound in the short term – in particular, the lagging recovery of its tourism sector and supply chain blockages at its northern border because of China’s COVID-zero policy.

By managing these challenges carefully, Vietnam may very well make a full recovery from the COVID-19 pandemic.

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