Reopening the constantly improving business environment marks a new day for Vietnam’s economic recovery
Building on the economic recovery in the fourth quarter of 2021, Vietnam’s gross domestic product (GDP) grew at a rate of more than 5 percent again in the first quarter of 2022, showing a good momentum of economic growth.
Statistics from the General Statistics Office of Vietnam (GSO) showed that the country’s GDP in the first quarter of 2022 was US$92.17 billion, up 5.03 percent year on year. Looking back at 2021 statistics, Vietnam’s GDP grew by 4.72 percent year on year in the first quarter, 6.73 percent in the second quarter, and only 6.17 percent in the third quarter. However, since the country reopened in October, its economic activities have only resumed gradually. In the fourth quarter of the year, GDP grew by 5.22 percent year on year, which contributed to annual growth of 2.58 percent in 2021.
Vietnam’s economic growth in the first quarter of 2022 was largely dependent on export trade. GSO statistics show that in the first quarter of 2022, Vietnam’s total imports and exports of goods reached US$176.35 billion, up 14.4 percent year on year. Its exports reached US$88.58 billion, up 12.9 percent, including US$65.31 billion of exports in the field of foreign direct investment (FDI, including crude oil), up 10 percent. Its imports reached US$87.77 billion, up 15.9 percent year on year, including imports of US$58.34 billion through foreign enterprises, up 17.1 percent.
Alongside exports, consumption and investment are also getting back on track. According to Vice Minister of Planning and Investment of Vietnam Tran Quoc Phuong, the country’s consumer price index (CPI) rose by 2.1 percent in the first four months of this year, the balance between fiscal, money, and credit was guaranteed, and state fiscal revenue was in surplus. Total retail sales of consumer goods and services in March 2022 were estimated at 438 trillion Vietnamese dong (VND), up 2.9 percent month on month and 9.4 percent year on year. In the first quarter of 2022, Vietnam’s FDI was estimated at US$4.42 billion, up 7.8 percent year on year to the highest level of FDI in the past five.
GSO Director General Nguyen Thi Huong identified several areas that have been particularly encouraging in the first quarter of 2022 compared to last year. The service sector has been recovering robustly, and manufacturing, especially processing, is embracing strong momentum. The Asian Development Bank (ADB) released its Asian Development Outlook (ADO) 2022 on April 6, which forecast Vietnam’s GDP growth at 6.5 percent and China’s at 5 percent for 2022. It also projected the Vietnamese economy to further expand by 6.7 percent and 4.8 percent for China in 2023.
Lifting Restrictions on Reopening
An important factor driving Vietnam’s rapid economic recovery in the past two quarters has been its active promotion of vaccination and gradual relaxation of strict pandemic prevention and control restrictions. As of March 2022, nearly 79 percent of the Vietnamese population had been vaccinated. In October 2021, Ho Chi Minh City began to lift restrictions. On October 11, the Vietnamese government promulgated Resolution No. 128/NQ-CP, which classified the pandemic risk into four levels and prescribed implementation measures to control local events and bolster socio-economic development while adapting to the new status quo by the end of 2021. Professor Mi Liang, doctoral supervisor at Beijing Foreign Studies University and executive director of the Chinese Association for Southeast Asian Studies, opined in an interview that COVID-19 has been the only reason for Vietnam’s decline in economic growth in the past two years. If it can overcome the problem, he expects its economy to resume rapid growth momentum.
On March 15, 2022, Vietnam announced full reopening of tourism, resuming its visa exemption policy for citizens from some countries and simplifying the testing process for inbound passengers. Dinh Viet Thang, director general of the Civil Aviation Administration of Vietnam (CAAV), disclosed that the number of passengers travelling by plane during the long weekend holidays will be 25 to 30 percent more than usual, up 90 to 95 percent year on year. Zhou Shixin, associate researcher at the Asia-Pacific Research Center of the Shanghai Institute for International Studies (SIIS), thinks that reopening international travel will help get international technical managers to return, which will benefit Vietnam’s manufacturing industry. Tim Leelahaphan, economist for Vietnam and Thailand at Standard Chartered Bank, predicted the reopening of tourism to contribute about 10 percent to GDP growth.
With the COVID-19 pandemic surging around the world, many countries are facing a state of stagnant economic activities and severely insufficient market supply. Vietnam has seized the opportunity to lead the resumption of work and production with an eye on gaining an even bigger share of the international market. Nguyen Teng Hsien, head of New Light Trading Company, said that improved market conditions have enabled his company to regain its market share, export more goods, and even pay workers more. He expects the business performance of his company to continue to improve. Chen Yueying, chairman of the business association of Thu Duc, a municipal city (sub- city) under the administration of Ho Chi Minh City, has identified plenty of business opportunities with bright prospects in 2022. Orders from producers and exporters have been filling up fast, with booming demand in the international and domestic markets. The area has provided positive stimulus for Vietnam’s continued economic recovery.
Improving the Business Environment
In addition to full reopening, the Vietnamese government has also introduced several measures to improve the business environment and promote economic recovery. First, the first extraordinary session of the 15th National Assembly opened in Hanoi on January 4, 2022. The session deliberated and adopted a package of 350 trillion VND (US$15.21 billion) to promote economic recovery. The package included 103.16 trillion VND on investment in transportation infrastructure, 64 trillion VND for tax reduction, and expenditures on pandemic response, the people’s wellbeing, recovery of tourism, and digital transformation. Second, the Vietnamese government promulgated its No. 2 Resolution on continued improvement of business environment on January 10, 2022, aiming to eliminate obstacles to investment and business activities caused by laws and regulations, provide guidance for the reform of the digital transformation, support the people in resuming production and business operations, and promote international cooperation combined with the reform of the domestic business environment. In addition, Vietnam has repeatedly revised the Investment Law to attract foreign investment, with the most recent revision coming into effect on January 1, 2021. Vietnam implements national treatment for foreign investors, offering enterprises in industrial parks tax exemption in the first two years, and tax cut by 50 percent in the ensuing four years. High-tech industries enjoy more preferential policies for tax exemption in the first four years and tax cuts by 50 percent in the ensuing nine years.
Nguyen Mai, chairman of the Vietnam Association of Foreign- Invested Enterprises, pointed out that although the global economy suffered from the negative impact of COVID-19 in 2021, encouraging achievements had been made in attracting foreign investment, which is a bright spot in Vietnam’s overall economic situation. Tran Quoc Phuong, Vice Minister for Planning and Investment of Vietnam, is also optimistic about the future of the Vietnamese economy, saying that the Vietnamese government’s policies of relaxing pandemic response restrictions and promoting economic recovery will help companies expand investment.
Free Trade Agreements
In the long run, Vietnam’s outstanding economic performance has been inseparable from its open- door economic policy. Chen Ching Hai, deputy director general of the Department of Import-Export Administration of the Ministry of Industry and Trade of Vietnam, said that the biggest opportunity for Vietnam’s exports lies in various free trade agreements (FTAs). Vietnam’s export growth target for this year is 6-8 percent, and it is the strongest driving force for achieving this goal to give full play to the role of the FTAs.
Since the beginning of reform and open-door policy in 1986, Vietnam has been exploring the market economy road, pursuing an export-oriented development policy. In 2006, Vietnam acceded to the WTO. In recent years, it has successively signed FTAs including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which officially took effect on January 14, 2019; the EU-Vietnam Free Trade Agreement (EVFTA), which officially took effect on August 1, 2020; the UK-Vietnam Free Trade Agreement (UKFTA), which officially took effect on May 1, 2021; and the Regional Comprehensive Economic Partnership (RCEP), which officially took effect on January 1, 2022. All of these agreements have laid the foundation for reducing trade barriers, enhancing trade facilitation, and promoting economic development. For example, according to the EVFTA, Vietnam and the 28 EU economies enjoy preferential tariffs, and the two sides will remove 99 percent of tariffs within 10 years. The RCEP’s entry into force will eventually reduce tariffs on more than 90 percent of trade in goods to zero. “The signing and entry into force of the RCEP will open the door of opportunity for Vietnam to expand its market, increase its exports, participate in new value chains in the region, and attract more investment,” commented Nguyen Hong Dien, Minister of Industry and Trade of Vietnam.
Zhao Qian, head of the China Business Association Ho Chi Minh City Branch, identified two advantages Vietnam wields in manufacturing at this stage: Its land price and labor costs are low, and market access facilitation and tariff reductions brought about by the FTAs between Vietnam and other major economies have helped. Xu Ningning, executive president of the China-ASEAN Business Council and chairman of the RCEP Industry Cooperation Committee, said that Vietnam’s participation in various multilateral trade agreements is helping Vietnam’s economy to attract more investment, boost economic recovery, and consolidate and develop regional supply chains.
Geographic and Demographic Advantages
In recent years, Southeast Asian countries represented by Vietnam have been favorites of European and American countries as indispensable links on the global manufacturing supply chain. One important reason is the region’s geographic and demographic advantages. Vietnam faces the sea on three sides, with a long coastline and numerous ports, providing ideal conditions for the import and export of goods and tourism development. By the end of 2020, Vietnam had a population of 97.34 million with rich human resources of young people at low cost, which has attracted many enterprises to invest and build factories there.
For example, Samsung, Sony, Qualcomm, Adidas, and Nike have all built factories in Vietnam. Vietnam is now Samsung’s largest production base in the world. In 2021, Samsung Vietnam’s exports exceeded US$65.5 billion, up 16 percent year on year. By the end of 2021, Samsung Electronics invested US$18 billion in Vietnam, up 102 percent year on year.
Risks and Challenges
Vietnam’s robust economic recovery has been accompanied by risks and challenges. For example, the ongoing Russia-Ukraine conflict has exerted a lot of pressure on Vietnam’s economy, including the rising price of raw materials, inflation, and the disruption of global supply chains. Both Russia and Ukraine are important trading partners of Vietnam. Russia has many FDI projects in Vietnam, mainly in oil, gas, and electricity, all of which will have to be put on hold. According to an HSBC Bank report on March 31, Vietnam’s crude oil imports doubled in March alone, and its gasoline imports were four times more than the same period last year. Rising international oil prices have directly affected the country’s imports of raw materials. Manuela Ferro, the World Bank’s Regional Vice President for East Asia and Pacific Affairs, said that although East Asian and Pacific economies are recovering from the impact of the pandemic, tensions in Ukraine have added to the challenges for economic growth.
Although the Vietnamese economy is growing rapidly, many problems are persisting for the long run. For example, problems of excessive dependence on foreign capital, unitary industrial structure too reliant on processing, weak basic industries, and limited technical capacity are all bottlenecking Vietnam’s economic development. Professor Mi Liang remarked that despite its comparative advantage of cheap labor, Vietnam’s disadvantages of low labor skills, incomplete industrial systems, and limited economic size prevent it from replacing China completely as a manufacturing power. Xu Ningning identified Vietnam’s advantages as cheap young labor, low production cost, improved infrastructure, and preferential policies for attracting foreign capital. However, Vietnam now imports many raw materials and spare parts from China. The country needs more technical management personnel, core technologies, and a more systematic industrial chain. Many challenges remain for the country to maintain long-term, sustained, and stable economic growth.
By Guo Xixian