Vietnamese economy remains resilient despite COVID-19

The IMF anticipate growth will be at 6.5% in 2021 due to strong economic fundamentals, decisive containment measures, and well-targeted government support.

The IMF’s report stresses that whilst the pandemic has hit the local economy hard, the country has taken decisive steps to limit both the negative health and economic impact.

“Swift introduction of containment measures, combined with aggressive contact tracing, targeted testing, and the isolation of suspected COVID-19 cases helped keep recorded infections and death rates notably low on a per capita basis,” says the assessment made by the IMF.

It adds that successful containment, coupled with timely policy support, also helped to limit the economic fallout and the size of the emergency response package which followed.

According to the IMF, the country entered the pandemic with solid economic fundamentals and policy buffers, although some structural challenges must still be addressed.

“Strong foreign investment and current account surpluses strengthened external resilience. The health of the banking system improved, with higher profitability, liquidity, and fewer non-performing loans than in the past, although weaknesses remained,” it added.

The IMF outlined how Vietnam made considerable progress in consolidating public finances prior to the COVID-19 pandemic hitting. The build-up of these fiscal, external, and financial buffers ahead of the pandemic made the country more resilient to the shock when it eventually arrived.

Despite these favourable outcomes and ongoing structural reforms, the IMF believe there is still significant room to boost productivity and improve economic resilience moving forward.

The IMF also suggested that macroeconomic policies must remain supportive in the year ahead in order to ensure a resilient and inclusive recovery.

The Vietnamese labour market was hit hard during the second quarter of 2020, particularly its sizable informal sector due to its limited access to social insurance. Although a subsequent rebound of informal employment occurred, weakness remained persistent. Therefore, policies in the short-term must focus on sustaining employment while simultaneously fostering a reallocation of resources.

“This can be achieved by, for example, using hiring subsidies and active labor market policies to incentivize job training. Over time, policies should aim at reducing labour informality by improving labor skills and lowering hiring/firing costs for formal workers, and encouraging firm formalisation,” the IMF state.

According to the financial institution, a sustained recovery also hinges on the necessity of safeguarding financial stability.

“Monetary, fiscal, and financial sector policies implemented by the government have helped mitigate the immediate risk of a surge in corporate defaults and mass layoffs. Such support should be better targeted to illiquid but viable firms until the recovery is on firmer ground.”

Finally, the IMF concluded that more decisive reforms are needed as a means of making the most of the considerable growth potential that exists for the nation. This would therefore require tackling the sources of pervasive low productivity.

Priority should therefore be given to improving the domestic business environment whilst ensuring a level playing field for small and medium-sized enterprises. “Indeed, reforms should be geared towards reducing regulatory burden faced by firms, improving their access to resources, enhancing governance and access to technology and innovation, and reducing skills mismatches,” the report adds.

“Reforms in these areas would also help Vietnam reap greater benefits from participation in global value chains in the post-pandemic world."