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WB: Domestic Sector Drives Vietnam’s Economic Recovery

Diep Nguyen
BizLIVE -

The responsiveness of the domestic sector can be largely explained by the successful management of the health crisis, which in turn has allowed the government to lift the mobility restrictions measures over time.

WB: Domestic Sector Drives Vietnam’s Economic Recovery
The domestic private sector was seriously affected by the almost complete national lockdown in April but responded quickly to the gradual easing of restrictions in the subsequent months. 
This so-called V-recovery can be captured through the evolution of manufacturing production and retail sales, which fell by about 15 percent and 21 percent (m/m), respectively, in April and recovered from May onward. The Danang outbreak increased uncertainty among economic actors for a short time in August, but the government’s rapid and targeted response helped allay these concerns and explain why the second wave had minimal impact on national economic activities. 
In October—the latest data available at the time of this report—the domestic rebound strengthened, since both indicators registered their highest growth rates (y/y) since the outbreak of COVID-19 in February, growing by 6.6 percent and 6.7 percent (y/y), respectively. These rates were close to the ones observed before the COVID-19 crisis.
The responsiveness of the domestic sector can be largely explained by the successful management of the health crisis, which in turn has allowed the government to lift the mobility restrictions measures over time. 
The level of manufacturing activities fell by 13.4 percent (y/y) during the national lockdown in April, when the stringency index rose abruptly. Subsequently, the gradual removal of restrictive measures led to an increase in both mobility and economic activity over time.
Overall, the close and positive relationship between economic activity and mobility seen in Vietnam has been found in most economies in the world. Vietnam has been an outlier, not in the above relationship, but in its capacity to lift those containment measures on a more permanent basis, including during the second wave in August. This success has certainly increased the confidence of local consumers and investors, who have in turn boosted domestic demand over time, leading to higher production and retail sales.
If the responsiveness of the domestic sector to the easing of stringency of measures was in line with international experience, the robustness of Vietnam’s external sector was not expected. 
At the beginning of the crisis, the prediction was that this sector was going to be hurt badly by the global downturn, the closure of international borders, and the revamping of global value chains that appeared excessively concentrated in China, including for key medicine and pharmaceutical products.
After all, Vietnam’s economy is one of the most open in the world, with a merchandise trade-to-GDP ratio close to 200 percent, and well-established trade and financial bilateral relationships with China.
Yet, in 2020, Vietnam is expected to achieve a current account surplus. It is registering its highest-ever merchandise trade surplus (Figure 1.7) and accumulating almost US$100 billion in international reserves. 
The current account surplus will be achieved even if the tourism sector has been badly hurt by the ban on foreign visitors, and by the expected decline in remittances from Vietnamese expatriates by approximately 7.8 percent in 2020 compared to a year earlier.

DIEP NGUYEN