Prospects and challenges for Vietnam’s economy in 2022

Vietnam was an economic star in 2020, as it managed to control the Covid-19 pandemic while maintaining one of the highest growth rates in the world. While GDP growth was only about 3 per cent, about half of its normal 6–7 per cent growth rate, most countries faced falling levels of output.

But the government — perhaps confident that its test, track and quarantine measures could continue to control the virus — was slow in procuring vaccines. When the Delta variant proved to be more transmissible and not so easily managed, there was a scramble to procure vaccines. This effort became more important after Omicron emerged.

As a result, 2021 was a tough year as shutdowns made life difficult and GDP slowed to 2.6 per cent. Increasing supplies of vaccines eventually allowed more normal activity in the last few months of 2021. Vietnam’s GDP shrank 6 per cent in the third quarter before bouncing back in the fourth quarter.

The trade surplus, a source of past tension with the United States, halved in 2021 to a modest US$4 billion. The nominal exchange rate of the Vietnamese dong against the US dollar modestly appreciated and foreign exchange reserves grew to four months of imports. Inflation was less than 2 per cent.

The big question now is if these developments will tarnish Vietnam’s hard-won reputation as a reliable supplier and alternative to China for manufactured exports ? Despite factory closures, exports rose 19 per cent in 2021 to an astonishing US$336 billion — while GDP was only US$271 billion in 2020 and grew only slightly in 2021. The high level of foreign direct investment (FDI) did not grow nor shrink much. The rapid increase in vaccinations — about 60 per cent fully vaccinated by early 2022 — suggests that factory closures will be modest in 2022.

But labour shortages may be more of a problem, as workers fear another round of factory closures and travel restrictions. There were troubles hiring even in 2019 as labour force growth slowed. Global pressures to reduce risk and increase resilience in supply chains are another headwind. While the momentum of past FDI commitments will keep export growth high in 2022, there are questions about later years.

One side effect of Vietnam’s rapid export growth has been a lag in domestic value-added in exports. Much of the work has been simple assembly rather than the development of a dense network of supplier industries that would make the FDI ‘stickier’ as wages rise and labour supplies tighten. The progress in this area has come from FDI suppliers following their ‘mother’ firms, not locally owned firms.

The Covid-19 pandemic slowed progress on this front, as fewer new enterprises opened and many more temporarily closed. Many firms that are still in business are financially weaker and will need time to accumulate resources to improve machinery, training and marketing. On the other hand, domestic firms managed to increase investment by 7 per cent in nominal terms while government and FDI firms saw declines. This is surprising given the 1.2 per cent real growth in service activity and 4 per cent real growth in the industry.