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Can Vietnam’s new leadership sustain its stellar growth?

Feature_vietnam_May2021
Newly elected leaders filled the positions of the General Secretary, Prime Minister, President and Chairman of the National Assembly

Amidst the ongoing Covid-19 pandemic, on April 5th, 2021, the National Assembly of Vietnam elected the country’s four leaders who will hold key positions over the next five years. While Nguyen Phu Trong was re-elected for the third time as the general secretary of the Communist Party of Vietnam, Pham Minh Chinh was elected as the Prime Minister. Nguyen Xuan Phuc was chosen as the newly elected President, and Vuong Dinh Hue was appointed as the Chairman of the National Assembly.

In 2020, economies across the world were battered because of the pandemic. However, Vietnam’s economic performance in 2020 caught global attention. Vietnam was the top-performing Asian economy last year, and according to government estimates, the Vietnamese economy grew by 2.9 percent year-on-year. What’s remarkable is that while some of the biggest economies were battling recessions, Vietnam did not report a single quarter of contraction, a period plagued by lockdowns, border closure and economic distress.

Interestingly, in the last decade, Vietnam achieved impressive yearly GDP growth of six percent or higher, reaching a 10 year high of 7.1 percent in 2018. Once known as one of the poorest economies in the world, Vietnam’s current impressive growth counters China. Top brands such as Nike and Samsung have established their manufacturing hubs in the country. So how did Vietnam achieve this remarkable feat? Vietnam reached its current peak through a series of social and economic reforms, liberalisation, domestic reforms through deregulation and investments in human and physical capital.

The new leadership in place has a daunting task in their hand. Not only they need to maintain Vietnam’s impressive economic growth but they need to steer the economy through a pandemic. Earlier this year, World Bank released reports acknowledging Vietnam’s transition from centrally planned to a market economy and is recognised as the most dynamic emerging country in the Southeast Asia region.

The World Bank’s data from 2002 to 2018 proves that the GDP has increased 2.7 times, yet, Vietnam reported per capita income to be $2,700 in 2019. Vietnam took initiatives to alleviate poverty from 70 percent to less than six percent during this period, a remarkable achievement. Vietnam’s impressive economic growth has been facilitated by export-oriented manufacturing and the resurgence of domestic demand. The country has a considerable number of young people population with a life expectancy of 76 years. According to the World Bank, about 26 percent of the population will be from the middle class by 2026.

Vietnam under new leadership
Newly appointed Prime Minister Pham Minh Chinh has prioritised the transformation and development of Vietnam’s economy to a digital-based economy. The Resolution of the XIII Congress of the Party has revealed the blueprint for the new regime that seeks to transform the economy by undertaking six key tasks and three strategic breakthroughs. Under the leadership of China, Vietnam will invest in science and technological development and create a more conducive environment for business development as well as for manufacturing concerns.

PM Chinch’s have prioritised national defence, sovereignty, territorial integrity, social order and safety amid unstable situations in the South China Sea. However, the bigger task in the hand of the newly elected prime minister is to lay down a constructive plan to build on recess success and develop Vietnam into a modern state with a fully developed economy in league with countries like South Korea, Japan and the western countries.

It will prove to be monumental and such transition will need to be guided by the vision of the new leadership and has to be aided by suitable economic and social developmental policies. While the current political leadership needs to kickstart the gargantuan project, the chances are high that the targets won’t be achieved in its lifetime. Therefore, PM Chinh would also need to oversee the commencement and successful implementation of the Five Year Economic and Social Development Plan (2021-2025) and the Ten Year (2021-2030) Economic and Social Development Strategy.

Institutions such as the World Bank and International Monetary Fund (IMF) expressed their belief that Vietnam is pacing towards a more open and competitive economy. They also appreciated the steps taken to increase diversifying its economic relationship with various countries across the world. As a result, despite the pandemic, Vietnam showed an impressive economic growth of about three percent in 2020.

The senior party leadership also agrees that the high growth rates pave the way for better living standards for the population. Thus, it is vital for them to work towards better economic management and integrate the country into the global supply chains. Furthermore, the new regime provide structural and institutional support for the private sector that boosts the country’s economy, Vietnam can be expected to adhere to its 2016-2020 economic reforms blueprint that outlines favourable conditions for the private sector.

Plans going forward
While addressing the nation in his first speech, Prime Minister Pham Minh Chinh stated that he would protect the sovereignty and independence of the country. At the same time, he also wanted to maintain the anti-corruption drive to cleanse the economy to provide a better niche for growth and investment. Along with Finance Minister Ho Duc Phoc, the Prime Minister has formulated strong fundamentals to boost Vietnam’s economic development and improve productivity.

The macroeconomic policies can support the active labour market and provide job training and a structural social safety net to address social and economic issues. Doi Moi, the economic reforms initiated after 1986 are afoot to provide better avenues for growth and active participation of the private sector to help build Vietnam as a sturdy economy of East Asia.

Vietnam is viewed as a middle-income country that has developed a small and medium enterprises economy. It has records of working on its disinvestment policies and implementing various multilateral and bilateral agreements that it had signed in the past two years. The government of Vietnam has always shown efforts at multiple levels for liberalising the Vietnamese economy and improving its trade with the US and the EU markets because the benefits from those economies would be of large volume and would trickle down to the different sectors of the economy. Reports on the economy of the country state that it witnessed a growth of about 4.5 percent in the first quarter of 2021, marking an increased trade with the US.

Thus the priority of the new leadership will eventually be focused more on the economy of the country. The government is also focused on improving English proficiency among entrepreneurs and easing foreign direct investment procedures in different provinces. In addition, commitments are made to build a better technological ecosystem that would provide capital and skilled labour for the network to thrive.

Urbanisation and strong economic fundamentals are also increasing. The new leadership is also seen preparing to address challenges like waste management and support green technologies to address pollution challenges. Financial institutions also acknowledge Vietnam as a country that has graduated from an agriculture-based economy to a modern economy. This will boost the living standards due to substantial foreign investment and sufficient current account surpluses.

Fighting the virus in 2021
Vietnam not only successfully navigated the pandemic on the economic front but also when it comes to the spread of the virus in the country. So far, Vietnam has recorded around 13,530 cases of Covid-19 in the country, with 69 deaths. This is attributed to strong economic fundamentals, decisive containment measures and well-targeted government support. Vietnam introduced containment measures with the help of aggressive contact tracing, targeted testing, and the isolation of cases suspected of Covid-19 infection. These swift moves of the government helped to maintain low recorded rates of infections and death rates on a per capita basis.

The newly elected government prioritises vaccinating its population against Covid-19 and preventing the spread of the virus in a working space. By accelerating the vaccination rollout, Vietnam can sustain growth, prevent a decline in income and economic conditions and at the same time prevent the pandemic from affecting consumer spending behaviour and lifestyle in the long run. However, Vietnam estimates that it would take around $1.1 billion to procure sufficient Covid-19 vaccines to inoculate the entire population.

The vaccine expense will further strain the state’s budget. Vietnam’s Ministry of Finance had already stated that it has managed to allocate about $608.9 million and will need $487.1 million to buy the required jabs. Thus, in order to help the country procure vaccines, Vietnam launched a public fund in early June. Many see the Covid-19 Vaccine Fund as a timely and suitable initiative of the government to mobilise resources available to fight against the virus.

Bank transfers, various channels, and an official website for the National Covid-19 Vaccine Fund are introduced to receive donations from individuals, businesses, and organisations in Vietnam and abroad. The fund would exceptionally ease the limited state budget and financially back the country to import, research, manufacture and distribute vaccines. To maintain growth, the government has promised to pay attention to attracting foreign direct investment through multilateral relations and take advantage of the bilateral and multilateral agreements the country has signed in the past.

Vietnam’s growth outlook optimistic for 2021
Despite mass vaccination programme underway in many places, Covid-19 cases are rising globally, and a fourth wave is looming large. Vietnam prided itself from keeping Covid-19 cases very low until now. Cases are rising alarmingly in Southeast Asia compared to Europe or the Americas. Yet economists predict that the GDP growth will exceed 6.5 percent in 2021 as a result of an increase in industrial production and global economic recovery. Towards the end of 2021, the domestic production sector in Vietnam can also expect a 17 to 18 percent surge as the manufacturing and processing rates are soaring.

The industrial production index in the first five months of 2021 was at 9.9 percent year-on-year, and the manufacturing and processing were at 12.6 percent. Total retail sales of goods and services reached 7.6 percent year-on-year. From a bigger picture, the US, China and the EU are bouncing back from the pandemic, and it has also increased the global credit demand. This is an opportunity for Vietnam to boost its exports. Furthermore, the economic growth of the US remains positive, strengthening the shipments from Vietnam more robust. RongViet Securities Corporation (VDSC) recently released a forecast that stated GDP would grow by 7.2 percent in the second quarter of 2021 and 6.5 percent for the year as a whole.

The IMF also predicted Vietnam’s GDP growth to be 6.5 percent in 2021 and the per capita income to be more than $3,750 by 2023. According to the latest economic outlook report from Oxford Economics (OE), commissioned by the Institute of Chartered Accountants in England and Wales (ICAEW) stated that Vietnam’s growth outlook remains optimistic. Its economy is expected to return to pre-pandemic levels by the second half of 2021 despite the recent resurgence in Covid-19.

Based on the factors listed above, we can say that Vietnam provides a positive outlook going forward. The improvements in policy-making settings and supporting the credit metrics can also contribute to the economy’s growth. Notably, even the weaknesses are balanced against the strong growth prospects and external position. Thus the new leadership’s focus on trade and economics could bring about positive changes and exponential growth.

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