Vietnam’s GDP growth rate in 2020, according to Fitch, would be only 6.3%, which is 0.5 percentage points lower than the target of 6.8%.

In a recent report, Fitch said that Vietnam’s economic growth in 2020 would reach 6.3% due to the negative effects of Covid-19 epidemic. This forecast by Fitch is more optimistic than that made by Vietnam’s Ministry of Planning and Investment in early February.

According to Fitch, the Covid-19 epidemic would have a strong impact on Vietnam’s growth in the first half of 2020, when production activities stagnated due to disrupted regional supply chains. In the immediate future, the lack of raw materials and the temporary closure of the border gate causing import and export activities to stall will significantly affect the manufacturing and processing industry (contributing 16% of Vietnam’s GDP). For example, nearly 12,000 workers of a factory in Thanh Hoa province have had to take a break because the factory lacked production materials.

Some big companies like Samsung have had to ship components from China to Vietnam by air to avoid supply chain disruptions. “Vietnamese small and medium enterprises will have difficulty finding alternative sources of raw materials. This fact may cause unemployment rate to increase in the near future” the Fitch report said.

Not only manufacturing and processing, service and tourism industries are also facing great pressure due to reduced demand when the Covid-19 outbreak has “crossed the border” from China, spreading to South Korea and Japan. These are also the three largest international tourist markets of Vietnam in Northeast Asia. Although tourism only accounts for 9.2% of Vietnam’s GDP, according to Fitch, the shock that this industry will suffer because the disease will not be small, greatly affecting the prospects of economic growth in 2020.

In the meantime, the Government’s supportive measures will help reduce the “earthquake” brought by Covid-19 to the Vietnamese economy. “Financial and monetary stimulus packages will be needed to help the economy overcome the shock of the epidemic” Fitch said. Specifically, the measures are credit support for small and medium enterprises, tax and land rental reduction for those directly affected, etc.

However, Vietnamese economic picture is not entirely gray

Fitch said that the economy will recover in the second half of the year if the supply chains return to normal operation and the pent-up tourism demand in Covid-19 period is released. At the same time, the EU-Vietnam Free Trade Agreement (EVFTA) has just been approved by the European Parliament and can take effect in July. With over 90% of tariff lines being cut to 0%, this agreement will open opportunities for Vietnamese goods to penetrate the market of USD 18,000 billion.

However, Fitch also noted that Vietnam’s economic recovery in the last 6 months of the year “may be lower than forecast” if infrastructure congestion at seaports is not resolved, restraining the resilience of the economy.

Earlier, in a report to the Government, the Ministry of Planning and Investment cited two scenarios of growth in the context of an outbreak of Covid-19. In scenario 1, if the epidemic is contained in the first quarter, the GDP growth this year will be at 6.25%, decreasing by 0.55 percentage points compared to the target set by the Government. In particular, GDP in the first quarter would increase by 4.25%, that in the second quarter would be 6.08%, the third quarter 6.92% and the fourth quarter 6.81%. In scenario 2, GDP in 2020 is forecast to reach 5.96% if the epidemic is controlled in the second quarter. This increase is quite low and down 0.84 percentage points compared to the target of 6.8% this year. In this scenario, growth in the first quarter would increase by 4.52%, second quarter 5.1%, third quarter 6.7% and fourth quarter 6.81%.

Aviation, tourism, services, textiles, footwear, electronics, etc. are the industries that will be most negatively affected by the disease. Tourism is forecast to suffer a loss of more than VND 116,000 billion, while the figure for the aviation industry would be VND 10,000 billion.

Source: Fitch Ratings
Author: Alice Hoang Thao – VietnamCredit