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Last year, Vietnam astounded the entire world with its effective control of the COVID-19 pandemic and its striking level of economic growth of 2.91%. This made the nation one of the world's top 10 countries in terms of economic growth, and also one of the 16 most successful emerging economies on the planet last year, Nhan Dan Newspaper reported.

Last year, the economy's GDP was worth as much as VND6.3 quadrillion (US$273.9 billion), increasing by VND263 trillion (US$11.43 billion) as compared to the previous year, ranking fourth in Southeast Asia, with a total export-import turnover of US$543.9 billion, up 5.2% year-on-year, raking in a record trade surplus of US$19.1 billion.

High expectations

Vietnam’s economy is predicted to continue flourishing this year, with an even bigger space for the private sector to operate in. Photo: NDO

According to the International Monetary Fund (IMF), a robust recovery is expected in 2021 despite some economic scarring.

"Growth is projected to strengthen to 6.5% as normalisation of economic activity continues, businesses recover, and private consumption and business investment rebound. Manufacturing and retail sales are expected to lead the recovery, while travel and hospitality services will remain subdued," the IMF stated in a report released over a week ago.

The ASEAN+3 Macroeconomic Research Office (AMRO), a regional macroeconomic research organisation based in Singapore, has also said Vietnam's economic growth had slowed to 2.91% in 2020 due to the pandemic but "is expected to rise to 7% in 2021."

"The rebound is expected to be underpinned by a recovery in external demand, a resilient domestic economy, capital inflows, and increased production capacity," said AMRO lead specialist Seung Hyun Luke Hong.

After a sharp drop in the second quarter, economic growth started to rebound in the third quarter of 2020. The recovery was broad-based. Manufacturing activity was boosted by a robust export sector, which benefited from Vietnam's relatively resilient export mix, as well as trade diversion from US-China trade tensions. Meanwhile, domestic consumption recovered following the relaxation of mobility restrictions, a result of the authorities' effective COVID-19 containment efforts. Furthermore, the rebound benefited from an acceleration in the disbursement of public investment.

Photo: Vietnamnet

According to Fitch Solutions (part of the global rating firm Fitch Group), one of the key drivers for Vietnam's economic growth this year will be a rise in public investment and foreign direct investment (FDI). In reality, Prime Minister Nguyen Xuan Phuc has set up seven task forces to speed up the disbursement of public funds as well as warning that officials would face disciplinary action if their ministries or localities fail to realise their respective public investment disbursement targets for 2020.

"In 2021, we forecast state budget expenditures will grow by 16.6% as a rebound of economic activity as well as government efforts to expedite public capital expenditure drive rapid growth in expenditure," said the statement. "We forecast real GDP growth to recover to 8.2% in 2021, from 2.91% in 2020, although we do flag some downside risks to our 2021 forecast from persisting economic challenges brought about by the pandemic."

A few weeks back, Standard Chartered published its latest projection on Vietnam's economic prospects in 2021, expecting the country's economic growth to "rebound to 7.8% in 2021 from 2.91% in 2020, with manufacturing likely continuing to drive the economy and helping Vietnam outperform the rest of Asia," said the bank in a recent press release.

"The economy emerged from the worst of the COVID-19 downturn in the third quarter of 2020, and we think the recovery remains intact. Vietnam has been one of the best-performing economies globally for the past decade, and we expect this to continue," said Tim Leelahaphan, Standard Chartered economist for Thailand and Vietnam.

In the same vein, the World Bank is also expecting the country's economy will continue bouncing back strongly this year.

"By all standards, Vietnam has managed the COVID 19 crisis very well. Looking ahead, Vietnam's prospects appear positive as the economy is projected to grow by about 6.8 percent in 2021 and, thereafter, stabilize at around 6.5 percent. This projection assumes that the COVID-19 crisis will gradually be brought under control, most notably through the introduction of an effective vaccine," said the World Bank in its recent economic update for Vietnam.

Fueling the private sector

However, according to these high-profile organisations, in order to reach higher levels of economic growth this year and beyond, as they have proposed many times, Vietnam should create more conditions for the private economic sector to flourish as it is now considered a backbone of the economy, responsible for a significant proportion of GDP.

At present in Vietnam, the private sector creates more than 50% of economic growth, 30% of state budget revenue, and 85% of the labour force.

The country has nearly 800,000 operational enterprises, of which about 98% are small and medium-size. According to the General Statistics Office, in 2020, there were 134,900 newly established enterprises, with total registered capital of over VND2.23 quadrillion (US$96.96 billion), employing more than one million people. This was down 2.3% in terms of the number of registered enterprises, but up 29.25% in registered capital.

A container ship docks at Cat Lai Port in Ho Chi Minh City. Photo: Shutterstock/xuanhuongho.

In the first two months of 2021, Vietnam witnessed 18,100 enterprises newly established, registered capital of VND334.8 trillion (US$14.55 billion), employing 172,800 workers - up 4% in the terms of the number of enterprises, 52.2% in the capital, and 9.7% in the number of workers as compared to the same period last year.

The average registered capital of each newly-established business in the first two months of the year was VND18.5 billion (US$804,347), up 46.4% year-on-year. If an additional VND385.6 trillion (US$16.76 billion) registered by 6,500 operational enterprises is included, the total registered capital inserted into the economy in the first two months was VND720.4 trillion (US$31.32 billion).

According to a report adopted at the recent 13th National Party Congress, over the next five years, with a view to further facilitating private sector development, "all state-owned enterprises (SOEs) will continue being reorganised, investing in only key realms of the economy, and in geographical areas which are important in security and defence, and in the areas not invested by other economic sectors."

The state will be exclusively invested in only four fields including the provision of indispensable products and services for the society; defence and security; natural monopoly; large-scale high-tech application with big investment creating momentum for the rapid development of the economy's other fields.

According to experts, furthering SOE reforms is needed more than ever in order to speed up the growth of national productivity and to raise incomes and living standards.

In fact, conflicts of interest would arise if the state is both the owner and regulator. and these generate inefficiency. As has been seen in Vietnam and globally, such conflicts of interests lead to pressures for state owning agencies to regulate in a manner, not in the national interest.

For example, by imposing business conditions or other restrictions on new businesses, the state agency can reduce the competition faced by SOEs. Policies and institutional structures that constrain competition are not in the national interest. While constraints to competition can make individual SOEs more profitable, the resulting lack of competition stifles innovation and overall growth in productivity.

Policy recommendations

A man works at an assembly line of Vinfast Auto factory in Hai Phong City, northern Vietnam, on June 14, 2019. Photo: Reuters

However, according to some experts, a protracted and uneven recovery of the global economy may jeopardise the recovery in external demand. This could seriously hurt the Vietnamese economy – the country’s GDP in 2020 was about $274 billion, while its export-import turnover hit $527 billion, according to Vietnamnet.

Furthermore, while domestic demand has picked up after a relatively successful containment of the pandemic – in which the manufacturing and processing industry which leads the economy’s growth increased 5.82 per cent on-year, and the total retail and consumption service revenue reached over VND5 quadrillion ($217.4 billion), up 2.6 per cent on-year - it remains susceptible to the risk of further waves of COVID-19 infection.

Moreover, the scarring effects of the pandemic, such as the impairment of the balance sheets of the business sector, and the hit on unemployment and the labour market, may undermine the prospects of recovery.

According to AMRO, amid heightened uncertainty, continued policy support is essential to bolster the nascent economic recovery and facilitate the transition to the post-pandemic period.

“Greater fiscal support through both revenue and expenditure measures may be necessary to support the nascent economic recovery if the growth momentum were to weaken, while targeted support to micro, smaller, and medium-sized enterprises and low-income households needs to continue and be regularly reviewed for its relevance and effectiveness,” said an AMRO report sent to VIR. “Enhancement of support programmes through simpler and better-targeted disbursement will facilitate the effective use of government funds.”

Meanwhile, given the benign inflation outlook, it is essential monetary policy remains supportive of economic recovery, keeping financing costs affordable for households and businesses, it said.

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