Ramifications of new relaxed regulations on the economy

Vietnam Investment Review

Vietnam’s development over the decades has been largely achieved thanks to foreign direct investment and technology transfer from the western world, together with training and capacity building from developed countries supported by multilateral and bi-lateral agencies. This is not meant to ignore the hunger of Vietnamese people to learn and develop themselves and the investment in education by the government, private sector, and the population as a whole.

Whilst the country has not had the benefit of large fiscal surpluses or large foreign exchange reserves (currently at record levels of over $80 billion), Vietnam has shown itself to be a leader in how to successfully manage the current pandemic through rigorous contact tracing, quarantine measures, and testing.

Vietnam has established itself as one of the safest, if not the safest, countries in the world in this context. It was similarly successful during the SARS epidemic in 2003. The country has only recorded under 300 total cases and zero deaths, which is a far better record than areas much smaller and less populated than Vietnam, and much further away from where it all started.

The first two cases were recorded in Vietnam on January 23 – a father and son travelling from Wuhan city of China. From mid-February, Vietnam went 20 days without a new case, which was a Vietnamese national returning from Europe. It has taken longer with the second wave to bring it under control but as of last week, the only new cases are people who have travelled from elsewhere and are already in quarantine. This will undoubtedly impact the reopening of our borders, which is crucial for the tourism and hospitality industry.

Vietnam was quick to impose quarantine requirements on all arriving international passengers when the second wave started, and ceased all international flights in and out at the end of March. Since then, we have had a period of 21 days of strict social distancing, which required all non-essential businesses to close, closure of public transportation services, and a fairly strict work-from-home policy for those fortunate enough to still have jobs, in businesses still having sufficient business.

Vietnam’s challenge now is supporting business and the economy, as the government is not in a position to inject large amounts of money into the economy, though this is badly needed in many sectors. In the first quarter, over 350,000 businesses closed. GDP growth in the first quarter of 2020 was the lowest in the last 10 years at 3.82 per cent on-year, and we can expect the growth in the second quarter to be lower or at best similar levels. According to Standard Chartered, GDP growth forecasts for the year range from 3.3 to 5 per cent plus.

Now to the joy of many, the social distancing requirements are being relaxed and the immediate impact was seen by the volume of traffic on the roads, although many small businesses seem to have remained closed and schools have not yet been allowed to reopen. It is now a question of how this will impact business and how business can benefit.

Unfortunately, the virus is not gone and things will not be back to business as usual because large areas of the world are going through major challenges caused by a vast number of reported COVID-19 cases and reported fatalities such as the United States, Germany, Italy, France, and United Kingdom – and many of these are major export markets for Vietnam. These economies have also been severely impacted and many are under strict lockdown and suffering from rapidly-increasing unemployment. The US for example has recorded 26 million claims for unemployment since mid-March.

So the impact will be different for different sectors of the economy. It will not be one-size-fits-all and we have to remember that many businesses will be short of financial resources because of the pandemic in the first four months of this year. We also have to remember that the business environment as and when the pandemic comes to an end may be very different from the one before it struck.

Sectors that have been really hard hit, like hotels and airlines, will see little direct benefit from the relaxation of social distancing as the increase in business from the limited increase in domestic travel, relative to the pre-pandemic levels, will be relatively small. Vietnam Airlines revenues dropped 26 per cent to $819 million in the first quarter as compared to the same period in 2019. The airline forecasts that its 2020 revenue is expected to decline by VND50 trillion ($2.17 billion), and over 10,000 employees will have to temporarily leave their jobs if the impact of the pandemic continues into the fourth quarter of 2020, with the volume of air passengers falling 46 per cent on-year from almost 90 million last year.

Hotels have had similar issues with virtually no business since March, when people started to stay at home and inbound flights from many countries were suspended. It is likely that domestic travel will resume as more flights come back into service. However many people may lack confidence to travel and also many people will be more focused on saving, rather than spending because of the uncertainty in the labour market. As yet it is uncertain how the country will open up to inbound travel from major source markets like China, Japan, and South Korea who together accounted for more than 50 per cent of our inbound travel business in the last several years.

It is quite amazing how external shocks can devastate markets. Last year my major concern, when making presentations on tourism and hospitality, was that nearly all our airports in Vietnam were operating at over-capacity and the constraints that would have on the growing supply of hotel rooms and branded residences. Now the airport capacity issue will no longer be an issue for the foreseeable future but the growing supply of hotel and tourism accommodation will be even harder hit.

Many manufacturing businesses have been able to stay open, with a requirement to comply with stricter social distancing requirements and medical requirements, but the key issue for most of them is when demand will resume or pick up from overseas markets to replace cancelled orders, and when supply chains will normalise. How will they survive if demand is not there and they are only operating at levels well below capacity?

Small local businesses will probably benefit the most as local purchasing will resume as people start to go about their daily lives and feel more confident in their employment status and people want to get out after being stuck home for the last several weeks. However, whilst this will help small businesses to function and maintain employment or re-employ staff, this will have a relatively small impact on the larger economy. One likely bright spot will be the acceleration of the movement of manufacturing businesses from China to Vietnam, and the positive impact this will have on investment flows, employment, and exports as many of these businesses will be export-orientated businesses. It has been reported for example that Apple has been advertising several senior positions in Vietnam.

By Ken Atkinson, Founder and senior board advisor Grant Thornton Vietnam

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