Why taking bold action is the right approach

Vietnam Investment Review

Given that Vietnam is a highly open economy, it is important to first understand the impact of the coronavirus on the world. The pandemic is a tragedy and has inflicted high and rising human costs worldwide. Protecting lives and allowing healthcare systems to cope have required social distancing measures, isolation, lockdowns, and widespread closures to slow the spread of the virus. The pandemic is therefore having a severe impact on global economic activity. It is a crisis like no other given its severity, the significant uncertainty about its duration and intensity, and the required policy response.

In the recent International Monetary Fund’s (IMF) World Economic Outlook, the global economy is expected to experience a deep recession in 2020, contracting sharply by 3.0 per cent, which is much worse than during the 2008 global financial crisis. Growth in Asia in 2020 is expected to be close to zero, which is also worse than throughout the global financial crisis of 2008 (4.7 per cent) and the Asian financial crisis in 1997 (1.3 per cent). Assuming that the pandemic fades in the second half of 2020 and a gradual lifting of containment measures occurs, the global economy is projected to grow by 5.8 per cent in 2021 as economic activity normalises, helped by policy support. But there is extreme uncertainty around the global growth forecast.

The economic impact of the coronavirus depends on factors such as the pathway of the pandemic, the intensity and effectiveness of containment efforts, supply disruptions, global financial market conditions, shifts in spending patterns and behavioral changes, confidence effects, and commodity price volatility. Despite the grim economic outlook, we see the balance of risks tilted to the downside. Appropriate policies are critical to avoid worse outcomes. The IMF has called on governments around the world to take bold actions. Initially, the priority is increasing healthcare spending and adopting measures that limit contagion. Policies also need to mitigate the economic impact on people, firms, and the financial system; reduce persistent damage to the economy; and facilitate the recovery once the pandemic abates.

Vietnam’s policy response to COVID-19 has been remarkable and will help the country recover its robust growth once the crisis abates. As noted, the severity of the economic impact requires bold actions by governments around the world, and Vietnam introduced bold measures in a timely manner.

In particular, the government scaled-up public healthcare spending and introduced robust and decisive measures to limit contagion, and the State Bank of Vietnam (SBV) has maintained abundant liquidity, eased monetary policy, and encouraged banks to show flexibility with borrowers affected by COVID-19. Also, fiscal policy has focused on helping businesses via tax and land rent deferrals, and increasing transfers to the poor, self-employed, and vulnerable households.

Furthermore, the government has also envisaged a large increase in the public investment, which we think should be accompanied by steps to improve public financial management and spending efficiency. But, given the extraordinary circumstances, additional support may be necessary to protect the most vulnerable and prevent long-lasting economic damage, if downside risks materialise.

While Vietnam has been successful in containing the spread of the virus domestically, thanks to the measures introduced by the government, it has not and will not be immune to the economic impact of COVID-19. Vietnam’s growth is projected to decline from an average of about 7 per cent in 2018-19 to 2.7 per cent in 2020, reflecting both weak external and domestic demand and the impact from strict containment measures.

As containment measures are lifted, Vietnam’s growth is expected to gradually pick up, reaching 7 per cent in 2021, supported by the accompanying macroeconomic and financial policies introduced by the government, relatively strong macroeconomic fundamentals, and a recovery in external demand.

Vietnam’s economic slowdown will be accompanied by an easing of inflationary pressures. Inflation reached more than 6 per cent in January, partly owing to a large increase in pork prices, but it has started to ease, declining to 2.9 per cent in April. Slow growth and muted demand are expected to bring inflation to 2 per cent at the end of 2020. With the economy gradually expected to pick up, inflation is also projected to gradually increase, converging to the SBV’s inflation target of 4 per cent in 2021.

Vietnam’s medium-term economic outlook remains positive and is not materially affected by the global health crisis. Its remarkable socio-economic performance of the last three decades can continue after the pandemic abates. But it will require an acceleration of structural reforms to support robust and inclusive growth and improve the resilience of the economy. This will include modernising macro-economic institutions, higher infrastructure investments, reforms of state-owned enterprises, and efforts to improve governance and productivity, among other actions.

By Francois Painchaud - Resident representative International Monetary Fund in Vietnam

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