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Vietnam’s Ability to Weather External Shocks Has Faded in 2021, HSBC Says

Diep Nguyen
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Fading protection in 2021. Vietnam’s ability to guard against external risks has been strong over the years, thanks to its shift to a current account surplus, as its trade surplus widened. However, the protection is fading in 2021.

Vietnam’s Ability to Weather External Shocks Has Faded in 2021, HSBC Says
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Vietnam is likely to see a current account deficit in 2021, before returning to a modest surplus in 2022.
While supply chain disruptions raise questions on Vietnam’s FDI prospects, HSBC believes long-term growth potential remains.
Data: Exports continued to recover, thanks to electronics and machinery shipments; demand-side prices remained weak.
Fading protection in 2021. Vietnam’s ability to guard against external risks has been strong over the years, thanks to its shift to a current account surplus, as its trade surplus widened. However, the protection is fading in 2021. 
Given prolonged lockdowns, Vietnam, once a trade champion, saw two consecutive quarters of trade deficits in 2Q and 3Q. The good news is its external engine is running again after the 1 October re-opening.
While HSBC expects to see a trade surplus this year, it will likely be too small to offset deficits in services and primary income. HSBC forecast a current account deficit of 0.5% of GDP.
Green shoots in 2022. That said, it is not all gloom and doom. Remittances, traditionally a bedrock of the current account, remain resilient. Meanwhile, Vietnam’s trade should normalise as supply chain disruptions ease, thus leading to a modest current account surplus of 2.3% of GDP next year, according to HSBC’s forecasts. 
In addition, sustained FDI inflows will likely also drive Vietnam’s future trade expansion. While there are concerns over whether Vietnam remains an attractive investment destination, HSBC thinks there are good reasons to stay optimistic on its prospects.
Containing COVID-19 is the key. Thus, to reassure investors’ confidence in Vietnam, the priority for policymakers is to contain the resurgence of COVID-19 as soon as possible, paving a sustained way to restore supply chains. Meanwhile, inflation recovered at a quicker pace than expected in November. That said, the main driver was rising energy prices, but demand-pull inflation remained weak. HSBC expect inflation to average 1.9% in 2021, before recovering to 2.7% in 2022.
Time to re-assess
HSBC há been writing extensively about Vietnam’s supply chain disruptions, the biggest challenge it has been facing. After four months of lockdowns, Vietnam’s external engine, typically a strong growth pillar, has lost some steam due to factory shutdowns. HSBC flagged in 2020 that Vietnam’s ability to defend itself against external shocks has been increasing over the years (see Vietnam at a glance: A better defender, 15 May 2020). 
That said, given changing circumstances, it is time to re-assess Vietnam’s current account position.
During the Global Financial Crisis, Vietnam saw the largest current account deficit of 11% of GDP. That said, its ability to weather external shocks has strengthened over the years. It is clear that a significant improvement in Vietnam’s current account position shift coincided with its emerging significance in global trade. Even in the first year of the pandemic, it registered a recordhigh current account surplus of 5.5% of GDP, thanks to export outperformance and an unusual import compression. 
However, trade fundamentals have shifted since the Delta variant wave from May. Vietnam saw the largest quarterly current account deficit of 6.7% of GDP in 2Q, as the trade balance turned from surplus to deficit (Charts 2-3). While current account data in 2H21 are not yet released, available trade data imply that the current account in 3Q was likely in negative territory.
In addition, the services deficit continued to be a drag. Prior to the pandemic, booming tourism generated substantial receipts, pushing Vietnam’s perennial services deficit to a historic low of only USD1.5bn in 2019. However, as tourism collapsed, the services deficit widened almost ten times, reaching USD10bn in 2020. The situation has not turned any better in 2021, implying that the services deficit this year would be no less than that of 2020. While it is encouraging to see Vietnam’s first step in re-opening its border to foreign visitors in five selected destinations from November, a confluence of factors such as the absence of Chinese tourists and a delayed resumption of international flights, suggests that a short-term V-shaped recovery in tourism is unlikely in 2022 (see Vietnam at a glance: Thawing tourism, 4 November). 

DIEP NGUYEN

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