Vietnam's economic fundamentals still intact but slow vaccination rate poses downside risk: report

VIETNAM'S structural growth drivers remain intact amid the country's worst Covid-19 outbreak to date, although the slow pace of vaccination presents a key source of risk for its economy, according to a report by the Bank of America (BofA).

BofA economists are expecting Vietnam's gross domestic product (GDP) to expand 7 to 8 per cent over the next three years - the highest within Asia.

They note that they had written in 2019 that the combination of sustained investments led by foreign direct investment (FDI), rising disposable income from higher urbanisation and strong private consumption should continue to support the country's medium-term growth.

"We revisit our thesis in this report and come away reassured that the Covid-19 shock - despite continuing to pose a large degree of uncertainty to the near-term outlook - is unlikely to alter the medium-term path much," said the economists.

Global FDI fell 34 per cent last year amid the immense global shock due to the Covid-19 pandemic.

Even so, Vietnam held up "remarkably well", with FDI falling only 2 per cent from the "already high levels" in 2019, BofA economists said.

Still, Vietnam's high leverage ratio, at 146 per cent of GDP, remains a key source of medium-term risk to financial and economic stability, the economists noted.

"While Vietnam's state-controlled economy and financial system should be better able to mitigate any systemic risks, we cannot ignore the fact that such large deviations of credit growth from fundamentals have historically led to banking crises in countries such as Indonesia, Malaysia and Thailand during the Asian financial crisis," they warned.

At the same time , near-term risks should not be ignored, and the country's slow pace of vaccination could become a key source of downside risk going into 2022.

So far, only about 3.8 per cent of the population in Vietnam is vaccinated, with most of them only partly vaccinated.

Its first batch of vaccinations relied mostly on donations, but the Vietnamese government on July 15 announced the securing of 20 million of additional shots made by Pfizer-BioNTech.

The authorities are hoping to administer 300,000 to 500,000 shots per day in the second half of the year and to fully vaccinate 70 per cent of its population by end-April 2022.

This means the lingering impact of Covid-19 could persist until the current wave stabilises, but uncertainty is likely to remain high before the country reaches its 70 per cent target, BofA economists said.

"While the medium-term growth potential remains intact, we see near-term risk rising and sporadic Covid wave could easily shave off domestic demand momentum in 2H," they added.