The coronavirus pandemic continues its spread and it has affected global economic activity dramatically, leading governments across the world to take a range of measures to manage the fallout. Vietnam, which has been one of Asia’s fastest growing economies in recent years, is no exception.
Thus far, despite some early success in managing the COVID-19 outbreak and assistance provided to some outside countries, Vietnam still has had to struggle with the virus, in large part due to infected cases brought back by overseas citizen and foreign visitors.
As this has played out, the economic consequences have become clearer. Early on, the Ministry of Planning and Investment warned that Vietnam’s economic growth rate would face a slowdown to 6.09 percent if the coronavirus pandemic is not fully contained. As of now, Vietnam’s growth has reached only 3.82 percent in the first quarter of the year, the worst in recent years since the first quarter of 2009, with 35,000 businesses closed.
In response, Vietnam has taken a series of measures. In March, Prime Minister Nguyen Xuan Phuc called Vietnam’s central bank to take urgent tasks and solutions to deal with the coronavirus impact as well as to ensure social protection. The State Bank of Vietnam (SBV) has issued a directive for credit institutions and commercial banks to manage cash flow, liquidity, debt, and interest rates, while SBV Governor Le Minh Hung has also promised fresh measures to protect the Vietnamese economy. There have been reported signs that this is having a positive, albeit limited, impact thus far.
The moves taken by Vietnam are not surprising: COVID-19 has led countries to adjust their economic approaches including through monetary and fiscal policy, as evidenced by cuts to interest rates we have seen in the United States and Britain. But the impact of individual measures such as reducing operating rates or adjusting interest rates may prove to be either too small or temporary relative to the broader impact of COVID-19, and they have their own risks as well, including generating inflation and undermining long-term macroeconomic stability. It should also be noted that the fiscal and monetary tools available to Vietnam also have their limits and will thus have to be used wisely and sparingly.
If the epidemic continues on for a longer period of time – perhaps six months or even through to 2021 – Vietnam will need to take more drastic measures that could reveal the aforementioned limits and force tradeoffs that Hanoi would prefer not to make. The consequences of that could be severe, and the probability of the Vietnamese economy falling into a recession is very high.
To be sure, it is difficult to provide specific prescriptions for Vietnam’s government given the complicated and unpredictable nature of a global pandemic that is still playing out. But if Hanoi is to fully and comprehensively manage the continuing economic fallout from COVID-19, it will likely require artfully balancing a focus on shorter- and longer-term dynamics as well as utilizing a series of tools beyond just narrow fiscal and monetary solutions.