Why Vietnam’s outlook for 2021 looks bright?

Data shows that Vietnam is one of the few countries after China to record net positive GDP growth in 2020 with 2.3% and 6.8% in 2021, provided the pandemic is contained, forecast by the Asian Development Bank (ADB).

Vietnam's economic outlook for 2021 is bright. Source: RMIT Vietnam

The pandemic hit Vietnam’s economy hard as GDP fell to 3.8% in the first quarter of 2020 as compared to 6.8% in the same period the previous year. Almost 35,000 businesses went bankrupt in the same quarter – the first time in decades the number of companies shutting down was higher than newly registered businesses.

Nevertheless, Vietnam’s early response to the pandemic seems to have paid off, as the country was able to reopen its economy early with specific plans for the recovery.

There remains significant issues that are likely to shape Vietnam’s business environment in 2021.

Covid-19 and supply chains

Vietnam itself was not spared from a significant impact on global supply chains, resulting in losses for a number of businesses.

The suspension of flights compounded the problem with restrictions on trade and air freight pricing spiking.

Less demand also resulted in canceled orders leading to a decline in exports, forcing companies to lay off staff.

In 2021, supply chains will need to become smarter, more efficient, and effective. This means that businesses will need to evolve, diversify, and look to reduce costs to ensure they are able to keep their supply chains resilient.

It also means looking at other locations depending on the type of industry and raw materials to ensure contingency plans remain in place. With a vaccine out and global air travel steadily resuming, businesses should take the opportunity to ensure a reliable supply chain with fool-proof plans in place for the future.

Vietnam-EU free trade agreement

Despite the pandemic, one of the most significant events this year in trade was the EU-Vietnam free trade agreement (EVFTA). The EVFTA came into effect on August 1, 2020, paving the way for increased trade between the EU and Vietnam, eliminating almost 99% of customs duties between the two countries.

According to the Ministry of Planning and Investment (MPI), the FTA is expected to help increase Vietnam’s GDP by 4.6% and its exports to the EU by 42.7% by 2025. While the European Commission has forecast the EU’s GDP to increase by US$29.5 billion by 2035.

Analysts hope the trade deal will give a much-needed boost to Vietnam’s industries, such as manufacturing, as it looks to recover from the pandemic.

For Vietnam, the tariff elimination will benefit key export industries, including the manufacturing of smartphones and electronic products, textiles, footwear, and agricultural products, such as coffee. Increasing Vietnam’s export volume to the EU, the FTA will facilitate the expansion of these industries, both in terms of capital and increasing employment as it enters 2021.

The Regional Comprehensive Economic Partnership (RCEP) signed on November 15 further builds on free trade agreements within ASEAN and will build on economic integration and shape future trade policy.

Regional Comprehensive Economic Partnership

The RCEP includes 15 countries including ASEAN members, which Vietnam is a part of, as well as Australia, China, Japan, South Korea, and New Zealand. Just like the recently ratified EVFTA and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the RCEP will reduce tariffs and set trade rules, and help link supply chains, particularly as governments grapple with Covid-19 effects.

Tariffs as per the agreement are expected to be reduced within 20 years. Building on several other FTAs, the RCEP is expected to benefit Vietnam’s major export categories including IT, footwear, agriculture, automobiles, and telecommunications. If ratified by six ASEAN countries and three non-ASEAN countries, the pact will formally enter into force, as early as the second half of 2021.

New Labor Code

Vietnam approved a new labor code, which will take effect in January 2021. The amendment to the labor regulations is a step towards aligning with international labor standards particularly as Vietnam integrates into the world economy as noted by the International Labor Organization (ILO).

Most of the code remains the same however, changes have been introduced to probationary employment, mandatory work rules, notice requirements, and other provisions generally suited to employees. The new code will have an impact on businesses and employers should seek to obtain assistance with regards to their labor practices to ensure their policies are legally compliant in 2021.

Laws on Enterprises and Investment

Vietnam adopted an amended Law on Enterprises and Law on Investment, which will take effect in January 2021. Both laws, which underline the government’s efforts to further improve Vietnam’s business environment in 2021, are timely given the passage of new free trade agreements.

The amended Law on Enterprises simplifies the business registration process, redefines state-owned enterprise (SOE), and excludes household business from the scope of the current law. The amended Law on Investment provides updates on conditional business lines, investment incentives, support mechanisms while removing administrative approval for certain types of investment projects.

Mergers and acquisitions

Mergers and acquisitions (M&A) are likely to continue playing a key role in Vietnam’s economy in 2021. Despite the pandemic, M&A activity saw transactions valued at approximately US$500 million.

Nevertheless, most of the deals occurred in real estate, finance, banking, and retail sectors. In 2021, Vietnam’s M&A activity is expected to recover to around US$4.5-5 billion and to the pre-Covid-19 figure of US$7 billion by 2022 as per the Corporate Investment and Mergers & Acquisitions Center (CMAC).

Euromonitor International in its M&A index report rated Vietnam as the market with the most dynamic and potential M&A activity globally just behind the US and forecasts Vietnam will continue to hold second place in the top 20 countries with the highest M&A index in 2021.

Investors upbeat on Vietnam

Vietnam’s successful containment of the pandemic, positive economic growth, and ratification of recent free trade agreements has reassured investors. All these factors have helped make Vietnam a highly effective alternative for relocation in Southeast Asia.

Investors remain upbeat on Vietnam’s growth trajectory with continued interest in Vietnam markets. While Vietnam has undergone change, the above-mentioned events will shape 2021 with Vietnam well-positioned to recover its economic growth in the coming year.

The large part of this article was first published by Vietnam-briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia and maintains offices in China, Hong Kong, India, Indonesia, Singapore, Malaysia, Thailand, the Philippines, and Vietnam.