Fitch Solutions, a subsidiary of Fitch Group, has revised down its GDP growth forecast for Vietnam to 6.3% from 6.8% previously.

Source: Fitch Solutions.

It is expected the Covid-19 outbreak will heavily impact growth in the first half of the year, mainly due to disrupted supply chains in the region which would weigh heavily on manufacturing and weak tourist arrivals, said Fitch Solutions in a recently-released report.

Additionally, general domestic fears of infection would drag on services activity, it added.

Moreover, Vietnam’s large manufacturing sector, accounting for 16% of GDP, is predicted to come under heavy pressure from supply chain disruptions as a result of the Covid-19 outbreak in China, a key source of raw materials and also a major export market for Vietnam.

China is Vietnam’s largest source of imports, accounting for around 28% of total imports, and is its second largest export market after the United States (20%), accounting for around 17% of total exports.

Fitch Solutions believed that the lack of inputs and demand shock from Vietnam-China border closures and multi-city lockdowns in China will weigh heavily on manufacturing growth in the first half of 2020.

While some companies such as Samsung are flying in inputs to circumvent the supply chain disruption from China, it is expected that many companies, particularly small to medium-sized firms, are likely to struggle in their search for an alternative source of inputs at short notice.

Services growth will also come under stress from weaker domestic and foreign demand. Work

disruptions, which would impact wages, and general paranoia of community cross-infection of Covid-19 would see weaker retail activity, which account for about 11% of GDP. Weak domestic demand is likely to also feed through to the rest of the services sector.

For example, financial services could face weaker loan demand and a possible rise in delinquencies. A major decline in tourism revenues as a result of Vietnam’s ban on all flights to and from China as well as a cutback in tourism due to a growing outbreak in South Korea and Japan, would also weigh heavily on Vietnam’s tourism industry. To be sure, mainland China, South Korea, and Japan, are Vietnam’s top three sources of tourists. While tourism only accounts for accounting for 9.2% of total GDP, a shock in this area would nevertheless still impact the overall growth outlook for 2020.

Support measures by the government will help alleviate the negative growth shock.

Vietnam’s Ministry of Planning and Investment (MPI) has said that fiscal and monetary stimulus will be necessary to help the economy tide over the crisis, although no concrete measures have been announced at the time of writing. Among its recommendations are credit support for small and medium enterprises and farmers, and tax cuts and delayed tax and land rent payment for affected businesses. Following that, the head of the central bank’s credit department said that the central bank would either exempt, reduce, or delay interest payments for loans to companies coming under pressure from Covid-19.

Fitch Solutions believed that these measures should at least help many struggling businesses stay afloat, which would aid a normalization of economic activity post-crisis.

The report suggested growth to rebound in the second half of 2020, assuming subsiding of the virus spread by then. However, this would be underpinned by a clearing of backlogged factory orders during the first half of the year upon the normalization of supply chains, and pent up tourism demand following an easing of global uncertainty around the virus’ outbreak.

Trade is likely to also benefit from Vietnam’s ratification of the EU-Vietnam Free Trade Agreement at the next National Assembly in April, which would eliminate tariffs on more than 90% of all of Vietnam’s exports to the bloc.