Standard Chartered Bank has joined other financial institutions to trim forecasts for Vietnam’s 2020 economic growth, lowering its projections for the country’s growth to as low as 3.3% in 2020 due to increase in external headwinds, before rebounding next year.

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The forecast is made in the bank’s recently published Global Focus – Economic Outlook report for Quarter 2 2020 entitled “Darkest before the dawn”.

“Vietnam is now more integrated with the global economy via its booming manufacturing sector; its trade-to-GDP ratio has risen to 300%, among the highest in Asia, signifying its high dependence on global demand. Lower global demand amid likely recessions in the US, the euro area and other G10 economies will weigh on 2020 growth.

We see growth rebounding to 6.5% in 2021 given an expected demand recovery and the low base from 2020.” said Chidu Narayanan, Economist for Asia, Standard Chartered Bank.

According to the latest macro-economic research report, Vietnam’s manufacturing growth is likely to decline sharply on slowing global demand, with growth rate expected at close to 3% compared to around 11% in 2019. The sector, which accounts for roughly 19% of GDP and has contributed almost a third of GDP growth in recent years, is likely to be the primary transmission channel of external weakness and contribute 1.6 percentage points less to this year’s growth than in 2019.

The expected rebound in growth in China should support manufacturing activity in the second half of the year, it forecast.

The services sector, contributing close to 40% of GDP, is forecast to slow to approximately 4% in 2020 from 7.3% in 2019, adding 1 percentage point less to growth. Softer manufacturing growth, slowing domestic activity and social distancing measures (including restrictions on large gatherings) are likely to weigh on consumption.

Tourism has declined substantially amid Covid-19-related restrictions on cross-border travel, and Standard Chartered Bank expects a sharp decline of roughly 60% in tourist arrivals in 2020. Meanwhile, agriculture growth is likely to remain steady at close to 4% in 2020, supported by a low base from 2019.

The study also forecasts that FDI inflows will see a plunge to below US$10 billion this year, with downside risks if coronavirus worries continue in H2. Construction activity is likely to decline on subdued sentiment and declining FDI investment. Export growth is likely to slow sharply given lower global demand while import growth will also likely moderate with a slower growth, keeping the trade balance in surplus in 2020.

Standard Chartered economists expect further Vietnamese dong (VND) weakness in the near term given the sharp decline in external demand, slowing tourism receipts, weakness in other regional currencies, and lower net FDI inflows.

The USD/VND rate is projected at 23,700 at mid-2020 and 23,200 at end-2020. The bank anticipates robust VND performance in in the medium term as Vietnam’s external balances are likely to remain strong.

The International Monetary Fund (IMF) has revised down Vietnam’s GDP growth forecast to a new low of 2.7% in 2020, lower than 3.3% projections of VinaCapital, 4.8% of the Asian Development Bank and 4.9% of the World Bank. However, Vietnam remains the fastest-growing economy in Southeast Asia.