Economy reveals inherent weaknesses

SGI

The global upsurge of the Covid-19 epidemic has exposed several inherent weaknesses and defects in the Vietnamese economy, especially those that are most vulnerable to external shocks.

A quarantined area.

A quarantined area.

Take for example, Vietnam’s trade relationship with China, one of its closest neighbors. China is today the second biggest economic power in the world, and Vietnam shares a 1,281 km border with China on the north and therefore cross border trade with China has developed strongly over the years.

Hence, if trade policies are square and fair, both countries would naturally benefit, especially as they lie in such close proximity to each other. However, in the current scenario the shock waves being felt in China’s economy are reverberating deep into Vietnam’s economy as well.

The Covid-19 epidemic has now affected China's economic growth severely which is taking an unfortunate turn for the worse and showing a drastic slowdown in GDP growth which showed an increase of only 6.1%, the worst index in the last three decades. Investment results are not indicating any significant improvement either and structural issues are still very serious.

The outbreak of Covid-19 has seriously affected all aspects of the Chinese economy. In the first quarter of 2020, China's economy could suffer losses of upto Yuan 1,000 bn (more than USD 143 bn), which is around 1% of the country's GDP.

The first economic casualty was the services industry where hotels, restaurants, transportation, amusement areas and all retail activities where hit immediately. Simultaneously, the losses facing manufacturing enterprises are also extremely worrisome as well and for some companies, the cumulative impact of this epidemic could be "the straw that broke the camel's back".

The current difficulties and depression in the Chinese economy will seriously and significantly impact the Vietnamese economy too. Research from the bilateral inter-industry balance sheet between Vietnam and China shows that in Vietnam's intermediate costs, 8% of inputs are imported from China, while in China's intermediate costs only 0.1% of the input is imported from Vietnam. This partly shows that the relative importance of imported products from China for Vietnam's production is much larger than vice versa.

Considering the factors affecting production and income, it shows that a household’s final consumption in Vietnam accounts for a higher proportion of gross value-added (GVA) than in China by upto 20% (56% compared to 36%), in return for final consumption in China which is 8% higher than Vietnam (14% and 6%).

However, China's overall final consumption in the GVA is still quite low compared to Vietnam (50% versus 62%), while the proportion of net exports in GVA of Vietnam is higher than China. Thus, in order to achieve growth, China largely relies on capital, because the proportion of investment in GVA of China is very high at around 44% of GVA, while this rate in Vietnam is only 22% of GVA.

 If this situation continues for a long time, it can lead to a vulnerable economy when the revenue from ownership is in trouble and savings are smaller than investment.

In general, the influence from the final demand to production value of China is higher than Vietnam. In particular, Vietnam's final demand stimulates China's production value which is much higher than China's final demand which stimulates Vietnam's production.

For example, an increase of USD 1 mn in Vietnam's final demand generates USD 318,000 in production value in China, while an increase of USD 1 mn in China's final demand generates only USD 3,000 in production value in Vietnam. Vietnam's production uses few inputs which are domestically produced except electricity, water and service costs.

Calculation of scenarios when there is trade vulnerability between the two countries shows that Vietnam is heavily affected. Assuming that a 10% reduction in imports from China will reduce Vietnam's GDP by 0.6%, imports from China decreased by 20% could result in Vietnam's GDP falling by 1.2%; and imports from China decreased by 50% could decrease Vietnam's GDP by approximately 3%.

In all such events and scenarios, only if the Covid-19 epidemic is eradicated at the earliest, will Vietnam’s economy become less vulnerable.

Translated by Hoa Nam

Dr. Bui Trinh, Vietnam Economic Institute

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