The United Nations reported that 81% of the world's workforce of 3.3 billion people have had their place of work fully or partly closed. In just quarter two, 6.7% of working hours across the world are expected to be lost. Oxfam estimate more than half a billion more people will fall into poverty.
UK and global markets
Whilst they estimate the global economy will contract by 3% in 2020, the International Monetary Fund expects the UK economy to shrink by 6.5%. Office for Budget Responsibility (OBR) is more pessimistic. It expects 12.8% contracting in 2020 with 35.1% collapse between April and June. Unemployment could rise by 2.1 million to 3.4 million by the summer, rising from 3.9% to 10%.
For many in the West, starting from the overhang from 2008, banks and countries start form a high level of debt. The OBR's estimates a three month lockdown would push up the UK's borrowing requirement to £273bn this financial year. The deficit ratio, the budget deficit as a proportion of GDP, would then rise to 14% and the debt ratio to above 100%. Moreover, the debt will remain around 85% in four years’ time. Previous Conservative administrations have imposed austerity measures on the UK economy to deal with a high debt ratio. The work of Reinhart and Rogoff is particularly important in this debt debate. They estimated that once the debt ratio creeps above 90%, economic growth slows, reducing the capacity to generate the tax surpluses needed to repay the debt. High debt ratios cause reduced growth, through confidence and interest rate effects. This provides a reason for bearing down on the debt – cutting expenditure and increasing taxes.
The OBR estimates are based on a 3 month lockdown but stressed the actual amount of growth would depend on how long the lockdown lasted, as well as how quickly activity bounced back once restrictions were relaxed. In late April, the Chief Medical Officer was warning about restrictions until December. Furlough costs are unlikely to be sustained until Christmas. This is a problem for growth and debt.
In mid-March with lockdown decreed, under its flagship loan scheme, the government planned to provide loans through the commercial banks, guaranteed up to 80% by value. NatWest, a subsidiary of the Royal Bank of Scotland, admitted on 7th April that it could not cope. Their call centres normally took 3,000 calls a day. The loan scheme led to that jumping to 25,000, beyond what they could cope with. A compounding issue was due diligence. Many firms complained that those banks have been slow to lend cash because they would be left to cover 20% of losses on loans that cannot be repaid. Even at 100% banks should still exercise some caution.
A month after the announcement of the support package of £330 billion, just over £1 billion in government-backed loans had been approved out of a total. Also, not all business qualified so that adjustments had to be made. For example, on 20th an additional £1.25billion package was announced to support innovative new companies that are not eligible for existing coronavirus rescue schemes. Restriction would reduce the flow of applicants. To qualify to receive the government money, a company must have raised £250,000 privately in the last five years.
The Purchasing Managers’ Index dropped from 36 in March to 12.9 in April, pointing to 7% quarter-on-quarter contraction in output. At the end of April the chairperson of the retail chain Timpson warned that some High Street shops would not survive the coronavirus lockdown, and that the UK town centres will be different. That is not to say the UK is in anyway worse than the rest of Europe. The European Composite Purchasing Managers’ Index also dropped to a record low of 13.5.
Vietnam faces obstacles
Vietnam economy has weakened due to the pandemic. The GDP in Q1 growing by 3.82% year on year (yoy), although not negative as in other countries like China (-6.8%) or Europe (-3.3%), was the lowest in the last 10 years (2018: 7.45%; 2019: 6.82%). Earlier this year, the Vietnamese government set the target for 2020 at 6.8% - 7.0% with an estimate of 6.52% - 6.77% for the first quarter.
International and local research institutions have updated their views on the growth of Vietnam economy. The World Bank adjusted its earlier forecast for the year from 6.5% to 4.9%. Sharing this fairly optimistic view, the Asian Development Bank forecasted a growth of 4.8%. The International Monetary Fund seemed to be more pessimistic with a forecast of 2.7%, a significant decline from 7.0% at the beginning of the year. The Standard Chartered Bank also saw a pessimistic picture with a forecast of 3.3%. A local research institute – Vietnam Economic and Policy Research – suggested a growth rate of 4.2% in their best scenario analysis that we think reflect a moderate view between the two above extremes.
Although the above figures are only good as a reference, we believe the weakening economy is understandable. New data released on 29th April by the General Statistics Office shows that industrial production fell by 13.3% month-on-month (mom), and 10.5% yoy – the only April decline in the last 5 years. The manufacturing sector, accounting for a large part of the GDP, declined by 11.3% yoy.
Other data also indicate a weakening economy, such as the number of newly registered companies and equity capital declining by 46.9% and 43.8% respectively yoy, while the number of companies registering for temporary business interruption increased by 33.6%. Or, data on import-export value show a decline of 18.4% mom and 3.5% yoy although it has increased in the first 4 month period. The consumer price index (CPI) has declined 1.54% mom – the lowest level in the last 5 years – although it has increased in the first 4 months on yoy basis – the highest in the last 5 year for the same period.
All the trending data above leads us to conclude that the Vietnam economy, which had been growing well, has suddenly slowed down. Whether this slowdown is long term or short term is a question of interest for many people, but in our opinion, it cannot be an issue of months. Most scenario based forecasts are subject to the condition of the pandemic being controlled globally. This is reasonable because Vietnam’s economic growth has relied heavily on the imported materials in the recent years. With transportation and logistics mostly being restricted while business decisions becoming more risk averse, we believe Vietnam is not ready to restore its capacity to the level it had been before the pandemic in the next 12 months.