If a rising tide lifts all boats, then Vietnam may find that there is a related saying in economics: when the tide goes out, you will see who was swimming naked.

The Southeast Asian country has fared fairly well amid the trade frictions around the world, with its foreign investment and gross domestic product continuing to grow. But even Vietnam is not immune if a recession hits the global economy, as some are expecting, which is why they are bracing for a hard landing. News this week that U.S. President Donald Trump plans to increase tariffs on Chinese goods has just added to the frictions, sending Asian stock markets plummeting.

An economic downturn — in other words, the tide going out — could expose vulnerabilities for Vietnam, the equivalent of those swimming naked. Most analysts are forecasting slower GDP growth for Vietnam in the year ahead.

Economic slowdown ahead

It “is important to recognize that the region continues to face heightened pressures that began in 2018 and that could still have an adverse impact,” said Andrew Mason, who is acting as the chief economist for the World Bank in the East Asia and Pacific region. “Continued uncertainty stems from several factors, including further deceleration in advanced economies, the possibility of a faster-than-expected slowdown in China, and unresolved trade tensions.”

His office projects the Vietnamese economy will expand 6.6 percent in 2019, while researchers at Capital Economics peg growth at an even lower rate of 6 percent year-on-year. That compares with the annualized rate of 7.1 percent in 2018.

The pending slowdown, if it comes, would be due to a variety of reasons, not least among them global demand. If more and more countries see their economies decelerate — because of the trade wars or otherwise — they will buy fewer goods from Vietnam. As an export-led economy based on factory products, Vietnam is extremely sensitive to the knock-on effects of foreign trade and consumption.

Another key risk factor for the economy is the portfolio of state-owned enterprises. The government has not divested its shares in the enterprises as quickly as planned. At the same time it faces a growing burden from tax and spending needs.

Public debt and a budget deficit

“Fiscal policy is also likely to become less supportive. Vietnam has one of the highest levels of public debt and the largest budget deficit in the region,” Capital Economics, an economic research company, said in a note to investors. “Tighter policy, in the form of slower spending growth and higher taxes, is needed to bring debt levels down to more sustainable levels.”

Both the company and the World Bank agree that, besides public debt, private debt poses a notable challenge in the country as well, especially at banks. Lenders have not completely offloaded their non-performing loan problem, which refers to loans that are unlikely to be repaid. That contributes to tightening credit, which can be a blessing and a curse.

“On the plus side, weaker credit demand is needed to reduce risks in the financial sector and put the economy on a more sustainable footing,” Capital Economics wrote. “But in the near term a slowdown in credit growth will drag on consumption and investment growth.”

Large trade deals

All of this comes during a transition period for Vietnam, which is preparing for new trade deals like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the European Union-Vietnam Free Trade Agreement. Academic researchers Tran Thi Bich Nhan and Do Thi Minh Huong say the transition period will create plenty of opportunities, but not everyone will come out ahead.

“In terms of society, the increased competition from participating in FTAs can push some companies in developing countries, primarily state-owned enterprises and companies with outdated production technology, into difficulties, bringing along the possibility of unemployment for a portion of the workforce,” Nhan and Huong wrote in the finance ministry’s official newspaper.

If Vietnam adds to that a slowdown in the global economy, workers and other vulnerable groups are most likely to be hardest hit. While the overall impact of a recession is generally negative, some say there is a silver lining. When the tide goes out, it can help distinguish between the efficient and inefficient companies, distinguish between an economy’s strengths and the weaknesses to be addressed. But no one expects it to be a pleasant process.

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