4 May 2020, NIICE Commentary 4481
Tridivesh Singh & Mahitha Lingala
The Coronavirus pandemic has had an impact on the global economy with International Monetary Fund (IMF) predicting that it could shrink by up to 3 percent in 2020. The Association of Southeast Asian nations (ASEAN) region, has often been cited as a role model for other regional blocs, in terms of economic integration. The bloc has also been one of the engines of growth. In recent years, the region has witnessed growth of above 5 percent approximately. But since the beginning of January, the COVID-19 pandemic has taken its toll on the global economy. A strong reiteration of this point is that Nikkei, FTSE and Dow jones have seen a drop of 14.7 percent, 24. 5 percent and 18.5 percent respectively. World Bank has predicted the worst economic slump in South Asia in 40 years due to the pandemic. While a number of countries in ASEAN, such as Singapore are likely to experience negative growth with IMF pegging it at -3.5 percent, apart from Singapore, the IMF also revised the 2020 growth rates of Indonesia, Malaysia, Philippines, Singapore and Thailand to -1.3 percent, among all the countries which is likely to grow albeit at a much slower clip in the region is Vietnam (the IMF has predicted that the ASEAN nation will grow at 2.7 percent). In the last few years, Vietnam, ASEAN chair for 2020, has been growing well at over 6 percent in recent years.
Vietnam’s economy has faced a significant setback due to the COVID-19. Orders received by the garment sector, from the European Union (EU) and other western countries were cancelled, and this has caused a loss to the industry. The country estimates that 30-50 percent of its 2.8 million workers employed in the garment/ textile industries are likely to be laid off in the coming months due to the pandemic. The economies of Vietnam and ASEAN countries like Thailand, Indonesia and Phillipines, are dependent upon tourism and receive a large number of Chinese tourists. The damage caused to the tourism sector, in the near future, is likely to have a severe impact on the economies of the above countries. With the disruption in supply chains, even the manufacturing sector will take time to revive. Domestic measures like lockdowns within the countries to contain the spread of COVID-19 has also affected the production and supply chain as ASEAN countries have significantly integrated production systems in agriculture as well as in manufacturing.
Handling the COVID-19
While Vietnam may have its task cut out as far as its economic revival is concerned, it would be important to bear in mind that the ASEAN nation has handled the pandemic reasonably efficiently by adopting stringent measures. While globally, the response of Taiwan and South Korea is being hailed, the fact that it has much lesser resources and has been successful cannot be ignored
Vietnam has also removed the lockdown, and resumed domestic travel. Other ASEAN countries like Singapore which were hailed initially for their handling of the virus, have had to extend the lockdown till June, given the steady rise in cases. After its successful handling of the COVID-19, which has also helped it in enhancing its international stature (Vietnam also provided assistance to the US), the question is whether Vietnam can benefit at the cost of China in a post-COVID-19 world.
Even in the midst of the China-US Trade war, Vietnam had benefited due to it’s location and other advantages which it possesses vis-à-vis some of its neighbors. It received nearly USD 25 billion in manufacturing, which bolstered the country’s growth. Vietnam certainly has an edge when it comes to drawing FDI. One of the major advantages for Vietnam, apart from being reasonably more successful in handling the pandemic is the point, that other competitors in ASEAN, as well as the Indo-Pacific region are likely to slow down considerably.
Geopolitics
It is not just the economic advantages, but geo-politics which will benefit Vietnam. In recent years, US-Vietnam ties have witnessed an upswing and so have ties with Japan. Given China’s recent aggressive moves with regard to the South China Sea, it is likely that the ties between US-Vietnam will further strengthen, and the country may play a closer role in the Indo-Pacific. While addressing ASEAN member states, the US Secretary of State Mike Pompeo highlighted about China’s increasing aggression and accused China of pushing territorial ambitions mid coronavirus pandemic, and also has referred to the Chinese sinking of Vietnamese fishing vessel in early April.
Japan which has brought in a USD 2.4 billion stimulus for Japanese companies to shift out of China and to other South Asian countries like Vietnam, may also increase investment in the ASEAN country. Already, it is the second largest investor in Vietnam. Google and Microsoft are already beginning to move some of their production lines to Vietnam and Thailand from China.
Apart from Japan, even South Korea already has significant investments in Vietnam. One of the key focus areas of South Korea’s New Southern Policy was on increasing FDI in Vietnam in 2019 and “facilitating a fourth investment wave across the country”. Powerful South Korean groups such as Samsung, LG, Hyosung Group, and Kumho Asiana Group have been investing in big manufacturing complexes in Vietnam.
Conclusion
Vietnam’s economy is likely to suffer on account of the lockdown to control the spread of the COVID-19 pandemic. Sectors like the textile, manufacturing and tourism will be severely hit. The Vietnamese government has categorically stated that tough measures were essential to prevent the spread of the outbreak. In fact, it could be argued that timely measures by the ASEAN country have helped it in successfully tackling the pandemic, and also resuming its economic activities in a phased manner –which few countries have been successful in doing so. While in the short run, Vietnam will have to deal with economic challenges but in the longer run, the prospects are promising. Hence, Vietnam’s economic and strategic clout are likely to rise not just in Asia, but globally.
