Vietnam risks giving the old investment adage “buy the rumor, sell the fact” a bad name as the delta variant upends an economy rumored to have beaten Covid-19.
Up until last month, the Southeast Asian growth star was on a multi-year run as the regional economy that really “gets it.” The government had nimbly and savvily lured factories its way as they fled trade-war battered China.
And Hanoi, the grapevine said, had found the special Covid-19 formula: staying open for business amid impossibly low infection and death rates.
It was widely hailed as fact – and proof – that the transformative Doi Moi reforms since 1986 were not just alive and well, but about to find a higher gear amid a major government leadership change. This argument dominated a March 10 International Monetary Fund report headlined: “Vietnam: Successfully Navigating the Pandemic.”
Not so much. Traders normally ride such narratives until the rest of the herd catches on – then they take profits. Yet Vietnam is now reminding the globe it’s far less ready for global prime time than hoped as a new Covid wave overwhelms the place.
“With the recent surge of the Delta variant, paired with shockingly low vaccination rates, public opinion on Vietnam’s performance is beginning to wither,” cautions economist Huong Le Thu at the Australian Strategic Policy Institute.
Investor opinion, too, as markets realize this threatens already shaky global supply chains. Huong notes that giants of the garment, footwear and electronics sectors from Adidas to Nike to Apple now must worry about their delivery schedules and prices as the Delta wave hits Vietnam Inc.
A month ago, Ho Chi Minh City was still among Asia’s most frenetic metropolises, one cutting lots of ribbons on new factories. Now it’s the epicenter of Vietnam’s worst Covid surge to date – and effectively shutting down.
On Sunday, the Vietnamese government confirmed the nation’s biggest single-day infection increase to date – more than 9,700. Though HCMC is the main hot zone, neighboring cities that also serve as industrial hubs like Binh Duong, Dong Nai and Long An are racking up dangerously high caseloads.
Vietnam’s game plan
What happened in Vietnam will sound familiar to observers of Southeast Asia’s economies: complacency, laxity and a lethal dose of hubris.
As we’ve seen in Thailand, Indonesia and Malaysia, governments’ initial success in containing the virus led them to slow-walk vaccination programs. The game plan was that any new increases in positivity rates could be quickly curtailed by doing what had worked before: social distancing guidance and more personal protective equipment.
During the first wave, Vietnam also took some decidedly top-down steps. Economist Stefan Angrick at Moody’s Analytics cites as an example of how Hanoi “has been aggressively trying to protect its economy” with its policy of “mandatory sleepovers” at “some factories to avoid Covid-19 infiltration that might cause delays to necessary production and broader supply chains.”
Then came the Delta variant, forcing a complete recalibration of government responses. That includes stepping up Hanoi’s vaccination game. Vietnam fell prey to vaccine nationalism, of sorts. One problem, in retrospect, says Barnaby Flower, a clinical research fellow at Oxford University, was that “there was little urgency to procure expensive new vaccines from abroad.”
Vietnam’s government, he says, “balked at the cost and the length of the queue and went on record to say it would be better to produce vaccines domestically.” Like many governments in Asia, it sensed an opportunity to flex its muscles in the biotech sector. Hanoi, Flower says, invested in at least four indigenous vaccines, knowing the lag-time could take considerable time.
This strategy hasn’t aged well as the Delta surge flips the script on Vietnam’s 2021. The government resorted to importing more Oxford-AstraZeneca vaccines. Just not in time to head off where Vietnam finds itself in mid-August 2021: more cautionary tale than economic success case.
This has meant quite a baptism by fire for new Prime Minister Phạm Minh Chính, who in April grabbed the reins from Nguyen Xuan Phuc. Chính’s government must tread carefully, though, to reassure investors who in recent years came to believe Vietnam moved beyond the “pendulum economics” of the past.
The reference here is to a decades-long Vietnam pattern where sentiment among global investors swings from exuberantly positive to wildly negative, often with little nuance between the extremes. The last headline-grabbing pivot toward crisis was in 2012 and a bit of turbulence in late 2013 amid the “taper tantrum” in emerging markets.
Since then, Phuc’s team did an impressive job trying to reduce the extremes and move beyond boom-bust cycles with steps to strengthen the financial system, increase transparency, reduce red tape and raise Hanoi’s ease-of-doing-business score. Companies including Apple, Adidas, LG, Nike, Panasonic, Samsung and myriad other responded by shifting production to Vietnam.
Yet these pre-existing conditions remain – and are now giving markets pause about how far Vietnam has really come. Suddenly, investors are being reminded of the nation’s opacity and knack for policy missteps in moments of extreme stress.
The good news, though, is that Hanoi is indeed displaying an aptitude for multitasking. One example is making nice with Joe Biden’s White House.
Last month, Hanoi and Biden’s Treasury chief, Janet Yellen, announced a deal that Vietnam won’t weaken the dong to gain a trade advantage.
Back when Trump added Vietnam to the currency list, its seemed retribution for the great headlines Hanoi was getting about winning the trade war. The outgoing US leader had hoped his taxes on Chinese goods and nontariff barriers would pull millions of jobs back to America. Instead, they zoomed to the greater HCMC area.
Yellen and State Bank of Vietnam Governor Nguyen Thi Hong moved to keep the peace. That means the pressure is on Hanoi to trim a ballooning trade surplus with Washington. In 2020, Vietnam’s trade surplus with the US jumped 25% to nearly $70 billion.
Hanoi said it will honor its commitment under International Monetary Fund rules “to avoid manipulating its exchange rate in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage and will refrain from any competitive devaluation of the Vietnamese dong.”
This suggests the temperature between the US and Hanoi will come down enough to create space for Chính’s government to raise its economic game.
A case in point is Chính’s government is taking a big swing at increasing the size of Southeast Asia’s smallest e-commerce market.
On Friday, Hanoi announced ambitions for digital enterprises to generate 20% of gross domestic product within four years. By 2030, the National Party Congress is targeting 30% of GDP produced by the digital sector. That’s up from just over 8% of GDP now. The plan is that that by 2025, 80% of the 98 million-person population will have online payment accounts.
Low wage costs
There are other silver linings here, says economist Michael Kokalari at investment firm VinaCapita. He lists fewer logistics bottlenecks of the kind cropping up in, say, Indonesia, and lower costs than those facing Malaysia. Economist Rajiv Biswas at IHS Markit Asia Pacific notes that even as Hanoi works to increase its vaccination rate, investors will continue to be drawn to its competitive strengths.
“Vietnam will continue to benefit from its relatively lower manufacturing wage costs relative to coastal Chinese provinces, where manufacturing wages have been rising rapidly over the past decade,” Biswas says. “Secondly, Vietnam has a relatively large, well-educated labor force compared to many other regional competitors in Southeast Asia, making it an attractive hub for manufacturing production by multinationals.”
So long as Vietnam can contain Covid, Biswas adds, it’s probably not done winning multinationals switching production of manufacturing away from China towards alternative hubs in Asia.
Finally, he says, many multinationals have been diversifying their manufacturing supply chains during the past decade to reduce vulnerability to supply disruptions and geopolitical events.
“This trend has been further reinforced by the Covid-19 pandemic, as protracted supply disruptions from China during February and March created turmoil in global supply chains for many industries, including autos and electronics,” Biswas says.
Yet all bets are off if Hanoi doesn’t get a handle on this second Covid wave. The economic pendulum swinging once again is the last thing this new government needs.