The June 2022 Report on HCMC’s Macroeconomy said the city’s economy has almost got back to its high-growth path. Certain industries have hit or exceeded their pre-pandemic growth rates. The report was conducted by researchers at the University of Economics and Law under the Vietnam National University HCMC, with Dr. Pham Thi Thanh Xuan serving as lead researcher.
From recovery mode to growth momentum
According to the report, in the first half of this year, trade-service value was equal to 98% of that in the first half of 2019, while export earnings outpaced the value two years earlier. However, industrial production has not regained the pre-pandemic growth momentum, and foreign direct investment tumbled in pledged capital.
As such, trade and service as a whole has almost gone through the recovery phase, skirting the pre-pandemic growth level. As of May, the total retail revenue of goods and services had risen to VND456 trillion, equal to 98% of the same period in 2019 but beating that in 2020. The V-shaped recovery was achieved within a short period.
In February, HCMC regained its position as the country’s top exporter, and its export revenue has continued to fly high since March. Its high export growth rate is attributed to the strong performance of farm produce and fishery. Fishery export rose 74% year on year while farm produce export also jumped 22%. Manufactured goods still took the central role in the city’s export structure, accounting for 75% of the city’s total export revenue.
However, the heavy reliance on China and the U.S. as the city’s two biggest export markets may pose risks. The U.S. is facing high inflationary pressure that may affect its demand for commodities, and non-essential export items from HCMC may be adversely impacted in near term. Similarly, consumption in Japan may also be set back due to inflation.
Industrial production in HCMC has basically recovered but is still far from the high growth momentum seen in the pre-pandemic period due to disrupted supply chains (it has contracted by 50% since October). The recovery was underpinned by the processing-manufacturing and mining industries, which grew 53% and 71% respectively.
The number of FDI projects was higher, but the total pledged capital plunged in 2021 and further declined in the first half of 2022. The report authors note that the steep fall in FDI capital is an issue of concern as the city’s economy is heavily reliant on this sector. The FDI sector employed more than 22% of 4.9 million laborers in the city as of April 2022, excluding indirect jobs in the construction at FDI projects.
Still, the FDI sector in the city is changing for the better, shifting from tapping comparative advantages like cheap labor and convenient locations to investing in high-tech, innovation and R&D spheres. Instead of focusing on traditional areas like processing-manufacturing and real estate, the FDI sector in the first five months of the year channeled more investment into knowledge-based sectors such as science and technology, with pledged capital in these sectors accounting for 21.6% of the total. Foreign funds into processing-manufacturing and construction accounted for only 7.8%.
In pursuit of growth
The authors observe that despite the inflationary pressure, the near-term growth prospect is positive as most fundamentals behind the city’s economic growth have seen improvement.
Capital has been absorbed well into the economy and will be translated into positive impacts in the months to come. In the year’s first half, capital channels were widened, including credits, financing by the city government, and FDI. The city injected VND1,200 trillion via support packages, quite sizeable compared to credits worth VND3,100 trillion from banks.
Moreover, the aggregate demand has been expanding and the purchasing power on the uptrend, and will continue into the summer owing to seasonal factors in the city’s economy. Labor supply has been stable and rising, meeting the demand of manufacturers. In addition, inflation is being kept under check, which is a factor underpinning the city’s growth prospect.
The authors note that the biggest challenge for the city is how to sustain this growth momentum in the rest of the year. The city’s economy is susceptible to global market volatilities and changes of domestic policies. As the country’s top locality in terms of international integration, HCMC is more exposed to external risks and shocks as well as internal counter-reactions.
As maintaining resilience is a challenge, the report recommends flexibility in adaptation. The city’s economy is highly exposed to and reliant on the global market via the FDI sector. Therefore, the city cannot evade risks, but must overcome risks to develop.
HCMC’s economy has high capacity for recovery. The report recommends that “the city maintain stimulus programs even amidst the risks of inflation.”
Avoiding excessive reliance on credits
The researchers agree that it is essential to have a cushion against risks, but there are no such measures to this effect in the city’s economy. Resources for development are constrained: difficulties in infrastructure upgrade; little room left for higher credit growth; short supply of labor and heavy reliance on labor-intensive sectors. Technologies have barely moved on from the beginning stage of digital transformation; budgetary reserves are not available as public debt has skirted the ceiling despite the privilege of special financial policies. Overall, the city cannot proactively respond to shocks in the absence of a ‘code of conduct’.
Economic stimulation is necessary in near term, but the city needs to overcome weaknesses like boosting public investment for growth, reliance on the FDI sector for exports, credit loosening, and labor intensiveness.
In this period, any stimulus needs to be directed to enhancing the efficiency in utilizing resources. Digitalization stimulus packages for the economy should be more prioritized than public investment stimulation due to faster deployment.
The city government needs to step up the administrative reform to facilitate enterprises and markets to function and prioritize support for laborers.
The researchers recommend that HCMC should not excessively tap credit-based stimulus packages as the credit growth quota has almost been exhausted and such a move contradicts inflation-control measures.
Finally, promptly adapting to common rules of global partners is also the way to help HCMC sustain growth by utilizing external spaces and resources to enhance the city’s internal capacity.