Q1 | 2020 · an expected U-shaped recovery in global growth, EIC believes CLMV economic recovery in 2H20 is likely to be gradual. With uncertainty regarding the containment of COVID-19,

Growth to slow down substantially amid the COVID-19 pandemic, global recession, and country-specific risks

Q1 | 2020

CLMV economies proved their resiliency during the global trade tension period in 2018-19, supported by strong domestic demand. However, EIC believes the COVID-19 outbreak has changed the CLMV economic outlook materially in 2020F, given falling external demand from a deep global recession and weakening domestic demand from lockdown measures and employment slowdown. The slowdown is expected to be broad-based, affecting CLMV economies through five key economic channels, including 1) exports, 2) supply chain disruption, 3) tourist arrivals, 4) foreign direct investment (FDI), and 5) private consumption. In addition, each country faces their own country-specific risks. As a result, EIC has substantially revised down 2020 GDP forecasts for all four countries. To shore up growth, accommodative fiscal and monetary policy responses have been introduced and are likely to continue. On the recovery path, given country-specific challenges and an expected U-shaped recovery in global growth, EIC believes CLMV economic recovery in 2H20 is likely to be gradual. With uncertainty regarding the containment of COVID-19, our forecasts are subject to further downside risks.

With growing risks from COVID-19 and EBA withdrawal, EIC has revised 2020 Cambodia GDP growth downward to 0.4%. Falling external demand is likely to adversely impact Cambodia due to the country’s high reliance on exports (63% of GDP) and tourist revenue (18% of GDP). Risks are tilted to the downside as the continued economic slowdown could affect highly leveraged households and financial stability.

With the global recession, substantial exposure to China’s economy and limited policy space, EIC has revised Laos’ 2020 GDP growth downward to 2.0%. Laos’ economy slowed down in 2019 (5.0%YOY vs 6.3% in 2018). In addition to weak economic momentum, concerns over their fiscal and external debt positions could limit Laos’ policy responses to the external and domestic demand slowdown.

Myanmar’s economy managed a rebound (6.8% YOY) in 2019. However, a deep global recession and lockdown measures should slow down Myanmar’s 2020 GDP growth to 2.4%. Compared with peers, Myanmar’s economy relies more on domestic demand. However, lockdown measures could slow employment and wages. Growth recovery should also depend on the progress of reforms leading up to the general election in November 2020.

Despite impressive growth in 2019 (7.0% YOY), the COVID-19 pandemic and global recession are likely to slow Vietnam’s 2020 GDP growth to 3.0%. Falling external demand is likely to have significant impacts on Vietnam’s exports (99% of GDP) and tourism (11% of GDP). Moreover, lockdown measures could exacerbate the falling external demand impacts on employment and wages.

Special Issue: Evaluating the Impacts of the COVID-19 Pandemic and Global Recession

The impacts from COVID-19 pandemic and global recession on CLMV economies should be broad-based…

Combined with country-specific risks, EIC expects CLMV economies in 2020F to slow down substantially

Q1 2020

Source: EIC analysis based on data from World Bank and Statistics Offices of CLMV Countries *Note: 2016 data is used for Laos

Source: EIC analysis based on data from IMF, WB, ADB, and CLMV Authorities *Note: 2020F for Myanmar refers to FY2019/20

In this issue, EIC CLMV Outlook focuses on the economic impacts of the COVID-19 pandemic and global economic recession in 2020F. To assess economic impacts on the CLMV economies, EIC has evaluated five economic channels that are likely to see depressed growth: exports, tourism, foreign direct investment (FDI), and private consumption, in addition to supply chain disruption (Figure 1). Moreover, in each country we look at the country-specific factors/risks that could affect the CLMV economic outlook for 2020F. Note that our key assumption on COVID-19 is that the pandemic is contained (no significant increase in new COVID-19 cases) and lock-down measures are relaxed in 1H20F.

Direct hits to external demand components, namely exports, tourism, and FDI (Figure 2 and Figure 3). With a global pandemic and a sudden halt to economic activities resulting from pandemic-driven lock-down measures in several countries around the globe, EIC expects global growth in 2020F to shrink by -2.1%YOY (a deeper contraction than the global financial crisis in 2009) which should result in falling global trade. As part of the global supply chain, CLMV exports will likely take a hit. Regarding exports, Vietnam is likely to experience significantly adverse impacts as it is one of the most open economies not only in the CLMV nations but also in ASEAN. Note that exports of goods and services account for 99% of Vietnam’s GDP and imports of goods and services account for 96% of GDP according to 2018 data. Cambodia’s exports, accounting for 63% of GDP, will likely be affected by both the pandemic and the partial withdrawal of Everything But Arms (EBA) tax privileges by the European Union. While exports of goods and services as a percentage of GDP are smaller in Laos (34%) and Myanmar (21%), impacts from the global recession should remain significant.

Evaluating the Impacts of the COVID-19 Pandemic and Global Recession

Source: EIC analysis

Figure 1: Channels of COVID-19 Economic Impacts on CLMV economies

Global tourism comes to a standstill. Amid the COVID-19 pandemic, global tourism has stalled, and the speed of its recovery remains uncertain, given the ongoing pandemic. Substantial adverse impacts are likely to be on Cambodia and Vietnam, whose tourism revenues account for 18% and 11% of GDP, respectively. With smaller contributions from tourism revenue, Laos (4% of GDP) and Myanmar (3% of GDP) should see smaller but still significant impacts. With global recession, FDI and domestic investment could be delayed. Among the CLMV economies, Cambodia has the largest FDI proportion to GDP (13%), followed by Laos (7%), Vietnam (6%), and Myanmar (2%). Global recession tends to be followed by a falling/slowdown in global trade and investment. Therefore, FDI and domestic investment in CLMV countries could be delayed, especially in 2020F. However, after COVID-19 is contained, production base relocation out of China should be one of the key decisions multinational companies need to make and the CLMV countries, especially Vietnam, could be one of the beneficiaries, given their young and educated labor force, improving infrastructure, and closer linkages to global supply chains. Figure 2: A deep global recession in 2020F will likely adversely impact CLMV economies

Source: EIC analysis based on data from World Bank and Statistics Offices of CLMV Countries *Note: 2016 data is used for Laos Figure 3: High reliance on external demand is likely to intensify effects of the global recession

Source: EIC analysis based on data from Statistics Offices and Central Banks of CLMV Countries

In the short-term, a high reliance on the Chinese economy by CLMV countries is likely to intensify COVID-19 impacts. EIC looked at the contribution of Chinese tourists, FDI, and exports to China as a percentage of GDP (Figure 4) and found that CLMV economic exposure to the Chinese economy is substantial. Among the four economies, Vietnam has the largest exposure, as Chinese exports, tourism, and FDI combined account for 19% of GDP, followed by Laos (17% of GDP), Cambodia (12% of GDP), and Myanmar (9% of GDP).

Domestic consumption will likely be affected by declining employment/wages and lock-down measures. During the global trade tensions in 2018-19, domestic consumption, which accounted for 65%-70% of GDP, acted as a buffer for the CLMV economies. However, the COVID-19 pandemic is likely to result in a deep global recession. Falling external demand is likely to result in declining employment and wages. Moreover, lock-down measures adopted by CLMV countries to contain the COVID-19 infection (nationwide for Cambodia and partial lock-down for the other three) should exacerbate declining domestic consumption activities. Accommodative fiscal and monetary policy responses have been introduced and are likely to continue. With tangible impacts of COVID-19 on both external and domestic demand, the CLMV governments and central banks have already implemented measures to mitigate the impacts. With public debt less than 30% of GDP, the Cambodian government mentioned that they stand ready to implement a stimulus package worth USD0.8-2.0bn (3.0%-7.6% of GDP) to mitigate the impacts for 6-12 months. In mid-March, the State Bank of Vietnam announced a refinancing rate cut of 100 bps (from 6% to 5%) to shore up the economy, and the government stands ready to inject liquidity and help credit institutions address NPLs. Despite the fiscal consolidation in progress, the Vietnamese government has thus far announced a stimulus package worth a combined total of 3.2% of GDP, including tax cut and cash transfer programs. In response to the pandemic, the Central Bank of Myanmar has so far cut its policy rate by 150 bps (50 bps on March 12 and 100 bps on April 1). The Myanmar government also introduced a soft loan program worth 0.1% of GDP. With tighter fiscal constraint compared with its peers, the Lao government, has implemented income tax exemptions and deferred tax collection for affected sectors, such as tourism. Meanwhile, the Bank of Lao PDR has cut its policy rate by 100 bps (4% to 3% for one-week loans) and cut its reserve requirement ratio by 200 bps for foreign currency and 100 bps for local currency.

Figure 4: CLMV economies have substantial exposure to China

Source: EIC analysis based on data from authorities of CLMV countries, WTTC, ASEAN Investment Report 2019, IMF, and CEIC Note: 2019 data is used for Vietnam

Combined with country-specific factors, EIC has substantially revised our 2020 GDP forecasts downward for the CLMV economies (Figure 5). In our forecasts, we assume COVID-19 significantly impacts the CLMV economies in 1H20. Given country-specific challenges, which we detail in the following sections in this report and a U-shaped recovery in global growth recently expected by the IMF, EIC believes CLMV economic recovery in 2H20 is likely to be gradual (U-shaped recovery). The growth recovery expected in 2021F heavily hinges on our baseline’s assumption that COVID-19 pandemic is contained by 1H20F and is mainly due to the low base effects and supportive policy measures. Note that as the COVID-19 pandemic across the globe remains fluid, we believe that the risks outlined in our forecasts remain tilted to the downside, especially if the pandemic is not contained by 1H20F.

Figure 5: EIC revises growth of CLMV countries downward substantially and expects a U-shaped recovery

*Note: 2020 refers to FY19/20 for Myanmar. Source: EIC analysis based on data from IMF, WB, ADB, and CLMV authorities

Macroeconomic Update

2019 Recap Cambodia’s economy grew 7.1% in 2019 according to the National Bank of Cambodia (NBC), slowing from 7.5% in 2018 amid headwinds from the global economic slowdown. Cambodia’s growth was supported by buoyant exports, tourist arrivals, and foreign direct investment, although all expanded at a softer pace in 2019. Exports grew 9.6%YOY in the first eleven months of 2019 driven by exports of garments & footwear, which increased 14.4%YOY and accounted for a 74.5% share of total exports. Exports to the EU, Cambodia’s main export partner, declined 0.9%YOY during the period but were offset by exports to Cambodia’s export runners-up the US, China, and Japan, which recorded growth of 39.5%YOY, 9.0%YOY, and 8.1%YOY respectively. This reflected the government’s attempts to diversify the country’s export markets in light of the partial withdrawal of EBA (Everything But Arms) trade privileges by the EU, which will come into effect in August 2020. Foreign tourist arrivals to Cambodia reached 6.61 million visitors in 2019, achieving growth of 6.6%YOY, according to Cambodia’s Ministry of Tourism. Of the total, Chinese visitors accounted for a 35.7% share, up 16%YOY. Vietnamese and Thai tourists, the second and third sources after Chinese tourists, also saw solid growth, increasing 13.6%YOY and 22%YOY respectively. Foreign direct investment grew 12%YOY in 2019, according to the NBC. China (including Hong Kong) remained Cambodia’s largest investor with a 43% share, with FDI inflows largely invested in construction and real estate as part of China’s Belt and Road Initiative. Meanwhile, low average inflation of 1.9% in 2019 contributed to continued robust domestic demand. 2020F Outlook Nevertheless, the outlook for 2020 leans towards a significant slowdown as Cambodia will likely face major challenges from partial EBA withdrawal, COVID-19, and the global recession. EIC is therefore revising its GDP growth forecast in 2020 to 0.4% (vs 7.1% in 2019). With major uncertainties surrounding the COVID-19 pandemic, the forecast is subjected to further downside risks.

Facts and Figures Population (2018) 16.24 million

Labor force (2018) 9.06 million

GDP (2018) 24.57 USD billion

GDP per capita (2018) 1,512 USD

GDP by sector (2018) Agriculture: 22%, Industry: 32.3%, Services: 39.5%

Top exports (2018) Textile 62%, Footwear 11%, Travel goods 4%

Economic Outlook

What to watch in 2020 Partial EBA

withdrawal from the EU effective

August 12

Economic slowdown from COVID-19

impacts and fiscal stimulus response

The Cambodian economy in 2020F faces a major risk as the COVID-19 pandemic will likely push the global economy into a deep recession in the first half of the year. Cambodia has imposed lock-down measures via the closures of schools and casinos and a ban of events with more than 50 participants. In addition, border control measures were implemented, such as suspending tourist visas, requiring health certificates, and ordering mandatory quarantine for all arrivals. Borders to neighboring Thailand, Laos, and Vietnam are closed. In EIC’s view, the COVID-19 pandemic may affect Cambodia’s key growth drivers through various channels.

• First, the tourism sector, accounting for 17.8% of GDP in 2018, is likely to be adversely affected. Tourist arrivals in March 2020 shrunk by 64.7%YOY and are expected to sink further as global tourism comes to a standstill. This is likely to result in a slowdown in the services sector, especially hotels and retails. Note that as of early April 2020 most of the key countries supplying foreign tourists had experienced a significant COVID-19 outbreak, including China (32.6% share of foreign tourists visiting Cambodia in 2018), Japan (3.4%), South Korea (4.9%), and Singapore (1.4%).

• Second, a slowdown in global demand could result in lower exports (63% of GDP) and FDI (13% of GDP), the two key economic engines. Lock-down measures imposed abroad, especially in the US and EU, will likely depress demand for garments and footwear (accounting for around 75% of Cambodia total export value) and weigh on Cambodian exports as both economies make up over half of total exports. Border trade is likely to be disrupted as all neighboring countries have closed border checkpoints as of early April. Furthermore, a sluggish Chinese recovery may result in the postponement of investment and construction plans in Cambodia.

• Third, a slow resumption in Chinese production and logistics could also lead to supply chain disruption for factories in Cambodia relying on raw materials from China, resulting in temporary factory closures and adding yet more pressure on the manufacturing sector before EBA withdrawal.

• Lastly, amid rising fear factors and declining economic activity, a loss of income for workers and domestic lock down measures are likely to slow private consumption, which accounted for 72.6% of GDP in 2018.

Moreover, the loss of trade competitiveness from the withdrawal of EBA could exacerbate the slowdown in economic growth this year. On 12 February 2020, the European Commission announced the withdrawal of EBA privileges for “selected garment and footwear products, and all travel goods and sugar” effective August 12, 2020 assuming no objections1. The commission cited violations of human and political rights as a key reason behind the withdrawal, but also noted that the commission would continue supporting Cambodia’s development by continuing tariff exemption on emerging industries and high value added garments. Products withdrawn from EBA will be replaced by the EU’s most favored nation (MFN) tariffs. According to the WTO, the EU’s average MFN applied tariff is EUR 4.6 / 100 kg for sugar cane, 8% for footwear, and 12% for garments, with rates varying by product.

1 For the full regulation and list of products withdrawn from EBA, see: https://ec.europa.eu/transparency/regdoc/rep/3/2020/EN/C-2020-673-F1-EN-MAIN-PART-1.PDF

https://ec.europa.eu/transparency/regdoc/rep/3/2020/EN/C-2020-673-F1-EN-MAIN-PART-1.PDF

EIC sees the rise in tariffs possibly affecting Cambodia’s economy through various channels, including

• A reduction in exports due to a loss of competitiveness (exports of products withdrawn from the EBA accounted for 29% of exports to the EU, or 10% of total exports in the first half of 2019).

• The relocation of factories out of Cambodia and lower foreign direct investment as companies take advantage of duty-free benefits in alternative countries (e.g. Vietnam via EU-Vietnam FTA. Please see details in the Vietnam section) or cheaper wages elsewhere (e.g. Bangladesh) (Figure 1).

• Reduced private consumption as companies may need to lay off workers, which could add an additional strain on Cambodia’s financial stability given the rise in microfinance loans concentrated in consumption (according to Cambodia’s Ministry of Industry and Handicraft, 923,313 workers, about 10.2% of labor force, were employed in the garment, travel goods, and footwear sectors in 2019).

With that said, economic slowdown due to EBA withdrawal will be felt most in the second half of the year as exporters will likely hasten exports in the first half of the year to take advantage of EBA before August, although a sharp contraction in European economies during 1H20 may halt progress. Nevertheless, consequences are likely to linger in the middle to long term. Effective export markets and FDI source diversification should be key factors for Cambodia to pursue to mitigate the impacts of EBA withdrawal. The Cambodian government and central bank stand ready to stimulate the economy. Government budget balance is likely to be in the red in 2020F. Cambodia has a strong fiscal position, as reflected in a fiscal surplus of 0.45% of GDP in 2019, according to the IMF. In addition, a public debt of 28.3% of GDP in 2019 (however, almost all of which is external) allows for fiscal space to stimulate growth. In the short term, the Cambodian government plans stimulus packages to provide relief to businesses and workers affected by the COVID-19 outbreak and EBA withdrawal. The government has reserved USD 800 million (in case the outbreak lasts 6 months) to USD 2 billion (in case the outbreak lasts more than a year) in funds to support the economy, valued at about 3% and 7.6% of 2019 GDP respectively. On the monetary side, the National Bank of Cambodia has implemented measures to ensure adequate liquidity and encouraged banks to lower interest rates on loans for affected borrowers. Figure 2 shows a summary of announced programs.

Figure 1: Cambodia’s minimum wage is higher than competitor countries

Source: EIC’s analysis based on data from national statistical offices

Medium-term efforts are focused on economic diversification and improving competitiveness. Cambodia has started free trade negotiations with key partners including China, South Korea, and the Eurasian Economic Union in order to diversify its export markets and reduce reliance on the EU. Additionally, Cambodia launched the SME bank in April and established the SME Co-Financing Scheme with capital of USD 100 million. The fund is expected to provide loans with low interest rate for SMEs, especially in priority sectors such as manufacturing. However, since a large number of Cambodian SMEs are not registered with the government, its effectiveness remains to be seen.

Maintaining financial stability will be another key issue for Cambodian authorities amid the major economic slowdown. According to the NBC, credit growth in 2019 grew 26%YOY, especially in real estate and consumer lending, with non-performing loans representing 2.2% of total loans. Similarly, the Cambodian Microfinance Association (CMA) reported a 30%YOY increase in microfinance credit portfolios, with NPLs representing less than 1.0% of total loans. Nevertheless, with the economy facing significant challenges, the CMA expects loan growth to slow this year, while risks remain as the overall economic slowdown may add pressure to the ability of borrowers to repay their debts. A key area to watch is the real estate sector, where lax regulations resulted in consumers taking loans directly from developers without going through financial institutions. Inadequate screening with regard to the ability of buyers to make debt repayments in addition to higher interest rates charged could pose a problem. In addition, the IMF reported that a decline in real estate prices may have a high impact on the Cambodian economy as a result of high leveraging. Continued macroprudential supervision and policies to moderate credit growth would be crucial to maintaining financial stability. Another area to be cautious of is Cambodia’s high current account deficit at 12.5% of GDP in 2019 according to the IMF, which may widen from slower exports this year. Although Cambodian foreign reserves are enough to cover 7.2 months of prospective imports, higher than the standard 3 months, slower foreign direct investment this year could expose Cambodia to higher external risks.

Financial Markets

Figure 2: Cambodian government and central bank’s key fiscal and monetary policy responses

Source: EIC’s analysis based on data from IMF and local press

Cambodia’s economy will likely slow to its lowest growth in 11 years as growing risks from COVID-19 and EBA withdrawal depress exports, manufacturing, FDI, tourism, and private consumption. Businesses are advised to remain cautious this year, especially firms with investment in heavily affected sectors such as tourism and garment manufacturing. Risks to outlook remain tilted to the downside as the economic slowdown may have consequences on financial stability, although the fiscal position and foreign reserves remain broadly adequate. With higher uncertainty regarding COVID-19, the riel may depreciate against the US dollar as a result of the current account deficit and strong demand for the USD as a safe haven. Another key area to monitor this year is the progress of fiscal stimulus efforts, which are expected to be a key growth driver and relieve pressure on affected sectors. As part of its diversification policy, businesses should keep an eye on government policies to support emerging sectors of the economy such as agro-processing, which may provide good investment opportunities in the future. Progress on free trade negotiations are also another factor to monitor, as Cambodia is expected to rely less on the EU market and more on the US and Chinese markets, especially the latter as there are strong economic ties between the two countries. Economic recovery in the future is likely to depend on the COVID-19 situation, China’s economic recovery, particularly the progress of the belt and road initiative, diversification of the economy and global economic recovery. Effective structural reforms via stronger revenue collection, development of workers’ skills and education, and stronger regulations will be important to sustain growth in the future.

EIC’s View

Source: EIC analysis based on data from Trademap and the NBC

Cambodia’s Key Indicators Indicators Unit 2015 2016 2017 2018 2019P 2020F 2021F

Real GDP % YOY 7.0 7.0 7.0 7.5 7.1 0.4 5.9

Consumer price index (average) % 1.2 3.0 2.9 2.4 2.4 1.5 1.9

Current account balance % of GDP -8.7 -8.5 -7.9 -11.4 -12.5 -22.2 -17.6

Deposit Rate (end of period) % 1.4 1.4 1.5 1.4 1.4 - -

Sources: International Monetary Fund (IMF) and Cambodian Authorities, EIC Analysis

Robust imports demand resulted in a widened trade deficit, while exports continued to grow in 2019

Tourist arrivals fell significantly as global tourism comes to a standstill

Sources: National Bank of Cambodia Sources: Ministry of Tourism

FDI inflows continued to grow steadily in 2019 Robust credit growth in 2019

Sources: National Bank of Cambodia

Sources: National Bank of Cambodia

KHR appreciated slightly since March, in line with ADXY

Inflation remained moderate in 2019

Sources: Bloomberg Sources: National Bank of Cambodia

Links with the Thai Economy

Thai exports to Cambodia fell in 2019, led by a decline in refined oil (-13%) and jewelry exports (-66%). However, exports grew in the first quarter of 2020.

Thai imports from Cambodia spiked in 2019 due to a rise in imports of jewelry, gems, silver bullion, and gold. Imports continued to spike in the first quarter of 2020.

Sources: Thailand’s Ministry of Commerce Sources: Thailand’s Ministry of Commerce

Thai exports via borders in the first quarter of 2020 grew 13.8%YOY after expanding 12%YOY in 2019

Thai imports via borders in the first quarter of 2020 grew 18.7%YOY after declining 7%YOY in 2019

Sources: Thailand’s Department of Foreign Trade Sources: Thailand’s Department of Foreign Trade

TDI to Cambodia ticked up in the last quarter of 2019, setting a new quarterly high

Declining tourist arrivals from Cambodia in 2019 should continue in 2020 amid the COVID-19 pandemic

Sources: Bank of Thailand Sources: Thailand’s Department of Tourism

What to watch in 2020


2019 Recap Laos’ economy is projected to grow around 5.0% in 2019, according to the Asian Development Bank. This figure is down from EIC’s earlier estimate of 6.4% as a result of natural disasters toward the end of the year. In September 2019, Laos was hit by a flood in its Southern provinces, while other areas were affected by a prolonged drought which is expected to last into early 2020. This impacted Laos’ agricultural output, particularly rice, along with causing disruption to the livelihoods of people living in the area. In addition, the natural disasters disrupted the generation of hydro-power, a key industry in Laos. Another major factor impacting Laos’ economy in 2019 was a slowdown in foreign direct investment. FDI in 2019 fell 57.8%YOY, mainly due to a slowdown in the Chinese economy and the construction of new hydro-power projects after the dam collapse in 3Q18. China is Laos’ largest foreign investor and creditor, especially through the Chinese-Laos railway and hydro-power projects. According to the ASEAN investment report (2019), Chinese investment accounted for 79% of total FDI in 2018, while the Bank of Lao PDR reports that 47% of the country’s external debt is in the form of concessional Chinese loans. Furthermore, Laos’ mining industry is expected to continue its sluggish growth, as reflected by mineral exports growing only 1.2%YOY in the first nine months of 2019. Nevertheless, Laos’ overall exports and tourism were strong in 2019. Exports grew 8.9%YOY in 2019, supported by resilient exports to China, which grew 5.0%YOY and accounted for about 34.9% of total exports. Tourism also showed continued strength, with visitor arrivals growing about 9%YOY and reaching 4.58 million visitors according to Laos’ Ministry of Information, Culture and Tourism. Growth mainly stemmed from tourists from neighboring Thailand, Vietnam, and China, which grew about 6%YOY, 11%YOY, and 27%YOY respectively. On the domestic side, consumption remained subdued in 2019. This is reflected in lower credit growth of 4.4%YOY in 2019 compared to 9.2%YOY in 2018. In addition, imports grew by only 1.4%YOY in 2019, further suggesting a deceleration in domestic demand (imports grew 8.8%YOY in 2018). Another pressure on domestic demand is rising inflation, which steadily rose to 6.3% in December after averaging 3.3% in 2019. Inflation rose due to rising food prices from lower agricultural output and an African swine fever outbreak, while a continuous depreciation of the Laos Kip against the Thai Baht resulted in higher import costs. In 2019 the Kip depreciated 13% against the Baht due to the Baht’s




GDP per capita (2018) 2,567.5 USD

GDP by sector (2018) Agriculture: 15.7%, Industry: 31.5%, Services: 41.6%

Top exports (2018) Electricity 25%, Copper & Ores 19%

Economic Outlook

Pressures on fiscal and external

stability as a result of the economic

slowdown

Effects from the COVID-19

pandemic and China’s economic

slowdown

status as a regional safe haven owing to Thailand’s strong foreign reserves and current account surplus. 2020F Outlook EIC has significantly revised down Laos’ GDP forecasts for 2020 to 2.0% (vs 5.0% in 2019) as a result of Laos’ already weak economic momentum, the COVID-19 pandemic, and global economic recession. Due to the country’s substantial exposure to the Chinese economy and neighboring economies, economic growth is likely to slow further, especially in light of Laos’ weak external position. To control the spread of the virus, Laos has implemented lock-down measures, including a mandatory stay-at-home order except for necessary activities, closures of factories and entertainment venues, and a ban of gatherings of more than 10 people. Borders are also closed except for the trade of goods. The spread of COVID-19 will likely have a broad-based pressure on economic growth this year through slowdowns in 1) foreign direct investment, 2) exports, 3) supply chain disruption, 4) tourist arrivals, and 5) private consumption.

• As stated earlier, 79% of FDI into Laos came from China in 2018 – the highest percentage of all CLMV countries. As the Chinese economy continues to decelerate, it is likely that FDI will also slow this year, even after a significant decline in 2019. China has been an important investment partner for many of Laos’ hydro-power projects – one of the country’s key growth drivers – and infrastructure construction; therefore, additional construction of new projects may slow down or be postponed. Domestic lock-down measures may also stall the progress of projects currently under construction. Since China is Laos’ largest foreign creditor, the country’s external position may face pressures this year.

• Furthermore, reduced Chinese demand may affect Laos’ exports to China, which have proven resilient in recent years. In particular, exports of garments, a bright spot in 2019 amid sluggish electricity and mineral exports, may be affected by supply chain disruption of raw materials as China slowly resumes production. Additionally, border trade activities, which Laos relies on heavily, may be disrupted due to border closures.

• Stricter travel restrictions, particularly border closures, quarantine measures, and fear of further COVID-19 spread will likely depress tourist arrivals this year – another key area of growth for Laos in 2019. In addition, a loss of jobs and income as a result of the COVID-19 outbreak and domestic control measures are likely to depress private consumption. Domestic consumption may also be affected if food prices rise or natural disasters affect farm output and income. Although lock-down measures are likely to ease in the second half of 2020, Laos’ weak fiscal and external positions may affect recovery.

With major uncertainties surrounding the COVID-19 pandemic, Lao’s economic growth outlook is subject to further downside risks. Laos’ economic growth in 2H20 would likely depend on China’s economic recovery and hence export recovery, especially electricity exports. Given, the global recession and slow recovery in China resulting from the COVID-19 pandemic, risks remain tilted to the downside. Impacts from the COVID-19 pandemic and global recession are likely to put more pressure on the country’s fiscal position. The IMF forecasts Lao’s public debt remaining at about 58% of GDP in 2019, with external public debt at 51.4% of GDP, while Laos’ fiscal deficit is projected to be at 5.1% of GDP in 2019, rising from 4.7% in 2018 amid higher spending on natural disaster relief. Although Laos has implemented fiscal consolidation

measures including raising revenue by improving tax administration, especially through the use of ICT, and minimizing expenses by reducing new civil servant hires and the construction of new projects in recent years, challenges such as natural disasters and the current economic slowdown hinder progress. Moreover, limiting construction of infrastructure and hydro-power projects may lower growth in the future and further increase reliance on foreign funding as they are the key growth drivers for the economy. With a rapidly escalating economic downturn due to the coronavirus, Laos has announced fiscal policy measures to stimulate the economy, which are expected to widen the fiscal deficit in 2020, along with monetary policy measures. Figure 1 shows a summary of announced programs. Laos’ high external debt remains a key concern. As noted earlier, China is both Lao’s largest investor and creditor and should remain so going forward due to China’s investment in railway and hydro-power dams. This may pose further risks as China’s economy will likely be heavily affected by the spread of COVID-19 this year, suggesting a prolonged slowdown. A deceleration in FDI inflows is likely to put pressure on Lao’s balance of payments, of which the current account remains in deficit at about 7.2% of GDP in 2019 (vs average current account deficit between 2016-2018 at 11.2% of GDP). The IMF forecasts Laos’ foreign reserves in 2019 to cover only 1.3 months of prospective imports, rising slightly to 1.7 months in 2020 – still well below the standard of 3 months. Additionally, a depreciation of the Kip will put further pressure on repayment of external debt. Moody’s Investor Service and Fitch Ratings have assigned first time ratings to Laos at B3 with positive outlook and B- with stable outlook respectively1. Moody’s cited Laos’ macroeconomic outlook as a key strength based on the strong growth in its hydro-power sector and the construction of the China-Laos railway, which should support logistics in the future, but noted some concerns regarding low household incomes and environmental risks. However, Moody’s also noted that government administration and governance remain weak. In addition, pressures arise from the country’s high public debt

1 Moody’s: https://www.moodys.com/research/Moodys-assigns-first-time-issuer-rating-of-B3-to-Laos--PR_415080

Fitch: https://www.fitchratings.com/site/pr/10110593

Figure 1: Key fiscal and monetary policy responses


https://www.moodys.com/research/Moodys-assigns-first-time-issuer-rating-of-B3-to-Laos--PR_415080

https://www.fitchratings.com/site/pr/10110593

and external vulnerability given low foreign reserves, although inflation management has been effective. The positive outlook stems from continued strength in hydro-power and railway construction, along with fiscal reforms. Similarly, Fitch cited Lao’s strong economic growth and outlook along with moderate inflation as the key ratings driver, but weak fiscal and external positions and low foreign reserves remain key concerns. The Bank of the Lao PDR and the People’s Bank of China signed the agreement on bilateral local currency cooperation, which aims to strengthen ties between the two countries. Under the agreement, both countries agree to promote cooperation and settlements in the Kip and Yuan at both the central bank and commercial bank level. In addition, the agreement also promotes direct trade in the Kip and Yuan, instead of exchange through the US dollar, which should enhance trade and investment relations between Laos and China and promote local currency usage. The Bank of the Lao PDR launched the Lao Credit Information Company (LCIC) in December 2019 to maintain financial stability as part of its plan to maintain NPLs below 3%. The LCIC will enhance central bank monitoring of credit growth from both financial and non-financial institutions and is a crucial step towards lowering default risks. In addition, the LCIC will aid financial institutions in better assessing loan approvals through higher information disclosure.

Laos’ economy is expected to continue its sluggish growth this year amid unfavorable external conditions and domestic risks. The COVID-19 pandemic and global recession will likely pressure the Laotian economy through a slowdown in external demand. The implementation of lock-down measures will likely affect domestic consumption and investment activities. Tourism and foreign direct investment should slow this year as border closures and travel restrictions affect arrivals, while new Chinese projects may need to be postponed. Supply chain disruption as a result of China’s slow resumption in logistics and production may affect manufacturing and exports, particularly in the garments sector. Exports of electricity could be affected from the spread of COVID-19 due to demand slowdown from neighbors such as Thailand, Cambodia, and Vietnam. Environmental risks such as a prolonged drought also pose a key risk in this regard and may affect domestic consumption if the drought lowers farm incomes and raises food prices. Pressures on fiscal and external stability remain high. A continued slowdown in external and domestic demand will likely continue to undermine Lao’s fiscal position, despite some progress in fiscal consolidation. Laos’ high public debt limits the country’s ability to employ large fiscal stimulus packages to support growth and provide relief to those affected by natural disasters or COVID-19. In addition, since much of Laos’ debt is tied to China, a sluggish Chinese economy may especially strain the country’s external position due to its high current account deficit. With rising global uncertainty, the Kip may depreciate against the USD and affect foreign debt repayment, although a weakening THB may ease import prices in the first half of 2020. In the medium-term, key factors driving Laos’ economic growth include the progress of the China-Laos railway and further development in hydro-power dams.

EIC’s View

Financial Markets

Laos’ Key Indicators Domestic Demand Unit 2015 2016 2017 2018 2019P 2020F 2021F

Real GDP % YOY 7.3 7.0 6.9 6.3 5.0 2.0 5.8



Policy rate (end of period) % 4.5 4.3 4.0 4.0 4.0 - -

Sources: International Monetary Fund (IMF) and Lao Authorities, EIC Analysis

Trade deficit shrank in 2019 due to slower import demand Tourist arrivals continued to grow in 2019

Sources: Bank of the Lao PDR Sources: Ministry of Information, Culture, and Tourism

FDI declined due to a slower Chinese economy and slowdown in hydropower projects after the dam collapse

Domestic credit growth slowed in 2019, suggesting sluggish domestic demand

Sources: Bank of the Lao PDR

Sources: Bank of the Lao PDR

The Kip continued to depreciate against the USD

CPI remained high on rising food prices and import costs

Sources: Bloomberg Sources: Lao Statistics Bureau

Unit: Million Persons Unit: %YOY


Thai exports to Laos fell in 2019 as a result of declining refined oil (-19%) and cars (-20%) exports. Exports continued to decline in the first quarter of 2020.

Thai imports from Laos fell in 2019 amid declining electrical machineries and appliances imports. However, imports grew in the first quarter of 2020.


Border exports to Laos in the first quarter of 2020 fell 1%YOY after declining 10%YOY in 2019

Border imports from Laos grew 15.1%YOY in the first quarter of 2020 after declining 6%YOY in 2019


TDI to Laos rose in 4Q19, reaching its highest level since 1Q17

Laos tourist arrivals in Thailand fell in 1Q20 due to the COVID-19 pandemic


2019 Recap Myanmar’s economy grew 6.75% in FY2018/191, according to the country’s Central Statistical Organization (CSO), up from 6.4% in FY2017/18. Growth was supported by recovering FDI and stable exports. Using the new fiscal year as the time period (Oct – Sep)2, approved FDI in FY18/19 registered USD 4.15 billion, posting a strong rebound of 27.8%YOY from a very low base in FY17/18 at USD 3.25 billion. However, compared with its peak in FY16/17 (USD 9.52 billion), approved FDI recovery in FY18/19 remained slow. Note that FY18/19 approved FDI was led by investment from Singapore (58% share of all FDI, the largest source), Hong Kong (11% share, the third-largest source), and Thailand; all of them grew more than 100%YOY. FDI from China (15.3% share, the second-largest source), Japan, and South Korea slowed, likely reflecting a lack of new projects. Investment from western countries remained negligible, only representing about 2% of total FDI, as investors prefer to maintain a wait-and-see stance regarding the political situation in Myanmar. FDI inflows were concentrated in the transportation/communication sectors (representing a 37% share) and manufacturing sector (34% share), reflecting strong growth in these industries. According to the CSO, the manufacturing sector grew 9.7%YOY while transportation grew 8.1%YOY and communication grew 12%YOY. Meanwhile, exports grew 3.1%YOY in FY18/19, driven by garments, which grew 37.3%YOY and took a 28.8% share, in addition to gas exports which grew 11.7%YOY and occupied a 23.1% share. Nevertheless, exports were dragged downward by rice (which was hit by EU tariffs in January 2019) and mineral exports, declining 8.4%YOY and 32.5%YOY respectively. Additionally, overall exports started showing signs of a slowdown in the last quarter of the fiscal year. As for tourism, Myanmar attracted 4.17 million visitors in FY18/19, an increase of 21.2%YOY. On the domestic side, growth was supported by private consumption amid pressures from rising inflation. Domestic consumption was pressured by an uptick in inflation, averaging 8.6% in FY18/19, as a result of a one-time electricity tariff hike and food price increases. Nevertheless, inflation is expected to decline slightly over time as the effect of

1 GDP is based on 2015/16 prices 2 Fiscal year 18/19 = October 2018 – September 2019




GDP per capita (2018) 1,326 USD

GDP by sector (2018) Agriculture: 23.3%, Industry: 36.3%, Services: 40.4%

Top exports (2018) Oil & Gas 22%, Textile 20%, Cereal 7%

Economic Outlook


Myanmar 2020 election and implications for

domestic reforms and policies

Economic slowdown from COVID-19 and

global recession


the tariff wears off and agricultural output recovers from improving logistical conditions. Although under pressure, domestic consumption remains a key driver of Myanmar’s economic growth due to the country’s rapidly expanding consumer base. This is reflected in the continuous growth in motor vehicle sales, which according to the ASEAN Automotive Federation saw 36%YOY expansion in units sold in FY18/19. 2020F Outlook Looking forward, Myanmar’s economy is expected to slow down significantly as the country will face a major risk via the spread of COVID-19 and a deep global recession. Growth recovery in the second half would also depend on the progress of reforms leading up to the election in November. Risks include a prolonged COVID-19 spread, global economic recession, political instability, and foreign pressure on humanitarian issues. As a result, EIC has revised Myanmar’s GDP growth in FY2019/20 to 2.4% (vs 6.75% in FY2018/19). The spread of COVID-19 and the global economic recession, particularly sluggish growth in China, will likely affect Myanmar’s economy through slower 1) exports (including border trade), 2) tourist arrivals, and 3) FDI, along with 4) supply chain disruption and 5) private consumption.

• The slowdown in Chinese demand and temporary closures of border crossings are likely to affect Myanmar’s exports to China, especially in the border town of Muse (a northern town located on the Chinese border). According to Myanmar’s Ministry of Commerce, exports through Muse between January 18 – April 3, 2020 were valued at about USD 603 million, down 37.3%YOY. In FY18/19, exports through Muse accounted for 43.7% of all border exports or 18.5% of total exports. Overall, exports to China account for about 35% of Myanmar’s total exports in FY18/19, according to Chinese import data, suggesting that Myanmar’s exports will likely take a hit at least in the first half of the year.

• With the outbreak of COVID-19 spreading rapidly worldwide in March, non-border exports have started to decline as lock-down measures abroad depress demand. Non-border exports fell 15.4%YOY during March 7 – April 3, 2020, valued at about USD 767.7 million. Total exports represented about 20.5% of Myanmar’s GDP in 2018.

• Tourist arrivals are also expected to decline and adversely affect the hotel and retail sectors as Myanmar has implemented quarantine measures to curb the spread of the virus, such as the suspension of visas for foreigners. In 2018, Chinese tourists represented the largest share of visitors, accounting for 23.8% of all arrivals according to the Ministry of Hotels and Tourism, with Japan and South Korea taking 7.5% and 5.2% shares respectively. Tourism accounted for about 3% of Myanmar’s GDP in 2018.

• FDI is also expected to slow this year, especially since Myanmar’s top investors (Singapore, China, and Hong Kong) will likely experience economic slowdowns. Myanmar’s factories may face supply chain disruption due to a slow resumption of Chinese production and logistics, especially garment factories which rely on raw materials from China. A loss of jobs will put pressure on domestic consumption this year, particularly with quarantine measures such as stay-at-home orders being imposed. Economic recovery is dependent on the situation of the COVID-19 pandemic. Reforms to attract investment and aid businesses should support long-term recovery.

To aid struggling businesses and workers, Myanmar has implemented fiscal and monetary policy measures to provide short-term relief. Figure 1 shows the key announced programs. Fiscal easing is likely to continue. Myanmar’s public debt stood at 22.8% of GDP in FY2018/19, according to the IMF’s projection. Combined with the fiscal deficit at 3.2% of GDP in 2019 (below the government target range of 4.0%-4.5%), EIC believes that Myanmar government has room for fiscal stimulus packages to stimulate the economy going forward. Note that for FY2019/20, the budget envisions a deficit of 5.0% to GDP, according to the ADB. Outlook for the medium term will likely depend on Myanmar’s ability to implement reforms and political stability. Myanmar has a rapidly developing banking and business environment, aided by continued financial liberalization, expanding consumer base, and public investment in infrastructure – which should help attract foreign investment in the medium term. The manufacturing sector should continue to be a key growth driver in the medium term, although the sector will likely be hit by setbacks from COVID-19 this year as evidenced by April manufacturing PMI dropping to an all-time low of 29.0. Nevertheless, risks to the domestic outlook will depend on the general election in November 2020 and the political situation leading up to it. The key issue is the Rohingya crisis, which has led to international pressures such as a potential EBA withdrawal from the EU. No decision from the EU has been made yet, and that process could take up to two years until implementation. Following up on an earlier announcement, the Securities and Exchange Commission of Myanmar will allow foreigners (including non-residents) to trade in the stock exchange from March 20, 20203. The move came as authorities aim to continue expanding the market to more businesses and investors. According to Myanmar law, foreigners (residing both in and outside Myanmar) will be allowed to own up to 35% shares in a company. However, foreigners are not allowed to purchase shares in the two banks listed in the Yangon Stock Exchange as the Central Bank of Myanmar has not yet allowed foreign ownership in Myanmar’s banks.

3 https://ysx-mm.com/wp-content/uploads/2020/03/SECM-Instruction_Foreigner_Participation_YSX_Eng.pdf

Figure 1: Key fiscal and monetary policy responses


Financial Markets

https://ysx-mm.com/wp-content/uploads/2020/03/SECM-Instruction_Foreigner_Participation_YSX_Eng.pdf

EIC’s View

Myanmar’s economy will likely be affected by both internal and external risks this year. Businesses are advised to remain cautious, as the spread of COVID-19 will likely depress economic activities in 2020F, especially in retail, tourism, and manufacturing. This is especially important if businesses use Myanmar as a transit location for the Chinese market as Myanmar relies most heavily on the Chinese market for exports among CLMV countries. As for recovery, EIC expects a gradual (U-shaped) recovery. Myanmar’s tourism and exports are expected to gradually recover along with global economic recovery. However, domestic demand recovery would also rely on the speed of relaxation in quarantine measures. In addition to COVID-19 and global recession, FDI recovery would depend on other factors, including domestic stability. The political situation and domestic reforms will also be the key issues to watch in the second half of the year. Businesses are also advised to keep an eye on new opportunities as Myanmar liberalizes its markets, as they may present investment opportunities for the future. Strong private consumption along with strength in the manufacturing and services sectors should continue to be growth drivers going forward, even if they are pressured by high inflation and the economic slowdown this year. The government still has fiscal space to use expansionary fiscal policies due to its relatively strong fiscal position, given public debt at 22.8% of GDP and fiscal deficit at 3.2% of GDP. Reforms to strengthen revenue collection should aid the fiscal position going forward. The external position remains broadly adequate, supported by foreign reserves covering over 3 months of imports according to the IMF, and a slight current account deficit of 2% of GDP in FY2018/19, although it may slightly widen due to slower exports this year. With the upcoming election in November 2020, political and policy risks could delay some investment decisions.

Myanmar’s Key Indicators Domestic Demand Unit 2015 2016 2017 2018 2019P 2020F 2021F

Real GDP % YOY 7.0 5.9 6.8 6.4 6.75 2.4 6.8



Policy rate (end of period) % 10 10 10 10 10 - -

Sources: International Monetary Fund (IMF) and Myanmar Authorities, EIC Analysis (2020F = FY19/20, GDP is rebased to 2015/16 prices)

Trade deficit declined from slower import demand in 2019 Tourism was strong in 2019, but likely to decline in 2020

Sources: Ministry of Planning and Finance Sources: Ministry of Planning and Finance

FDI inflows started to bottom out, but recovery remained slow

PMI dipped to an all-time low of 29.0 in April as the COVID-19 outbreak disrupts manufacturing output

Sources: Directorate of Investment and Company Administration

Sources: IHS Markit

MMK has continuously appreciated against the USD

Inflation rose due to an electricity tariff hike in July 2019

Sources: Bloomberg Sources: Central Statistical Organization

Expansion Contraction


Thai exports to Myanmar fell in 2019, led by a decline in exports of chemical products (-15%) and machineries (-21%). Exports in the first quarter of 2020 was stable.

Thai imports from Myanmar rose slightly in 2019, led by a rise in imports of natural gas and plant products. Imports in the first quarter of 2020 declined slightly.


Thai exports via borders to Myanmar fell 6.4%YOY in the first quarter of 2020 after declining 6%YOY in 2019

Thai imports via borders from Myanmar fell 4.1%YOY in the first quarter of 2020 after rising 7%YOY in 2019


TDI to Myanmar rose slightly in 4Q19, but still remained below the three year average

Myanmar tourist arrivals in Thailand increased slightly in 2019, but the COVID-19 outbreak is likely to slow arrivals in 2020




2019 Recap As one of the key beneficiaries from the trade tensions between the US and China, the Vietnamese economy recorded impressive GDP growth of 7.0% YoY for 2019 (vs the 6.8% government target and EIC estimate of 7.1% in 2018). A slowdown in agriculture was more than offset by firm export (8.5% YOY) and strong manufacturing sectors, combined with accelerating construction and service sectors. Despite a global FDI slowdown in 2019 on the back of global trade tension uncertainty, Vietnam enjoyed an increasing flow of FDI disbursement of 6.7% YOY (vs 9.1% in 2018). On the domestic demand side, final consumption and investment remained strong, growing by 7.2% YOY and 7.9% YOY respectively. Regarding price stability, FY 2019 headline inflation slowed to 4.3% YOY (vs 4.6% in 2018) on the back of falling food and non-alcoholic beverage prices, especially in 2H19. On the monetary policy front, the State Bank of Vietnam (SBV) surprised markets with a 25 bps policy rate cut (from 6.25% to 6%), its first rate cut since July 2017. In our view, the rate cut was pre-emptive amid rising concern over global trade tensions and in response to easing monetary policy in developed markets over 2H19. Moreover, 2019 loan growth registered 13.5% YOY, the slowest loan growth since 2014 (vs the SBV target of 19%) as the SBV took measures to rein in credit growth in sectors, including real estate, which recently shifted their funding source to the corporate bond markets. According to data from AsianBondOnline of the Asian Development Bank, as of September 2019 the real estate sector’s corporate bonds outstanding accounted for 28.4% of the total outstanding amount. External stability remained firm; fiscal consolidation progress was on track. The full year 2019 current account showed a surplus of USD 13.1bn and the balance of payments a surplus of USD 23.3bn. On the fiscal front, the 2019 fiscal deficit registered 3.4% of GDP, in-line with the Vietnamese government deficit target. Note that the government’s deficit target excludes debt repayment expenditures. If debt repayment expenditures are included, the government deficit is expected to reach 6.6% of GDP. At end-2019, Vietnam’s public debt to GDP ratio was 56%, registering another year of declining public debt to GDP ratio from its current peak in 2016. In a related development, in December 2019 Moody’s Investors Service downgraded Vietnam’s outlook to negative but maintained its Ba3 rating,




GDP per capita (2019) 2,714.74 USD

GDP by sector (2019) Agriculture: 14%, Industry: 34%, Services: 43%

Top exports (2019) Electronics and parts 34%, Garments and footwear 19%

Economic Outlook

Impacts from COVID-19, global recession,

and China’s slowdown on Vietnam’s economy

Risks of being labeled a currency

manipulator by the US

citing the ongoing risk of government payment delays on some of its indirect debt obligations due to administrative deficiencies. Robust growth in 4Q19. Regarding quarterly GDP, 4Q19 Vietnam GDP growth recorded 6.97% YOY, slowing somewhat from 3Q19 (7.5% YOY). In detail, 4Q19 exports remained firm (8.5% YOY) on the back of trade diversion, with Vietnamese products were substituted for some Chinese products exported to the US. Among the top 3 product groups, exports of mobile phones and parts saw positive flat growth (0.5% YOY) after accelerating in the two previous quarters. Textile and garment exports also slowed (2.6% YOY vs 8.5% in 3Q19). Meanwhile, exports of computer and electrical products accelerated (32.6% YOY vs 23.6% in 3Q19). Tourist arrivals accelerated further (32.4% YOY vs 17.8% in 3Q19) on the back of surging Chinese (58.1% YOY) and South Korean (24.8% YOY) tourists. On the domestic demand front, 4Q19 overall retail sales remained firm (11.3% YOY vs 12.0% in 3Q19) on the back of robust consumer products, strong services, tourism-related purchases, and robust passenger car sales. Note that passenger car sales fell -3.4% YOY, mainly due to a high base effect from 4Q18. Regarding price stability, 4Q19 headline inflation slowed to 3.3% YOY (vs 4.0% YOY in 3Q19), thanks to falling food and non-alcoholic beverage prices. However, with the outbreak of African Swine Fever, domestic pork prices saw a sharp increase in December 2019, resulting in a spike in headline inflation to 5.2% YOY (vs 2.9% YOY over October-November 2019). 1Q20 GDP showed signs of COVID-19 impacts, with GDP slowing to 3.82%YOY, according to the General Statistics Office (vs 6.97% in 4Q19). The slowdowns were broad-based across the agriculture sector (0.1%YOY vs 1.6% previously), industry and construction sectors (5.2%YOY vs 7.9% previously), and service sector (3.3% YOY vs 8.1% previously). As to demand side indicators, export growth slowed to 7.7% (vs 8.5% previously), foreign tourist arrival growth fell -18.1%YOY (vs 32.4% previously), and retail sale growth slowed to 5.2%YOY (vs 11.3% previously). Despite strong data from the first two months, March 2020 data showed signs of significant economic slowdown on the back of COVID-19 and global recession impacts, such as export growth (-12.1% YOY), foreign tourist arrivals growth (-68.1% YOY), and retail sales growth (-0.3% YOY). In addition to COVID-19 impacts on external demand, the partial lock-down measures, with implementation beginning in mid-March, could be another factor slowing down economic activities. 2020F Outlook EIC has revised its outlook for 2020 Vietnam GDP growth downward to 3.0% (vs 7.0% in 2019) due to the impacts of COVID-19, global recession, and lock-down measures. With the ongoing COVID-19 pandemic, risks on our forecasts remain tilted to the downside, especially if the COVID-19 is not contained by 1H20 and the lock-down measures are extended beyond 2Q20. Partial lock-down has been implemented since Mid-March. As of 17th April 2020, Vietnam has reported 268 COVID-19 cases with no deaths. According to the International Monetary Fund (IMF), the Vietnam government adopted gradually strict containment measures in late January 2020, including social distancing, travel bans on all foreign travelers, school closures, and public event cancellations. In mid-March, non-essential services were required to close nationwide, and individuals are encouraged to stay home and strictly minimize domestic traveling.

Falling External demand. With exports of goods and services accounting for 99% of GDP, combined with imports of goods and services (96% of GDP), the Vietnamese economy is the most open economy among CLMV countries. The deep global recession expected in 2020F is likely to directly affect Vietnam’s exports and hence economy. Among Vietnam’s top export destinations, most countries are likely to experience either GDP contraction or major slowdown, including the United States (23% export share), China (16%), Eurozone (10%), Japan (8%), and South Korea (8%). As a result, 2020F Vietnam export growth is likely to substantially slow down or even see a contraction, which would be its first export contraction since 2009. Moreover, with the COVID-19 pandemic and global tourism on the halt, Vietnam’s tourism sector is likely to take a hit. Note that tourism revenue accounts for 11% of GDP. Similar to exports, key foreign tourists visiting Vietnam are from countries with economies heavily affected by the COVID-19 and the global recession, including China (32% share), South Korea (24%), Japan (5%), and the USA (4%). One bright spot: EU-Vietnam Free Trade and Investment Agreements are expected to take effect in July 2020. The European Union approved the agreements in mid-February 2020 and the Vietnamese National Assembly is expected to ratify them by 1H20. According to Vietnam Industry and Trade Minister Tran Tuan Anh, the agreements are expected to take effect in July. The deals will eliminate 99% of tariffs for Vietnamese exports to the EU. In return, tariffs on European products exported to Vietnam will gradually decline over a 10-year period. Note that a number of Vietnamese products currently benefit from trade preferences under the EU General Scheme of Preferences (GSP). However, the agreement will allow Vietnam to maintain free access to the EU market for those products in the future, even if its economic situation no longer justifies the preferential treatment reserved for developing countries. Note that the share of Vietnam exports to European Union members had been in the range of 17%-19% of total Vietnamese export values over 2011-18. Figure 1 shows the top 5 export products.

Figure 1: Vietnam’s Top 5 Exports to EU-27 (2018)

Source: EIC analysis based on data from Trademap

Domestic demand slowdown. Falling external demand is likely to adversely affect employment and wages. Recent labor market data suggests weakening momentum. While the 1Q20 unemployment rate remained stable at 2.22% (vs 2.15% in 4Q19), the underemployment rate rose to 2.0% (vs 1.1% in 4Q19). The partial lock-down measures, limiting economic activities, are likely to exacerbate the domestic demand situation, especially in 1H20F. The recent retail sales growth in March, the first month under partial lock-down measures, fell by -0.3% YOY on the back of a slowdown in sales of goods (5.4% YOY vs 7.9% in February 2020), falling passenger car sales (-39.2% YOY), and declining retail sales growth related to services and tourism (-10.9% YOY). In addition to a deep global recession and lock-down impacts, Vietnam’s substantial economic exposure to China’s economy (exports 16% share, tourism 32% share, and FDI 7% share) and supply chain disruption events could exacerbate the economic impacts. Policy responses: Delaying fiscal consolidation, the SBV stand ready to shore up the economy. In response to the economic impacts of a global recession and COVID-19 impacts, the Vietnamese government has, thus far, mitigated the impacts by using both fiscal and monetary policy measures. On the fiscal side, the government has implemented measures worth around 3.5% of GDP, such as 1) VAT, CIT, and PIT tax cuts as well as 5-month land rental payment deferrals (worth VND180 tn, 2.4% of GDP), 2) Up to 12-month deferral of contribution by firms and workers for their pension funds (estimated to reach VND 9.5tn, 0.1% of GDP), 3) a 3-month cash transfer package to more than 20% of the population (worth VND 36 trillion, 0.5% of GDP), and 4) Temporarily cutting electricity prices by a maximum of 10 percent for 3 months to support firms and households affected by COVID-19 (VND 10 trillion, 0.2% of GDP), according to the IMF database. On monetary policy, in addition to a 100 bps policy rate cut in mid-March, the SBV introduced a credit package worth VND 285 tn (3.8% of GDP) from the banking sector for affected firms and households. The SBV also stated that it is ready to inject liquidity into the system. EIC believes both easing fiscal and monetary policy are likely to continue throughout 2020F to shore up the economy. Over the last few years, the Vietnamese government has successfully reduced its public debt to GDP ratio from 63.7% in 2016 to 54.3% of GDP as of April 2020. However, with a very deep global recession, we believe the fiscal consolidation effort is likely to be postponed. According to the IMF, the 2020F Vietnam fiscal deficit could reach 5.2% of GDP, its highest ratio since 2016. For monetary policy, the SBV’s recent track record suggest that the central bank stands ready to shore up the economy. EIC thus expects that further easing monetary policy measures are still on the table, including more policy rate cuts. Pressure from a declining current account surplus on the VND. VND’s recent movement has been consistent with its regional peers. After the mid-March policy rate cut, coinciding with the strong DXY amidst global recession concerns, USD/VND has been depreciating somewhat. Looking forward, the SBV announced in late March that it would intervene in the currency market as needed to smooth excessive exchange rate volatility. However, EIC believes weakening pressure on USD/VND remains a key factor to watch in financial markets as falling exports and tourist arrivals should result in a significantly smaller current account surplus in 2020F. Note that the IMF expects the 2020F Vietnam current account surplus to slow down to 0.7% of GDP (vs 4.0% of GDP in 2019).

Financial Markets

EIC’s View

Vietnam’s economy will likely fall to its lowest growth rate in over 30 years at 3.0% as COVID-19 pushes the global economy into a recession. As evidenced by 1Q20 data, COVID-19 has already disrupted economic activity and should continue to do so at least into 2Q20. Due to the country’s high reliance on external demand via exports, FDI, and tourism, the nation’s economy is likely to be adversely affected by the contraction of the global economy, especially a slowdown in China. Domestically, lock-down measures and loss of incomes are expected to depress private consumption, which has steadily grown at about 7.3% per year since 2016, although the 1Q20 unemployment rate was stable. If the COVID-19 outbreak is not contained by 1H20, suggesting an extended lock-down, we see further downside risks for our forecasts. Easing monetary and fiscal policies are likely to continue to shore up economic growth. The State Bank of Vietnam has cut its policy rate by 100bps and stands ready to inject liquidity into the system. EIC views that a further policy rate cut is not out of the question, although the depreciation of the VND is a key factor to watch. On the fiscal side, Vietnam is expected to postpone its fiscal consolidation and implement policies such as tax cuts and cash transfers to prop-up the economy, which is expected to widen the fiscal deficit this year. Vietnam’s economic outlook over the medium-term remains firm in our view. Despite sharp impacts from COVID-19 on Vietnam’s economy in 2020, after the outbreak is contained, a recovery in tourism and exports as well as FDI should take place on the back of pent-up demand and production base diversification. In particular, Vietnam might benefit from the relocation of factories from China as companies look to diversify their production bases. In addition, the EU-Vietnam Free Trade and Investments Agreement could promote exports and FDI in the future. EIC believes that in the medium term, Vietnam’s economic fundamentals should remain firm, supported by a young labor force, growing middle-income class, and Vietnamese industries integrating into the global supply chain.

Source: EIC analysis based on data from General Statistics Office

Vietnam’s Key Indicators Domestic Demand Unit 2015 2016 2017 2018 2019P 2020F 2021F

Real GDP % YOY 6.7 6.2 6.8 7.1 7.0 3.0 7.1


Current account balance % of GDP -0.9 0.2 -0.6 1.9 4.0 0.7 1.0

Policy rate (end of period) % 6.5 6.5 6.25 6.25 6.0 - -

Sources: International Monetary Fund (IMF) and Vietnamese Authorities, EIC Analysis

Vietnamese exports continued to grow in 2019 Visitor arrivals fell sharply due to the COVID-19 pandemic

Sources: General Statistics Office Sources: General Statistics Office

Total Registered FDI has been continuously robust A sharp contraction in IPI and PMI suggested that COVID-19 impacts have started to cause disruptions in manfacturing

Sources: Foreign Investment Agency

Sources: General Statistics Office and IHS Markit

VND started to depreciate in line with regional currencies

Retail sales growth and inflation fell in April

Sources: Bloomberg Sources: General Statistics Office


Thai exports to Vietnam slowed in 2019 due to a decline in frozen fruits, refined oil, and plastic pellet exports. Exports continued to decline in the first quarter of 2020.

Thai imports from Vietnam also slowed in 2019 due to slower demand for electrical appliances and crude oil. However, imports grew in the first quarter of 2020.


Cross border exports to Vietnam fell 39.3%YOY in the first quarter of 2020 after declining 8%YOY in 2019

Cross border imports from Vietnam rose 16.7%YOY in the first quarter of 2020 after plummeting 42%YOY in 2019


TDI to Vietnam dipped slightly in 4Q19 with investments focused in the financial activities sector

Vietnamese tourist arrivals in Thailand fell in 1Q20 due to the COVID-19 pandemic


Disclaimer: The information contained in this report has been obtained from sources believed to be reliable. However, neither we nor any of our respective affiliates, employees or representatives make any representation or warranty, express or implied, as to the accuracy or completeness of any of the information contained in this report, and we and our respective affiliates, employees or representatives expressly disclaim any and all liability relating to or resulting from the use of this report or such information by the recipient or other persons in whatever manner. Any opinions presented herein represent our subjective views and our current estimates and judgments based on various assumptions that may be subject to change without notice, and may not prove to be correct. This report is for the recipient’s information only. It does not represent or constitute any advice, offer, recommendation, or solicitation by us and should not be relied upon as such. We, or any of our associates, may also have an interest in the companies mentioned herein.

Main author

KAMPON ADIREKSOMBAT, Ph.D. Head of Economic and Financial Market Research

Kampon is the head of economic and financial market research team, analyzing Thailand, ASEAN, and major economies and financial markets. Prior to joining Siam Commercial Bank, Kampon was the head of economic team and an equity strategist in leading financial companies. He was also an Assistant Professor in the Economics Division at Nanyang Technological University in Singapore and held a position with Thailand's Ministry of Finance. Kampon earned a BA in Economics with honors from Chulalongkorn University, a MSc in Economics from the National University of Singapore (Asian Development Bank scholarship), and a Ph.D. in Economics from Michigan State University (Graduate school fellowship). During his Ph.D. study, Kampon also had an internship at the International Monetary Fund.

PUNN PATTANASIRI Analyst Contact : [email protected]

Punn has experience conducting research in the field of corporate governance and management during his studies. He also participated in an exchange program to the Faculty of Economics, Kyoto University, Japan. Punn received his bachelor’s degree (First-Class Honors) from EBA program, Faculty of Economics, Chulalongkorn University.

Documents

Q1 | 2020 · an expected U-shaped recovery in global growth, EIC believes CLMV economic recovery in 2H20 is likely to be gradual. With uncertainty regarding the containment of COVID-19,