Closures and government deficits

So the lockdown is supposed to last for another in 2 days in Vietnam. The airlines were going to open up on Thursday. But people seem to think it will be extended. HCMC’s government asks the central government to extend it to April 30.

It doesn’t help that there were 3 more cases of COVID-19 over the past few days (not sure the exact timing of them). When it originally announced the closures, the government said that it would extend the lockdown if there were more cases.

Part of the problem is that the current lockdown is only partially working. Social distancing is very hard to implement. Workers are still going to factories, and also are in the streets. At the same time, construction is ongoing for major infrastructure projects.

Companies are also not equipped to safeguard against the virus. Because of this, the HCMC government is asking its largest employer to close for 3 days, and it looks like it has agreed.

Ultimately, it seems like Vietnam’s process is working, even without full social distancing in place. There is lots of testing (including a pick up at industrial parks and export processing zones), and contact tracing has been very comprehensive (as maybe can only be done in a country with an authoritarian government). I wonder if this will be the new normal. There will be a lockdown, some people will stay home, lots of businesses will be closed, but not all of them. This seems like maybe a solution, as long as the number of cases doesn’t start to grow.

Ultimately, it is kind of hard to get a sense of how we get out of it, when what we know about COVID-19 is still so unclear.

Source: IMF

In the meantime, the government realizes that it is going to need more cash, especially because less revenue is coming in. Vietnam is looking to raise $1bn in debt from major multinational lenders (the IMF, World Bank, Asian Development Bank), to fill its coffers, according to a statement from the Ministry of Finance. The budget deficit will be worse because of COVID-19. This is no surprise, but tax revenues are going to fall by VND140-150tr (c$6bn) because of the virus, and that’s if it is contained within 2Q.

Looking historically, Vietnam has had a very high deficit to GDP, but it has been helped by strong growth. This year, the IMF had been forecasting just a 4.2% deficit, but now it looks like it will be 5.0-5.1%.

Government debt to GDP was falling over the past few years, and there was expectation that it would fall more over time. Now, it looks like it will be growing this year, allowing less flexibility on the government’s part going forward. In some ways, those really bad years of 2012-2015 really didn’t help put Vietnam in a position to weather a big downturn.

If growth picks up again later this year and into next, then things will be fine. But there’s a big hole in the budget, at a time when there wasn’t much cushion to begin with.