COVID-19 POLICY RESPONSE NOTE #1 Economic costs associated to the coronavirus pandemic for Vietnam FEBRUARY 2020 Economic costs associated to COVID-19 POLICY RESPONSE NOTES the coronavirus pandemic for Vietnam A preliminary note on the economic costs associated 1 to the coronavirus epidemic for Vietnam The short-term impact of coronavirus outbreak (i.e., 2019-nCov)on Vietnam’s economy could be significant, as high 6-10 percent of monthly output, but short-lived if the outbreak is rapidly contained. While the recent measures by the Government to limit the mobility of people, goods, and services with China will help to prevent the outbreak from spreading to Vietnam, they come with some economic costs. Tourism and electronics trade are the most vulnerable, with one-third of foreign tourists are from China and with over $3 billion per month of bilateral trade between the two countries. The direct costs to contain the epidemic remains relatively small but could increase rapidly if the outbreak spreads within Vietnam, restrictions on mobility are sustained over time and if people behavior amplifies the initial negative impacts. Lessons from experience of recent pandemic show that while the negative costs could be high, the economy tends to recover rapidly once the outbreak is contained. The estimates presented here are highly dependent on assumptions regarding the magnitude and the duration of the epidemic and should be considered as preliminary. 1. The magnitude of the outbreak and government's policy responses The Government of Vietnam has acted Vietnam has taken several preventive quickly to the announcement of the steps to stop the outbreak from coronavirus outbreak in China. The reaching its border. The civil aviation Prime Minister has declared the authority has suspended all flights to outbreak an epidemic in Vietnam and mainland China from February 1. It has established a nCoV National Steering stopped issuing visas for Chinese Committee chaired by a Deputy PM.As tourists and foreigners who have been in of February 11, 2020, Vietnam has China in the past 14 days. Several confirmed that 15 people have been border gates between Vietnam and infected and 547 people are under 2 China in the northern province of Lang quarantine (no death) . The government Son were initially closed but then has ordered the health ministry to reopened to trade.Similarly, the aviation supervise and detect infection early, authorities imposed and then lifted the monitor border crossings, airports, and ban for travelers from Hong Kong, seaports, particularly for passengers Macau and Taiwan after one day. The coming from affected areas. Vietnam’s Ministry of Labor, Invalids, and Social airports have been ordered to deploy Affairs has discouraged businesses not additional personnel and coordinate with to bring back Chinese and other foreign local health agencies to deploy body workers who have traveled to temperature scanning equipment as well coronavirus-affected as a screening of passengers. locations. Meanwhile, 61 out of 63 provinces have closed schools and colleges/universities until the end of February 9. These include institutions in main urban centers such as Hanoi, Ho Chi Minh City, Da Nang and Can Tho. 1. This note was prepared by Jacques Morisset under the guidance of Deepak Mitra, with inputs from Keiko Inoue, Duc Minh Pham, Viet Tuan Dinh; Quang Hong Doan; Brian G. Mtonya, Anh Thuy Nguyen; Ngan Hong Nguyen; Caryn Bredenkamp; Dilip 1 Parajuli; Netsanet Walelign; Mukesh Chawla; Rocio Schmuni; and Anh Thi Quynh. 2. The statistics were reported by MoH as of February 11, 2020 and will be updated with arrival of new information. Economic costs associated to COVID-19 POLICY RESPONSE NOTES the coronavirus pandemic for Vietnam 2. An assesment of the economic impact of the outbreak on Vietnam The economic impact of the Vietnamese economy, as the expected coronavirus outbreak remains highly decline in GDP growth in 2020 would tentative. The magnitude of the impact only be a 0.13-X percentage points of the2019- nCoV on the Vietnamese even in the worst-case scenario economy will depend on the duration envisioned by the WBG team in China. and severity of the outbreak as well as Vietnam shares a border of more than the Government’s policy response. As in 1,200 km with China, where the previous episodes, it will also be greatly epidemic originated. One can influenced by behavioral responses from therefore expect spillovers from China households and firms, which could onto Vietnam due to the numerous and intensify the short-term economic diversified linkages between these two impacts. Given the uncertainty, our economies. The impact of a slowdown in baseline scenario assumes that the China’s GDP growth on Vietnam outbreak will be contained in China by economic growth can be roughly the end of March, with limited contagion quantified by using the recent cross- in Vietnam. This scenario corresponds regional elasticities calculated by the 4 to the current one adopted by the IMF, and by assuming that China’s GDP Vietnamese authorities (the so-called growth could decline between 0.2-1 scenario 2, as defined by the Ministry of percentage points depending on the Health) even if, at this point in time, one 5 Accordingly, gravity of the crisis in 2020. cannot discard a faster containment of everything else equal, a 1 percent the outbreak in China or, alternatively, a growth slowdown in China would lead to longer propagation in Vietnam a decline in Vietnam’s economic activity (scenarios 3, 4 for the Ministry of by 0.13-X percentage points. The impact 3 Health). of the current outbreak should therefore remain relatively limited in Vietnam even The economic costs associated to the in the scenario where the Chinese coronavirus outbreak are classified authorities would be slow to contain the into two groups. First, they arise from outbreak. the preventive measures taken by the Vietnamese authorities to restrict the However, the above estimates do not mobility of people, goods and services account for the preventive measures with China. Second, they are linked to adopted by the Vietnamese the management of the epidemic authorities to restrict the mobility of outbreak on the home front and the persons, goods and services with associated measures to contain it. China.6 Because China accounts for approximately one-third of tourism 2.1. The costs associated with the revenue (Figure 1) and almost a quarter measures to contain the contagious of Vietnam trade flows (Table 1), the effects from China recently announced ban on all visitors coming from China and the suspension A slowdown in China due to of several transport routes (notably by coronavirus outbreak is expected to air) will have effects over and above the have a marginal impact on the direct effect of a slowdown in China’s Vietnamese economy. 3. The MoH has adopted the following scenario 1 - there is (are) imported case(s); scenario 2 - there is secondary infected case; scenario 3 - there are more than 20 infected cases in the country and scenario 4 - there is widespread infection in the community with over 1,000 cases. 4. https://www.imf.org/external/pubs/ft/wp/2016/wp16214.pdf 2 5. World Bank, Coronavirus Outbreak: Recent Developments, Economic Impacts, and Policy Options for China, February 4. 6. Such approach was followed by the Financial Times is often cited article, Coronavirus will hit global growth. Economic costs associated to COVID-19 POLICY RESPONSE NOTES the coronavirus pandemic for Vietnam Figure 1: 1/3 of foreign tourists visiting Vietnam Table 1: Share of China in Vietnam trade, % of total are from China The most direct and immediate trade for a 2-month period could impact negative impact is on tourism, which the national GDP by about 0.8 percent accounts for approximately $30 billion of GDP. revenue per year for Vietnam. To illustrate, if the 5.8 million Chinese Official trade statistics from the tourists are prohibited to enter the General Department of Vietnam country (assuming that without a visa, Customs indicate that the decline in nobody can enter the country) for a bilateral trade between China and month, this could represent a loss of Vietnam will be concentrated in a few approximately $750 million. A back to products, mainly electronics and to a envelop calculation indicates that this lesser extent textile apparels and cost might increase to $1 billion per food. Table 2 indicates that the main month if the number of other visitors will export items to China are computers, decline by 10 percent (many tour phone, vegetables, and textile, while the operators have already suspended part main imports products are machinery, of the operations in East Asia). The loss computers, fabrics and phones. The would jump up to $1.6 billion per month most exposed sectors are electronics by considering the multiplier effect and textile (fabrics) due to their associated to a decline in tourism integration in regional and global value activity on other economic sectors. chains. For example, the risk of disruption appears high for the 3C Beyond tourism, other goods will be electronics industry that depends heavily negatively affected by the (temporary) on parts imported from China by air and closing of transport corridors report limited inventories as the industry between China and Vietnam. To is built to respond to just-in-time illustrate the magnitude of the possible variations in demand. The textile impact, a decline by 50 percent in both apparels sector is also vulnerable due to merchandise exports and imports its high dependence on imported input between the two countries could reduce from China, estimated close to 50 Vietnam’s trade by approximately $5 percent by a recent study in Vietnam.7 billion per month. A full stop of all While the share of agriculture products bilateral rated would reduce trade flows remains relatively small, it still by almost $10 billion per month. represents about 10 percent of According to the Vietnamese authorities, Vietnam’s exports toward China. This a fifty percent reduction in bilateral figure can underestimate the magnitude trade abc of 7. For more details, see Capital economics, the supply-chain disruption from the coronavirus, 5 February 2020. 3 Economic costs associated to COVID-19 POLICY RESPONSE NOTES the coronavirus pandemic for Vietnam of the trade as a large fraction of these 9 past few years. exchanges are not reported in official figures8 . A decline in these exports The restrictions on return of Chinese could disproportionally affect farmers in workers to Vietnam could also bordering regions. negatively impact economic activities. According to official figures, there Sustained mobility restrictions could were 91,500 Chinese nationals who had also affect FDI flows between the two permission to work in the country before countries. By the end of 2019, total Tet even if this number could be far from committed Chinese FDI was estimated at reality as many of Chinese are employed around US$16.3 billion and accounts for in non-registered businesses. The port 4.6 percent of total accumulated FDI to city of Haiphong, a rising manufacturing Vietnam (20 percent if Hong Kong SAR, hub in northeastern Vietnam, has China, and Taiwan, China, are added). already acted shortly by asking Chinese contractors are also heavily companies to stop thousands of workers involved in civil works in several from China possibly returning from the 10 important infrastructure projects in Spring Festival holiday. Vietnam, mainly in power and transport sector. The travel ban could reduce the The negative spillover effect through activity of these firms as they employ the financial market contagion can be Chinese employees, who might be significant as well. In China, the Hang unable to come back to Vietnam after Seng equity index has declined by about the end-of-new year holidays. By 8 percent since January 20, with the contrast, over the long run, several travel and entertainment stocks hit the foreign investors could be encouraged to hardest, mirroring the expected move their production from China to economic impact of the outbreak. Other Vietnam - reinforcing the trend observed equity markets in East Asia have over the past few years, to avoid future weakened as well, including in Vietnam disruption as China has been the with the HCMC stock index down by epicenter of several epidemic over the almost 10 percent since January 31. past abc Table 2: Bilateral Trade between Vietnam and China, Top ten products, 2019 8. For more details, see the website of the General Department of Vietnam Customs. 9. Savills Vietnam published its white paper on Vietnam’s industrial real estate for the first half of 2019, listing large corporations moving from China to Vietnam, including aerospace manufacturer Hanwha Aero Engines Co., Ltd. from South Korea, automotive components manufacturer Yokowo from Japan and garment and textile producer Huafu Industrial Co., Ltd.from Hong Kong. 4 Besides, two other groups have moved, namely AirPods manufacturer Goertek (to a factory in Bac Ninh), and electronics – TV manufacturer TCL (moved to Binh Duong). 10. The official number of Vietnamese workers in China is very small, only 194 are reported in mainland China. Figures are also low in Macau (401) and Hong Kong: 100 (2 female). The only exception is Taiwan (54,480 people). Economic costs associated to COVID-19 POLICY RESPONSE NOTES the coronavirus pandemic for Vietnam 2.2. The costs associated to the for children because of school closures, management of the epidemic on the or are afraid (Falcone and Detty home front 2015; U.S. Homeland Security Council 2006). Two categories of economic costs can be considered on the home front. The The economic costs associated to first one is associated to the treatment preventive measures within the of infected patients, while the second country can vary greatly. At a includes the prevention measures to minimum, they include early -phase reduce the risk of contagion within the public health efforts to contain or limit country. outbreaks (such as tracing contacts, implementing quarantines, and isolating Regarding the first category, the infectious cases) entail significant costs appear limited as there are only human resource and staffing costs a limited number of reported cases in (Achonu, Laporte, and Gardam 2005). Vietnam but could increase rapidly if Fear induced behavioral changes reduce the infected cases rise over time. The labor force participation over and above cost of treatment is estimated at around the pandemic’s direct morbidity and VND40 million by the MoH, but other mortality effects and constrict local and costs could emerge. As an outbreak regional trade. Measures that decreased grows, new facilities may need to be person-to-person contact, including constructed to manage additional social distancing, quarantine, and school infectious cases; this, along with closures, had the greatest cost because increasing demand for consumables they cause the largest amount of (medical supplies, personal protective economic disruption.During the SARS’ equipment, and drugs) can greatly outbreak, the economic impact was increase health system expenditures. largely transmitted through behavioral The cost of upgrading existing facilities responses to the outbreak which could reach about VND 748 billion reduced aggregate demand and (US$32 million) in case of 20 -1000 disrupted supply (Brahmblatt and Dutta, infected cases in Vietnam (scenario 3) 2008). The slowdown was relatively and VND1,110 billion ($43 billion) in broad-based but most pronounced in case of a major outbreak (over 1000 services, particularly transport, thousand infected cases). As a result, accommodation and catering. Services the MOH has already requested involving face-to-face interaction are additional budget for an amount VND most heavily affected by the demand 597.7 billion to supplement its available shock. Along these lines, the temporary resources. These estimates do not closure of most schools in Vietnam include additional expenses that could could lead to productivity losses through arise at the provincial level and from absenteeism among caretakers of other Ministries such as the police and school-age children.A recent study on the militaries. At peak of the cost of absenteeism in the UK due to severepandemic, the existing health school closure estimated that the labor system could become under pressure as productivity loss could reach, with a health care workers might be greater impact in sectors such as increasingly unable to report for duty education and health where the number 11 because they are ill themselves, need of female workers is relatively elevated. to care for ill family members, need to care 11. Smith and others 2009 4 Economic costs associated to COVID-19 POLICY RESPONSE NOTES the coronavirus pandemic for Vietnam 3. Conclusion, risks, and further actions The economic costs associated to the health security funds that were available outbreak could be high for Vietnam. in case of epidemic outbreaks. The Our preliminary analysis suggests that Ministry of Health has requested an these costs could reach 6-10 percent of additional budget allocation of around monthly ouput, which would be in line $25 million. The MPI is preparing a with experience from pandemic episodes policy package, including the (e.g. 2003 SARS) in the region. These consideration of a fiscal stimulus costs would be the combination from the (including interest rate subsidy and tax expected loss in revenues from tourism breaks) to support the SMEs affected by (around 5-6 percent), from the decline in the outbreak and protect the most traded goods (about 1-2 percent), and exposed sectors, including tourism and the costs associated to curative and electronics, following the recent example preventive measures within the country of South Korea. 12 It has also opened cross (about 2 percent). These costs would be borders roads to merchandise trade short lived as the economy recovers after two or three days of uncertainty. relatively quickly once the outbreak is Over the longer-run, Vietnam should act contained in couple of months. For this to improve its level of national-level reason, assuming that the outbreak will epidemic preparedness, which suffers be limited in Vietnam and globally from major weaknesses, including : (i) contained by end of March, the total limitation to effectively plan and allocate effect on the Vietnamese economy funding; (ii) lack of integration of should not exceed 0.5-1 percent of GDP disease surveillance by geographical during the year 2020 in line with the area; (iii) limited information on simulations shared lately by the MPI. coordination, funding sources, and outcomes; (iv) failure to consider other To mitigate these costs, the sectors such as agriculture and tourism; Government of Vietnam needs to take limited understanding at central level of a number of actions. The Government the actual workload and budget in response to the outbreak has been subordinate units. 13 Importantly – private timely and evidence-based. It has sector involvement should be already accelerated the implementation encouraged, both in terms of financing of prevention measures using existing and implementation. health 12. Korean Local reports that Government pledges 400 billion won ($334 million) to support exporters potentially facing troubles due to the outbreak of the new coronavirus in China. 13. For more details, see World Bank’s Health Security Financing Assessment, 2019. 5