Vietnams Economy Shows Fundamental Strength, with Stable and Positive Medium Term Outlook

Stocks and Financial Services Press Releases Friday July 14, 2017 09:14
Hanoi--14 Jul--World Bank

Hanoi, July 13, 2017 – Amidst strengthening recovery in the global economy since late 2016, Vietnam's gross domestic product (GDP) expanded by 5.7 percent during the first half 2017, while inflation has so far moderated and core inflation remains low, at less than 2 percent.

"Vietnam's economy is strong, as a result of strong momentum of Vietnam's fundamental growth drivers — domestic demand and export-oriented manufacturing.", said Sebastian Eckardt, Lead Economist and Acting Country Director for the World Bank in Vietnam. "These are good conditions to address critical structural bottlenecks to medium term growth while solidifying macroeconomic stability and rebuilding policy buffers."

According to the report, the service sector—which accounts for about 42 percent of GDP—accelerated in the first half of this year, driven by buoyant retail trade growth, as a result of sustained growth of domestic consumption. Industrial production remains robust despite a significant reduction of output in the oil sector, and growth has gradually recovered in agriculture, though the recovery is still fragile.

Monetary policy continues to balance growth and stability objectives, with low real interest rates and rapid credit growth of about 20 percent (year-on-year). The rising credit intensity of growth, and sustained acceleration of credit may raise concerns over asset quality, particularly given the past unsolved bad debts.

The report notes that after a large surplus in 2016, Vietnam's external current account balance started to decline in early 2017, due to an expected recovery in import growth. The nominal exchange rate has been relatively stable, but the real exchange rate continues to appreciate. Real exchange rate appreciation is driven by a large external surplus of the FDI sector, but is a concern for Vietnam's domestic private enterprises, which continue to face significant competitiveness challenges.

Looking forward, Vietnam's medium-term outlook remains positive, with real GDP growth projected to accelerate slightly to 6.3 percent in 2017, as a result of buoyant domestic demand, rebounding agricultural production, and strong export-oriented manufacturing, aided by a recovery in external demand. Inflationary pressures will remain moderate, reflecting stable core inflation, lower food and energy prices and diminishing administrative price hikes. The current account is expected to remain in surplus, albeit at a lower level as stronger import growth resumes. Over the medium term, growth is projected to stabilize at around 6.4 percent in 2018–19, accompanied by broad macroeconomic stability.

The report argues that elevated global uncertainty calls for macroeconomic prudence. In view of sustained growth momentum, solidifying macroeconomic stability and rebuilding policy buffers should remain the foremost priority. Lowering the fiscal deficit would help to contain rising risks to fiscal sustainability and provide fiscal space to accommodate potential future shocks. Containing risks from rapid credit growth requires continued improvements in supervision and prudential regulation. The longer term challenge for the Vietnam is to sustain rapid growth and poverty reduction. Considerable gains are possible from structural reforms that alleviate constraints on productivity growth, including through SOE reforms, further improvements in the business environment and improved factor markets for land and capital.

The report features a special section on fiscal consolidation. The National Assembly and the Government have made a commitment to rein in the fiscal deficit over the medium term. In this context, the report recommends a gradual, high-quality fiscal consolidation which strikes an appropriate balance between revenue mobilization and expenditure containment. On the revenue side, enhancing revenue administration to improve collections and lower the compliance burden on taxpayers should be accompanied by tax policy changes to enhance domestic revenue mobilization. Specific policy options include VAT reforms, increases in excise taxes for selected goods, a review and rationalization of tax expenditures to broaden the CIT base and introduction of a recurrent property tax. On the spending side, productive investment in infrastructure and human capital should be protected while focusing on efficiency gains with regard to both capital and recurrent spending.


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