Vietnam Economic Prospect: Brighter but Riskier

Stronger domestic demand, services sectors and robust export-oriented manufacturing are driving Vietnam’s economy, with GDP growth expected to increase to 6.7 per cent in 2017, said Taking Stock, the World Bank’s bi-annual economic report on Vietnam released recently.

Stronger domestic demand, robust export-oriented manufacturing, and a gradual recovery of the agriculture sector, are driving Vietnam’s economy, which expanded by 6.4 percent during the first nine months of the year compared to the same period last year, says a new World Bank report. The manufacturing and services sector respectively grew by 12.8 percent and 7.3 percent during the same period.

Over the medium term, growth is projected to stabilise at around 6.5 percent, and inflation is projected to remain low.

“Growth momentum picked up across major economies and global trade recovered in 2017,” said Mr Ousmane Dione, the World Bank Country Director for Vietnam. “With incomes rising and poverty falling, Vietnam’s economy had another good year of strong growth and broad macroeconomic stability.”

Low inflation and rising real wages sustained buoyant domestic demand and private consumption, while the stronger global economy helped Vietnam’s export-oriented manufacturing and agricultural sectors. Job growth continued, with 1.6 million new jobs added in the manufacturing sector over the past three years, and 700,000 additional jobs in the construction, retail, and hospitality sectors, leading to higher aggregate labour productivity. Labour demand also contributed to rapid wage growth, with wages increasing by 15 percent cumulatively between 2014 and 2016.

Despite progress in resolving non-performing loans, risks remain, including the lack of robust capital buffers in some banks, especially amidst rapid credit growth.

Fiscal tightening is underway and has led to a leaner budget deficit and containment of public debt accumulation. However, the decline in public investment - falling to 16 percent of total spending in the first nine months of 2017 compared with an average of 25 percent in recent years - may not be sustainable over time, as Vietnam needs significant investments in infrastructure to support future growth.

WB warned that a slow-down in structural reforms could also impact the ongoing recovery, especially given the weaker growth in investment. Enhancing macroeconomic resilience and structural reforms can lift Vietnam’s growth potential over the medium term.

“Structural reform remains a central priority in view of tepid productivity growth” said Sebastian Eckardt, the World Bank Lead Economist for Vietnam.

Taking Stock’s special section focuses on improving efficiency and equity of public spending. With public debt closes to the statutory limit of 65 percent of GDP, Vietnam’s government faces tight budget constraints for several years to come. This special topic section looks at fundamental expenditure reforms in key public services to identify opportunities for constraining expenditure growth through improvements in expenditure productivity.

Government spending remains high relative to GDP. The share of recurrent expenditures is on the rise due to increased spending on social security, salaries, wages, benefits, and interest payments. The share of investment expenditure, despite being lower than total state budget expenditure, is still higher than that of other countries in the region and in the world.

According to the World Bank, Vietnam is moving towards a market price for service mechanism in order to gradually reduce subsidies for public service delivery agencies (Decree 16). If prices are not determined correctly, inequality in accessing basic services may rise. Long-term impacts on social mobilisation should be taken into careful consideration. And, it is noted that it is possible to apply different models for different industries or different levels of service in the same industry. Importantly, impact mitigation measures are needed to ensure that the poor and near-poor are given equal access to high-quality services and that they are properly targeted.

Anh Mai / vccinews