Vietnam Economy: Resilient despite Weaker External Environment

10:26:04 AM | 7/10/2019

“Vietnam’s economy resilient despite weaker external environment,” said the Asian Development Bank (ADB) in the recent 2019 Asian Development Outlook Update.

Vietnam's economy is forecast to maintain strong growth by ADB in 2019 and 2020 at 6.8% and 6.7%, respectively, after a sharp increase at 7.1% last year.

In the Asian Development Outlook 2019 Update, ADB noted that while Vietnam’s gross domestic product growth moderated in the first half of 2019, it will remain resilient this year and next year despite a weaker external environment. Inflation forecasts have been lowered to 3.0% from 3.5% for 2019 and 3.5% from 3.8% for 2020.

ADB's Country Director for Vietnam, Eric Sidgwick, said, “Despite a slowdown in export growth due to the escalation of the trade conflict between the United States and China and the consequent downturn in global trade, the economy remains healthy thanks to continued strength in domestic demand and sustained inflows of foreign direct investment. Prospects for domestic consumption continue to be positive, supported by rising incomes, buoyant employment and moderate inflation.” 

According to ADB's assessment, as the ongoing trade war between China and the U.S. leads to a decline in global trade, the export growth rate is forecast to decrease in the short term. However, increased domestic demand will compensate for the decline in export growth. On the demand side, domestic consumption continues to show positive prospects. Private consumption will continue to increase thanks to low inflation. Continued government efforts to improve the business environment together with the recently improved national credit rating will stimulate private investment. If the U.S.-China trade war continues to escalate, many manufacturers may consider Vietnam an alternative production base, creating new impetus for FDI inflows. The recent signing of a free trade agreement with the European Union promises to further open market access for trade and investment, as does the regional Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Therefore, FDI inflows will continue to be strong in the coming time, as evidenced by the US$13.1 billion committed in the first eight months of 2019.

In addition, the newly amended Public Investment Law will improve public investment by speeding up processes and procedures and helping to accelerate disbursement progress. In terms of economic sector, the prospects of industries and services continue to be positive, but agriculture will slow down. The purchasing management index in the manufacturing and processing industry in the first eight months was still over 50, which is a positive sign. The average inflation forecast is revised down to 3.0% in 2019 and 3.5% in 2020. Average annual inflation is curbed at 2.6% in the first eight months of 2019, at the lowest in the last three years.

ADB forecasts that average inflation will be revised down to 3.0% in 2019 and 3.5% in 2020.

ADB also said that income from exports will grow more slowly than previously forecast, and imports will also fall at a slower pace than expected because domestic consumption and investment remain high, especially with the possibility that some manufacturing enterprises may move from China to Vietnam. Remittances may be affected by the global economic downturn, further reducing the current account surplus. The current account surplus is forecast to be reduced to 2% of GDP this year, and 1.8% of GDP in 2020. The Government continues to pursue fiscal consolidation. Despite the need to accelerate the disbursement of investment spending, the government has continued to increase efforts to raise budget revenue and more strictly control unnecessary spending to curb overspending and improve sustainability of public debt.

Although inflation is low, according to ADB, the Government will continue to conduct prudent monetary policy in 2019 and keep credit growth at the target of 14%. Commercial banks will continue to be under pressure to meet Basel II standards by 2020. Credit will also continue to be restricted to high-risk investment areas such as real estate. The biggest risk from the outside will be if the U.S.-China trade war continues to increase and global trade continues to decline. If the trade war - mainly through increased tariffs - turns into currency devaluation, it will have greater implications for international financial markets and create new risks for the Vietnamese economy.

Anh Mai