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Economic Sector

Last updated: Monday, October 23, 2017

 

Economy Stays Firm amidst Volatility

Posted: Wednesday, October 04, 2017


Due to declines in mineral and crude oil output in the first half of this year, the Asian Development Outlook Update (ADOU) trimmed Vietnam’s growth forecasts to 6.3 per cent for 2017 and 6.5 per cent in 2018, taking 0.2 percentage points off each forecast in ADOU 2017.

Engines of export and domestic consumption
Mr Eric Sidgwick, ADB Country Director for Vietnam, said, despite the drop in mining and oil output, the rest of the Vietnamese economy has continued to perform well, driven by its twin engines of export-orientated manufacturing and rising domestic consumption. Manufacturing expanded by 10.5 per cent in the first half of the year, as new foreign-invested factories ramped up production, while the services sector continued to pick up steam as a result of rising retail trade, growing bank lending and a 30 per cent jump in tourism arrivals.

According to ADB, Vietnam’s economic growth was expected to rise in the second half of this year, buoyed by further increases in foreign direct investment and exports, domestic credit growth, a further recovery in agriculture from the 2016 drought and accelerating disbursements of capital expenditure on national infrastructure programmes.

The report stressed that while Vietnam’s economy remains bright, some emerging policy challenges will need to be addressed to ensure sustainable growth.
Recent efforts to bring down interest rates and raise already strong bank lending growth by cutting interest rates to historical lows have the potential to increase financial sector risks, given the large stock of past, unresolved bad debts. It will be vital to strengthen regulations and supervision on loan quality and to continue the introduction of more stringent (Basel II) regulatory standards over the next 12-18 months.

Besides, although recent progress in trimming the budget deficit is commendable, it leads to a drop in capital spending which, if not rebalanced, could erode Vietnam’s long-term performance. For Vietnam’s fiscal consolidation to be growth-friendly, the authorities may usefully focus on adopting additional taxation measures while trimming non-core public expenditures, such as administrative expenses which have crowded-out infrastructure in recent years.

The report noted that while export-oriented manufacturing remains a bright spot for Vietnam’s economy, the trade surplus narrowed faster than expected, as surging imports outpaced export growth. In the first 6 months of the year, the trade surplus shrank to equal an estimated 1.5 per cent of GDP from 8.1 per cent in the first half of 2016.

“Though the country’s strong trade performance is expected to continue, Vietnam may be exposed to increased risks if a slowdown in major industrial economies occurs or from unexpectedly low growth in China, an increasingly important trading partner,” added Sidgwick.

Economic indicators point to strong growth
Economic growth in 2017 is now expected to come in at 6.3 per cent, marginally lower than forecast in ADO 2017. Inflation is projected slightly higher than foreseen in April, and the current account surplus is likely to shrink faster than earlier envisaged.

The report said a modest recovery in mining output is foreseen as declines in mineral and crude oil output bottom out later this year or early next year. Other economic indicators also point to strong growth next year.

The manufacturing purchasing managers’ index continues its rising trend. New orders have risen continuously since December 2015 to signal improving business conditions for manufacturers. Continued buoyancy in foreign direct investment inflows should add impetus to growth in the coming months, as should the recent easing of monetary and credit conditions.

On the demand side, the outlook for private consumption remains stable as it benefits from strong growth in manufacturing employment. Acceleration in public capital expenditure in the second half of the year is expected to boost growth in investment. With only about 26 per cent of planned capital outlays for the full year completed by the end of June 2017, efforts are being made to speed up the implementation of public infrastructure projects in the remainder of the year. Prospects for private investment also look bright, with the number of new companies registered in January - August 2017 rising by 16.3 per cent and additional support coming from high inflows of foreign direct investment.

As revenue growth exceeds expectations, the government’s target of trimming the budget deficit to the equivalent of 3.5 per cent of GDP in 2017 and 4.0 per cent in 2018 looks broadly attainable. This will depend, however, on further efforts to enhance revenue collection and stricter control of spending on wages and salaries and other recurrent expenditures. After three years of lower infrastructure spending, redirecting the 2017 budget toward capital outlays should help achieve this badly needed adjustment to public expenditure.

The main external risk to the outlook is the continued fragility of economic recovery in the advanced economies. A domestic risk is the possibility that the government may decide to stimulate growth by excessively loosening monetary and fiscal policies. With public debt now reaching its legislated limit at the equivalent of 65 per cent of GDP, any weakening of budget discipline would derail fiscal consolidation and debt sustainability. Similarly, any continued loosening of monetary policy would compound the already serious problem of bad loans and non-performing assets in the banking system.

Anh Mai








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