Economic Sector

Last updated: Friday, February 15, 2019


Vietnam Economy: Robust Growth

Posted: Thursday, October 04, 2018

Vietnam’s economy continued to perform strongly in the first half of 2018, although external and domestic challenges could affect the country’s growth outlook for this year and next.

This is the assessment of the Asian Development Bank (ADB) in its flagship annual economic publication, Asian Development Outlook (ADO) 2018.

With growth moderation likely in the second half of the year for exports, agriculture, and construction - and with continued contraction in mining - GDP growth for the whole year is now seen slightly lower than earlier forecast. As inflation is on an upward trend and unlikely to change course in the near term, inflation forecasts for this year and next are revised up. The current account surplus is forecast to narrow more than foreseen in April.

Mr Eric Sidgwick, ADB Country Director for Vietnam, said, the economic performance was broad-based, driven by vigorous manufacturing expansion, bumper agriculture production, robust performance of services sector, resilient domestic consumption, and strong investment fuelled by FDI and domestic enterprises.

According to ADB, Vietnam’s economic growth will likely hold up well in the near term buoyed by resilient domestic demand. However, growth moderation in the major economies such as the European Union (EU), Japan and the People’s Republic of China may dampen aggregated demand of global trade and global manufacturing networks where Vietnam is integrating more deeply. Severe floods in July and August could undermine agriculture, while aging mines will likely drive down mining output. The growth forecast for this year is therefore revised down from 7.1 per cent in ADO 2018 to 6.9 per cent, while the forecast for 2019 is retained. Meanwhile, inflation forecasts are adjusted upward from 3.7 per cent to 4.0 per cent for 2018 and from 4.0 per cent to 4.5 per cent for 2019. Prospects for private consumption continue to be bright, while the outlook for private investment remains stable under the government’s continuing efforts to improve the business environment and facilitate the opening of new businesses. Acceleration in public capital expenditure in the second half of the year is expected to boost growth in investment.

Growth in merchandise exports is likely to moderate in the near term although Vietnam’s participation in various free trade agreements should support continued access to foreign markets for major exports.

By sector, agriculture should post slower growth at 2.5 per cent this year, below the earlier forecast and the government target of 3.0 per cent, following severe floods in recent months. Mining output, which contracted by 1.3 per cent in the first half of the year, continues to be handicapped by aging mines, oil fields, and unfavourable weather conditions. Growth in construction will moderate in the rest of the year as the government seeks to prevent a real estate bubble. The manufacturing purchasing managers’ index (MPI) reached a record high of 55.7 in June, indicating continued improvement in business conditions, but some softening in industry growth cannot be ruled out as exports moderate in the coming months. Meanwhile, services are likely to hold up well thanks to rising private consumption and buoyant tourism.

According to ADB’s analysis, the emergence of trade deficit in July and August signalled that growth in merchandise imports is likely to outpace that of exports. The current account surplus will likely narrow even if net service exports remain steady. Forecasts for the current account surplus are therefore revised down to the equivalent of 2.3 per cent of GDP this year and maintained at 2.0 per cent next year. On the capital account, FDI continues to be a major source of strength. However, if trade tensions escalate, foreign investors may consider adjusting their business strategies, dampening FDI inflows to Vietnam. Although FDI remained strong in the first half of this year, it has been less buoyant since then.

Amid the complexities of the emerging macroeconomic environment, Vietnam is cautiously deploying fiscal and monetary policies to maintain stability while supporting growth. Fiscal policy continues to focus on broadening the tax base and strengthening tax administration. Although the central bank has kept its policy interest rate unchanged, it has taken other measures to stabilise the exchange rate, notably selling USD to commercial banks in July and August. Interest rates for central bank bills issued since late July have also been adjusted upward, pushing up the interbank money market interest rate. Going forward, the SBV intends to pursue a more flexible exchange rate regime with the ultimate objective of gradually shifting its monetary policy framework from focusing on exchange rate stabilisation and monetary-credit targeting to inflation targeting. Building on these recent measures and future policy intentions, there is merit in a tighter monetary policy in the near term to rein in inflation.

Risks to the outlook are mostly on the downside. If escalating trade tensions around the world slow global trade substantially and disrupt global production networks and supply chains, the growth outlook for Vietnam will be much dimmer. Not only would such developments hurt its export prospects, but would also hold back FDI. Heightened volatility in international financial markets is another downside risk.

Anh Mai

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