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Last updated: Tuesday, November 20, 2018

 

Vietnam Medium-term Economic Prospects Keeps Improving

Posted: Wednesday, October 24, 2018


Vietnam’s medium-term prospects continue to improve. The country’s real gross domestic product (GDP) is now projected to expand by 6.8 per cent in 2018, up from 6.5 per cent in the World Bank’s previous estimation in April, before moderating to 6.6 per cent in 2019 and 6.5 per cent in 2020 due to the forecast cyclical moderation of global demand.

This is the remark in the World Bank (WB)’s World Bank East and Pacific Economies Update titled “Navigating Uncertainty”.

Despite reduced slack in the economy, the report forecast inflation to remain around the 4 per cent target of the government, predicated some tightening of the monetary stance to counter price pressures emanating from domestic input price pressure and rising global commodity prices. On the external front, the WB also anticipated that the current account balance will remain in surplus but will start narrowing from 2019, reflecting widening deficits on income and services accounts. Fiscal consolidation is expected to contain public debt over the projection period.

However, according to the report, risks remain significant, despite improved short-term prospects. Domestically, a slowdown in the restructuring of State-owned enterprises and the banking sector could adversely impact the macro-financial situation, undermine growth prospects and create large public-sector liabilities. External risks include escalating trade protectionism, heightened global and regional geopolitical uncertainty and continued tightening of global financing conditions, which could lead to disorderly financial market movements.

For that reason, the WB suggested policymakers take advantage of the favourable economic environment to push ahead with policies that increase macroeconomic resilience and lay the foundation for sustained growth in the future. Monetary policy should tighten liquidity in the banking sector to align interbank rates with policy interest rates and to bring credit growth in line with fundamentals. This could be supported by macro-prudential measures aimed at preventing excessive credit flow to high-risk sectors such as real estate or personal consumption. Moreover, steps to enhance banking supervision, resolve non-performing loans and reinforce capital buffers would not only reduce risks to financial stability but also improve financial intermediation, which in turn would contribute to higher medium-term growth. Further flexibility in exchange rate management could help mitigate the risks of external volatility.

On the fiscal policy, according to the WB, further deficit reduction should be underpinned by a comprehensive strategy to enhance spending efficiency and sustain medium-term revenue potential. “Prudent macroeconomic policies should be accompanied by continued focus on comprehensive and deep structural reforms, including regulatory reforms to remove barriers to and reduce the cost of private-sector activity, reforms on human capital and high-quality infrastructure investments and further reforms to enhance the productivity of the State-owned enterprise sector. Some localities have been affected by natural disasters and floods in recent years. Therefore, investing in climate change mitigation measures remains a priority to prevent vulnerability of Vietnamese households to natural disasters,” the report said.

According to the WB report, despite a less favourable external environment, the growth outlook for developing East Asia and Pacific (EAP) remains positive. Growth in developing EAP is expected to be 6.3 per cent in 2018, lower than in 2017 due to the continued moderation in China’s growth as its economy continues to rebalance.

The report underscored that in recent months a combination of trade tensions, higher US interest rates, and financial market volatility in many emerging economies has increased the uncertainty around the region’s growth outlook. At the same time, inflation has begun to rise across the region, particularly in Myanmar, the Philippines and Vietnam.

The WB report pointed to a four-pronged approach for countries in developing East Asia to address these emerging risks. The first one is to reduce short-term vulnerabilities and build policy buffers. Pursuing proactive macro-prudential policies can help address financial sector vulnerabilities, reduce capital market volatility, and manage exposure to exchange rate movements.

The second is to redouble commitment to an open, rules-based international trade and investment system, including through deeper regional economic integration. Regional economies could gain by deepening existing preferential trade agreements and lowering non-tariff barriers.

The third is to deepen structural reforms, including liberalising key sectors, improving the business climate, and boosting competitiveness. And, the final one is to strengthen economic security and promote economic mobility though programmes such as targeted cash transfers and fiscally-sustainable social insurance systems.

Quynh Anh








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