Economic Sector

Last updated: Tuesday, March 26, 2019


Vietnam Economy Grows Robustly, But Risks Intensify

Posted: Monday, December 24, 2018

This remark is made by the World Bank in its Taking Stock, a bi-annual economic report on Vietnam released recently.

Growth will be slower in 2019 and 2020
Economic growth in Vietnam has proven resilient despite weakening external conditions, driven mainly by strong domestic demand and a dynamic export-oriented manufacturing sector.

The pace of expansion is forecast to remain at 6.8 per cent this year, higher than the projected figure of 6.3 per cent for emerging markets in the East Asia and the Pacific.

Over the medium term, in line with the global trend, Vietnam will see a slower pace - 6.6 per cent and 6.5 per cent in 2019 and 2020, respectively. Inflation will remain muted at 4 per cent as the result of tightening monetary policies.

“Despite a challenging global context, Vietnam continues to achieve robust growth accompanied by moderate inflation and a relatively stable exchange rate,” said Mr Ousmane Dione, the World Bank Country Director for Vietnam. “Policymakers should take advantage of the still favourable growth dynamics to advance structural reforms to enhance private sector driven investment and growth, along with improving efficiency in public sector investment.”

The report says final consumption and capital formation are expected to contribute 5.3 and 2.4 percentage points, respectively, to the overall GDP growth of 2018. Investment from the foreign-invested sector rose 8.4 per cent year on year over the same period, and accounted for nearly a quarter of total investment outlays in Vietnam.

In addition, public investment strengthened in the third quarter of the year, contributing about 33.6 per cent to total investment outlays. Despite this increase, the share of public investment has posted a steady decline in recent years, from 12.4 per cent of GDP in 2016 to 11.9 per cent in 2017 and a projected 11.4 per cent of GDP in 2018, as the government has clamped down on investment spending to support fiscal consolidation.

The recent decline of public investment has been more than offset by strong private domestic investment and consistent foreign direct investment (FDI) inflows, which have led to rising total investment as a share of GDP over recent years.

Strong growth outturns over recent years have supported steady job creation and rising labour income. The official unemployment rate in Vietnam is very low, at around two per cent. Correspondingly, the labour force participation rate is relatively high above, achieving 76.6 per cent as of the second quarter of 2018 for the population aged 15 and above. Monthly average income during 2010-2017 rose by US$10.5 per year in nominal terms (around 4 per cent in real terms).

Risks to the outlook have intensified and are titled to the downside, highlights the report. Given its high trade openness and limited fiscal and monetary policy buffers, Vietnam remains susceptible to external volatilities. Escalating global trade tensions could cause a falloff in export demand, while tightening global liquidity could reduce capital inflows and foreign investment. Domestically, a slowdown in reforming state-owned enterprise and banking sectors could undermine growth prospects and create public sector liabilities.

“Slower global growth, ongoing trade tensions and heightened financial volatility cloud on the global outlook,” said Mr Sebastian Eckardt, the World Bank Lead Economist for Vietnam. “As an open economy, Vietnam needs to maintain a responsive monetary policy, exchange rate flexibility and low fiscal deficits to enhance its resilience against potential shocks.”

Non-tariff measures are increasing
In light of the recently ratified Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA), the special section of this Taking Stock edition focuses on streamlining non-tariff measures to help boost Vietnam’s export competitiveness. This timely analytical work is a product of the Second Australia-World Bank Group Strategic Partnership in Vietnam (ABP2).

The report observes that while tariffs are rapidly declining, the number of non-tariff measures (NTM) is increasing. Vietnam’s average preferential tariffs have fallen from 13.1 per cent in 2003 to 6.3 per cent in 2015. In contrast, the number of NTMs has increased by more than 20-fold during the same period. International experience shows that poorly designed and implemented NTM could restrict trade, distort prices, and erode national competitiveness.

According to this report’s assessment, the NTM system in Vietnam remains complicated, opaque, and costly, resulting in high cost of compliance. One study estimates that the equivalent tariff rate that sanitary and phytosanitary measures Vietnam are imposing on imported goods is 16.6 per cent compared to the average level of 8.3 per cent for ASEAN countries.

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