ADB Raises Vietnam GDP Forecast

“Vietnam has successfully exited from the economic stimulus measures in response to the global economic crisis in 2008-2009 to the policies aiming at stable growth. In order to prepare for the next ten year period as a new Middle Income Country, however, Vietnam needs to be cautious in maintaining macroeconomic stability and effectively communicating such a policy stance to the public while accelerating reforms,” the Asian Development Bank (ADB) said in the Asian Development Outlook 2010 Update (ADO Update) recently released in Hanoi.

ADO 2010 Update increased Vietnam’s growth forecast for 2010 from 6.5 percent to 6.7 percent, and for 2011 from 6.8 percent to 7.0 percent, while lowering the inflation projection in 2010 to 8.5 percent and 2011 to 7.5 percent.

 

Mr Ayumi Konishi, ADB Country Director for Vietnam, said: “Since the last press conference on Asian Development Outlook 2010 in April this year, Vietnam has consolidated its macroeconomic stability, and as a result we are making upward adjustments in our growth forecast for both 2010 and 2011, while lowering the projections for inflation.”

 

ADO Update noted that the steps taken by the Government to stabilize the economy have contributed to an improvement in the external and foreign reserves positions. With an improvement in the capital account, the overall balance of payments likely turned to a small surplus in the second quarter 2010, after recording deficits since the start of last year. Economic growth quickened in the second quarter.

 

It is specifically noted that two laws approved by the National Assembly in June 2010 - a new Law on the State Bank of Vietnam (SBV) and a Credit Institutions Law - together with various legal documents issued by SBV and other agencies, mark important progress in strengthening the framework for monetary policy implementation and safeguarding banking system stability. The two laws will come into force on January 1, 2011.

 

The new SBV Law will enhance the central bank’s autonomy and accountability in formulating and implementing monetary policy. It explicitly stipulates that the key objectives of monetary policy are to stabilize the value of the currency and to control inflation, putting more emphasis on these objectives than the current law. Furthermore, the SBV’s authority for surveillance and supervision of credit institutions is enhanced by the legislation.

 

The new Credit Institutions Law will allow credit institutions greater autonomy and flexibility in doing business, for example in setting fees and interest rates, and in providing a wider range of financial services.

 

This law also simplifies administrative procedures for banking and sets out that institutions are to gradually adopt best international practices. It applies both to banks and non-bank financial institutions.

The outlook assumes that the government will maintain macroeconomic stability during the forecast period, so that the balance of payments gradually improves and the fiscal deficit narrows. It is assumed that the authorities target growth in credit at 25 percent and maintain efforts to safeguard and enhance banking system soundness.

 

On these assumptions, government investment could be restrained by fiscal consolidation, but recoveries in world trade and financial conditions will underpin growth in private investment. Illustrating improvements in the investment environment, Vietnam’s ranking in the Global Competitiveness Index compiled by the World Economic Forum was upgraded to 59 among 139 countries in 2010 (from 75 in 2009), and its ranking in the Forum’s Enabling Trade Index rose to 71 among 125 economies (from 89 in 2009). Progress being achieved in a government drive called Project 30, to simplify bureaucratic procedures, by reducing red tape for businesses.

 

Private consumption growth is projected to get support during the forecast period from rising incomes and recovering remittance inflows.

 

According to ADB, Vietnam is benefiting substantially from the rebound in world trade, which is projected to continue through 2011 at nearly the same pace as this year. Growth in the country’s merchandise exports was running at about 30 percent in July–August, supporting growth in industry and, to a lesser degree, in agriculture. In particular, trade with the People’s Republic of China (including Hong Kong, China) has stepped up, owing to a rebound in those economies reinforced by a free trade agreement that came into effect in January 2010 between the PRC and the Association of Southeast Asian Nations.

 

The impact on the trade deficit from the real devaluation of the dong (due to a larger nominal devaluation than inflation differentials) is expected to be limited, largely because exports of manufactured goods usually require substantial imported materials and equipment.

 

GDP growth for 2010 is, on this basis, seen at 6.7 percent. The economic expansion rate is expected to pick up slightly in 2011, to about 7 percent, as investor confidence improves in tandem with more subdued inflation and a more robust external position.

 

The current account deficit, as a ratio to GDP, is forecast to narrow in the period due to an improving trade account, inflows of remittances, and the recovery in tourism. The deficit is forecast at 7.5 percent of GDP in 2010 and 5.4 percent in 2011. The overall balance of payments is expected to continue improving, supported by foreign direct investment attracted by the expanding economy as well as by capital inflows. Foreign reserves are expected to increase modestly to more comfortable levels.

 

Inflation is projected to average 8.5 percent in 2010, easing to 7.5 percent next year on the assumption that domestic macroeconomic stability is maintained and that global oil and commodity prices are relatively steady in 2011. These forecasts are lowered slightly from April, owing to the improvement in macroeconomic conditions and moderate growth in credit. However, large swings in inflation (from 28 percent year on year in August 2008 to 2 percent in August 2009, then up to over 8 percent this year), together with expectations of dong devaluation, suggest that inflation expectations, too, are not firmly anchored.

 

The government is preparing a new socioeconomic development strategy for the next 10 years, scheduled to start in 2011. This provides an opportunity to address infrastructure bottlenecks, deficiencies in the legal and regulatory framework for the private sector, inefficiencies and corporate governance problems at state-owned enterprises, and shortages of skilled labour. Structural policies that promote productivity growth and support the development of higher valued-added activities hold the key to sustaining growth and extending its benefits to more people.

 

“Vietnam should continue its efforts to ensure a better understanding of its policy stance by the public at large, supported by a greater amount and availability of information and statistics. This applies not only to the Government but also to the corporate sector. In order to promote better corporate governance of both public and private enterprises, the quality and timeliness of information made available to owners or shareholders and potential future investors will be the key,” Konishi said.