Vietnam Economy Becomes More Stable

 

After a prolonged period of heightened turbulence, Vietnam’s economy is gradually entering a more stable macroeconomic environment. Economic growth is expected to be around 5.7 percent, and year-end inflation is forecast to decline to below 10 percent in 2012.

 

In addition, between 2007 and 2010, partial adjustments to a series of shocks, including a surge in capital flows, resulted in rising macroeconomic vulnerabilities evidenced by higher inflation, falling reserves, an increase in public and external deficits, and structural weaknesses in the banking and enterprise sectors. At that time, these vulnerabilities and the absence of a persuasive strategy to address them led to deterioration in sentiment towards Vietnam. The situation, however, started to reverse after the government introduced the Resolution 11 to stabilise the economy and to ensure social stability.

 

Indeed, while Vietnam’s economy has started to stabilise, the significant tightening of macroeconomic policies, along with uncertain global economic environment, are beginning to take a toll on its economic growth. Accordingly, real GDP growth decelerated from 6.8 percent in 2010 to 5.9 percent in 2011 and further to 4 percent in the first quarter of 2012 as domestic demand slowed, affecting construction, services, and utilities. Besides, tighter domestic policies in 2011 have dampened investment (particularly in infrastructure and real estate) and private consumption. In spite of sacrificing GDP growth, this is not the time the Vietnamese Government to loosen policies. Besides, the Government must increase the credit ratings in financial market management. In the context of general difficulties, most economies, not only Vietnam, have to choose between growth and stability.

 

According to statistics, the current account deficit is estimated to have declined to 0.5 percent of GDP in 2011 from 4.1 percent in 2010, mainly due to a broad-based rebound in exports. Export earnings soared by 34.2 percent in 2011 and continue to grow. Exports in the first quarter of 2012 were 23.6 percent higher compared to the same period last year. Key labour intensive manufacturing exports such as garments, footwear, and furniture continued to grow at 14-18 percent in the first three months of this year.

 

Besides, Vietnam is recognised as a country with a young and dynamic population. With a supply of 2 million labourers each year, Vietnam will have a good solution for restoring the health of economy when the Government has training and employment solutions for this huge workforce. But, this is a considerable challenge for the economy if this workforce is not employed rationally.

 

According to the WB, Vietnam’s public debt is likely to remain sustainable if the economic recovery continues and the authorities remain on the current path of fiscal consolidation. The World Bank’s Low-Income Country Debt Sustainability Analysis shows that Vietnam remains at a low risk of debt distress. The largest source of uncertainty to debt sustainability comes from implicit obligations to state-owned enterprises, which are not captured under government and government-guaranteed debt statistics. A reliable estimate of such liabilities is not available, which limits the government’s ability to manage associated risks. Besides, greater transparency and disclosure of information is critical to build confidence among market participants.

 

According to the WB, the unresolved problems in the banking sector are likely to remain a source of concern for Vietnam in the coming years. particularly, the State Bank of Vietnam (SBV) has stepped up its supervision efforts and raised minimum capital requirements in response to concerns about the health of the banking sector. For example, on March 1, the Prime Minister issued the Decision 254 on “Restructuring credit institution system in the 2011–15 period.” The decision provides a framework to deal with weak banks and sets out a number of targets to be achieved by 2015. It sets out a number of restructuring options including letting the SBV directly acquire the equity of weak banks, increasing the ownership limit for foreign banks in domestic credit institutions, encouraging healthy banks to buy good quality assets and loans from weak banks, and allowing banks to sell their bad debts to the Debt and Asset Trading Company.

 

However, even if only a subset of the announced structural reforms is implemented steadfastly, Vietnam should return to a more sustainable macroeconomic environment while laying the foundations for greater efficiency and productivity to drive medium- and longer-term growth.