“The government is facing growing fiscal challenges due to sluggish revenue collection. Growth is likely to remain moderate in 2014 in the absence of visible progress in addressing the mentioned structural problems. Vietnam’s economy is projected to grow at a moderate pace of around 5.5 percent by 2014,” the World Bank said in its recently released East Asia Pacific Economic Update, April 2014.
Slow-moving structural reforms
According to the WB, while macroeconomic performance further improved during 2013, economic growth continued to come in below its potential in the face of structural problems in State-owned enterprises and the banking sector, and due to policy distortions that continue to thwart domestic private investment and competition in key sectors. Gains in macroeconomic stability were underpinned by moderating inflation and strengthening external accounts.
Despite the improved macroeconomic balances and strengthened external accounts, a sustained recovery in GDP growth remains hampered by slow-moving structural reforms and global uncertainty. Domestic demand in Vietnam remains weak on account of subdued private sector confidence, over-leveraged State-owned enterprises, under-capitalised banks, and shrinking fiscal space. On the supply side, cross-country competitiveness assessments show that Vietnam is falling behind relative to comparator economies. Re-energising medium-term growth will require renewed attention on a number of structural reforms - with emphasis on restructuring the country’s State-owned banks and enterprises and removing barriers to domestic private investment.
The WB report shows that important financial sector vulnerabilities remain, creating a drag on overall economic performance. Non-performing loans (NPLs) in the banking sector continue to be a major concern, although poor quality data and limited disclosure requirements preclude accurate estimation of their magnitude. In an effort to deal with NPLs of the banking sector, the government has established the Vietnam Asset Management Company (VAMC), which is responsible for the purchase, recovery, and restructuring of the bad debt of banks. However, there are concerns over the operational capacity of the VAMC, the lack of resources (including fiscal) to meet banking sector capitalisation needs, and the pace of implementation, among other issues. The issues of bankruptcy, insolvency, and creditor rights will also need addressing to facilitate corporate debt restructuring.
The government is faced with some crucial fiscal policy choices, as it seeks to balance the twin objectives of economic expansion and macroeconomic stability. Attention is also needed to the changing composition of public debt. The share of concessional external debt in Vietnam’s total public and publicly guaranteed external debt has already started to fall with its graduation to middle-income country status. This has important implications for long-term fiscal sustainability, since domestic bonds carry considerably higher interest rates and are of much shorter maturity relative to concessional external debt.
Emerging challenges
According to the WB, Vietnam’s economy is projected to grow at a moderate pace of around 5.5 percent by 2014. This assumes macroeconomic prudence through the continuation of monetary policy caution and a renewed focus on structural reforms (with particular attention on restructuring the State-owned enterprise and banking sectors and unleashing domestic private sector investment). The trade and current accounts are expected to remain in surplus in 2014, although by a smaller amount than in 2013. Inflation is likely to stay within the government target of 7 percent in 2014 given the modest credit growth and assuming that no major supply-side shocks materialise.
With the restructuring agenda gaining momentum, some important progress is expected in 2014. Efforts to divest non-core assets and equitise a large number of State-owned enterprises could send a positive signal to investors about the government’s commitment to this agenda.
There is an urgent need to resolve the bad debt problem in the banking sector, although given the complexity of the issues involved, it is likely to be a much more drawn-out process. Many of these actions would involve costs, and it is unclear how these will be met.
The WB said Vietnam’s gains on the macroeconomic front are, however, still fragile and face several downside risks: Private sector demand remains sluggish and highly susceptible to any further negative news; although diminished, the risk remains that authorities could depart from fiscal and monetary discipline to offset weak private sector demand; and the momentum on structural reforms could further slow, putting GDP growth on a lower trajectory and undercutting fiscal sustainability.
Quynh Anh
Vietnamese
