Economic Growth Slows

According to the World Bank East Asia and Pacific Economic Update for October 2014, Vietnam’s GDP growth was estimated at 5.4 percent in 2014 and was projected not to exceed 5.5 percent before 2016.

 

In the short run, this is linked to weakness in domestic demand. Longer-term growth remains subdued due to a web of structural problems in SOEs and the banking sector, policy distortions that continue to thwart domestic private investment, skills shortages, and gaps in infrastructure and trade logistical services.

 

Sandeep Mahajan, WB Lead Economist for Vietnam, said Vietnam is driven by a two-pace development process. Although FDI has levelled off in recent months, the foreign-invested sector remains an important engine of economic development in Vietnam. The nation’s GDP growth is supported by foreign direct investment disbursements, the performance of foreign-invested enterprises, and 15 percent export growth this year despite weak domestic investments and low credit growth at banks.

 

Low confidence and consumption in the domestic sector continue to dent the country’s economic growth, he said.

 

Vietnam further consolidated macroeconomic stability in 2014, with continued low inflation. Slower economic growth has prompted an easing of monetary policy, but lending has been constrained by weaknesses in bank balance sheets and subdued private sector demand.

 

The WB warned that a growing number of domestically owned businesses have been closing or suspending operations. As many as 37,600 companies closed and suspended operations in the first seven months of 2014, a 10 percent increase over the same period last year. Growth in retail sales - a proxy for private consumption - eased. The share of domestic private investment in GDP stood at only 10.7 percent in the first quarter of 2014, well below the level of 13.9 percent in 2010.

 

According to the report, developing countries in East Asia - Pacific will see slightly slower economic growth this year, but the pace of growth in the region, excluding China, will pick up next year, as the gradual recovery in high-income economies boosts demand for exports from the region. Still, developing East Asia - Pacific remains the fastest-growing region in the world.

 

Developing East Asia will grow by 6.9 percent this year and next, down from 7.2 percent in 2013. In China, growth will ease slightly to 7.4 percent this year and 7.2 percent in 2015, as the government seeks to put the economy on a more sustainable path with policies addressing financial vulnerabilities and structural constraints. Excluding China, growth in developing countries in the region is expected to bottom out at 4.8 percent this year, before rising to 5.3 percent in 2015, as exports rise and domestic economic reforms advance in the large South Asian economies.

 

Axel van Trotsenburg, World Bank Vice President for East Asia and Pacific Region, said “East Asia - Pacific will continue to have the potential to grow at a higher rate- and faster than other developing regions - if policymakers implement an ambitious domestic reform agenda, which includes removing barriers to domestic investment, improving export competitiveness and rationalising public spending.”

 

While the region as a whole will benefit more than any other region from the recovery of the global economy, the impact will vary across countries, depending on their investment and export environment. China, Malaysia, Vietnam and Cambodia are well positioned to increase their exports, reflecting their deepening integration into the global and regional value chains that have driven global trade in the last 20 years.

 

Significant uncertainties remain that could affect the region’s growth. High-income economies, especially in the Eurozone and Japan, could face downside risks in the near term. Global financial conditions could tighten sharply, and international and regional geopolitical tensions could affect prospects. The region also remains vulnerable to a sharp slowdown in China, which, though unlikely to happen, could hurt commodity producers especially hard, such as metal exporters in Mongolia and coal exporters in Indonesia.

 

Mr Sudhir Shetty, Chief Economist of the World Bank’s East Asia and Pacific Region, said, “The best way for countries in the region to deal with these risks is to address vulnerabilities caused by past financial and fiscal policies, and complement these measures with structural reforms to enhance export competitiveness.”

 

The report also discusses long-term structural reforms that will help countries maximise the benefits of the global recovery. Key reforms include investing more in infrastructure, improving trade logistics, and liberalising services and foreign direct investment. And, as many education systems in the region aren’t producing skills demanded in the labour market, the report recommends a comprehensive strategy to address issues ranging from early childhood development to higher education and lifelong learning.