Vietnam Economy Grows Faster

This positive outlook is largely due to the country’s ongoing macroeconomic stability and continued strong performance of the foreign-invested manufacturing export sector. Positive macroeconomic conditions contributed to Vietnam’s improved sovereign risk ratings, enabling US$1 billion of government bonds to be issued on international capital markets on favourable terms.

 

Government revenue increased by 17 percent in the first nine months of this year compared to the same period last year. At the same time, total expenditure rose by 11.5 percent, due largely to recurrent spending. While Vietnam is still considered at low risk of debt distress, overall public debt levels are becoming an increasing concern. Credit growth continues to come in below target, hampering the State Bank of Vietnam’s efforts to carry out credit expansion to support economic growth.

 

The Government has taken some important measures in 2014 to improve business conditions which are expected to bear fruit from next year. This includes Resolution 19 on shortening the time for administrative procedures for filing taxes, reduce administrative costs, and strengthening the transparency and accountability of state administrative agencies. The revised Law on Bankruptcy, the Enterprise Law and the Investment Law, are expected to improve corporate governance in enterprises and State Owned Enterprises (SOEs).

 

Victoria Kwakwa, World Bank Country Director for Vietnam, said “Vietnam’s potential for much more rapid growth can only be realised if substantial progress is made in addressing distortions such as in the state enterprise and banking sectors, that tax the economy’s efficiency and productivity. Stepping up this reform agenda and strengthening the business environment are critical for moving forward.”

 

The report finds that underlying the broad pattern of economic recovery, the performances of foreign-invested and domestic firms remain dichotomous. The foreign-invested sector continues to be a significant source of growth, while the domestic private sector remains subdued, as reflected in the rising number of domestically-owned businesses that have closed or suspended operations. Despite a pick-up in momentum, SOE reforms are lagging behind planned targets. The Government has articulated a clear policy vision on SOE reforms, but more consistent implementation will be the key.

 

Over the medium term, Vietnam’s macroeconomic outlook is good, with continued modest GDP growth and a further consolidation of macroeconomic stability. The Government’s continued commitment to fiscal consolidation and debt reduction is reassuring. Critical to this will be improved revenue collection, better controls on recurrent expenditures, and improving the efficiency of public investment.

 

However, the outlook is subject to two key risks: relatively slow progress on SOE and banking sector reforms could adversely impact macro-financial conditions; and adverse turn of events in the global economy could undermine Vietnam’s growth prospects, given the relatively large size of the export sector.

 

The weak performance of the financial sector is due to a complex array of institutional and regulatory factors. These factors have included episodes of interference by central and local authorities on the investment and credit decisions of SOEs and State-owned commercial banks; inadequate governance structure and risk management capacity in these institutions; connected lending in several joint-stock banks; weaknesses in financial infrastructure, including poor financial reporting standards; and deficiencies in financial regulation and supervision. The Government has announced a comprehensive reform program designed to address these problems and resolve the bad debts in the system. Accelerating the reform programme remains a priority.