Towards More Productive, Creative Economy

Vietnam’s economy is projected to sustain growth at 6.7 per cent in 2016 before the pace moderates to 6.5 per cent in 2017, said the report.

 

ADB Country Director for Vietnam Eric Sidgwick said Vietnam’s economic growth will be driven by continued high foreign direct investment, rising domestic consumption and demand, and pro-growth policy settings. Vietnam will benefit from the signing of a range of new free trade agreements (FTAs) which, once going into force, will create many new business and trade opportunities for Vietnam.

 

He said, despite its positive growth, Vietnam’s economy is also facing major challenges, both in the short and long terms. Global instability and slowing growth in major trade partners has the potential to disrupt the country’s economic outlook. Domestically, in the short term, Vietnam should rebuild macroeconomic buffers to ensure the economy can be more resilient to any future economic shocks. This requires special attention to enhancing fiscal sustainability and strengthening foreign exchange reserves.

 

“Over the longer term, greater efforts are also needed to address Vietnam’s low productivity growth, and to support domestic firms’ ability to integrate into global value chains. The State-owned enterprise (SOE) reform should also be boosted to mitigate the negative impacts these companies have on the economy and its competitiveness.

 

“The Government of Vietnam should continue taking actions to strengthen the banking system, including resolving the existing stock of non-performing loans and preventing the build-up of new ones, as this continues to stifle the creation of an efficient and inclusive financial sector,” said Eric Sidgwick.

 

Although Vietnam will be one of biggest beneficiaries from new FTAs, it will have to accept a significant cost to adapt to FTAs. Once opened, the economy will face more competition and have more stringent export standards, local enterprises will have to face increasing business pressure.

 

The report said inflation picked up to average 1.3 per cent in the first 3 months of 2016 and is forecast to average 3 per cent this year and 4 per cent in 2017. The government is expected to raise administered prices for education and health care and boost public sector minimum wages. Import prices will rise this year with dong depreciation, and higher global food and fuel prices in 2017 will add to inflation next year.

 

Rising incomes and modest (though quickening) inflation are expected to buoy private consumption. Sharply rising sales of automobiles - up by 55 per cent in 2015 - illustrate the recovery in consumer confidence. Vietnam has become the fastest-growing auto market in Southeast Asia. Business sentiment is similarly buoyant. A survey in December 2015 showed that 41 per cent of businesses expected conditions to improve in 2016, and a further 40 per cent expected stable conditions.

 

Prospects for growth in private investment are enhanced by a proliferation of trade and investment agreements concluded over the past 18 months. These include trade agreements with the European Union (EU) and South Korea, and commitments to participate in both the Trans-Pacific Partnership (TPP) led by the United States and the Eurasian Economic Union (EEU) led by the Russian Federation. Vietnam is expected to benefit as well from the ASEAN Economic Community (AEC), whose members in the Association of Southeast Asian Nations (ASEAN) collectively form Vietnam’s third-largest export market after the US and the EU.

 

These agreements will be implemented over several years but are expected to stimulate investment in the near term as businesses prepare for expanded trade opportunities. The agreements also signal to the business community the government’s renewed commitment to liberalise the economy. In recent years, it has eased restrictions on foreign ownership of property and corporate shares and has said it would reduce from 51 to 6 the number of industries closed to foreign ownership. The VN-Index of share prices rose by 6.1 per cent in 2015, building on an 8.1 per cent gain in 2014.

 

“To maximise benefits of the FTAs, the Government should work to create an economy with higher productivity to adapt to rising competitiveness,” said Sidgwick.