Vietnam Economy Overcomes Challenges

One of the successes of the Vietnamese economy in 2016 is to overcome tremendous challenges in the country and in the world to achieve positive results, featured by a GDP of about 6.21 per cent. Currently, Vietnam is seen as one of the most dynamic economies actively and deeply integrated into the world economy.

The business environment improves significantly
With the government’s great efforts for macroeconomic stability and important institutional reform, the Vietnamese business environment improved in 2016. According to November data released by the General Statistics Office (GSO), in spite of facing unpredictable global economic volatility and serious challenges from climate change and the environmental incident with Formosa Ha Tinh, the index of industrial production (IIP) maintained growth momentum (up 7.3 per cent), and the total retail value of goods and services rose 9.5 per cent over the same period of 2015 or climbed 7.6 per cent if inflationary factors were excluded (up 8.3 per cent in the same period of 2015).

In particular, Vietnam saw a record of business start-ups in 2016. The number of newly established enterprises in 2016 reached more than 110,100, up by 16.2 per cent over 2015. Registered capital by these new enterprises also rose by 48.1 per cent to over VND891 trillion (over US$39 billion).The average registered capital per business was VND8.09 billion (US$355,000), up 48.1 per cent as compared to last year. A total of 26,689 enterprises resumed operations, up 43.1 per cent from the previous year. Up to 54,046 companies suspended operations in the reviewed period, down 13.8 per cent year on year. These positive signals showed that the Government's measures to business support and development were effective and instrumental for the development of the business community.

A survey into over 10,000 domestic companies conducted by the Vietnam Chamber of Commerce and Industry (VCCI) showed that the business community’s economic confidence was further strengthened. 49 per cent of respondents planned to expand operations in the next two years, the highest rate in the latest five surveys of VCCI. 44.5 per cent planned to keep their current scale unchanged, while just nearly 7 per cent faced dissolution and closure. The foreign-led business sector also had a more optimistic sentiment about the Vietnamese business environment. Last year, 11 per cent of FDI companies scaled up operations and 62 per cent expanded their staff. According to the latest PCI-FDI survey, recruitments grew most in five years. Optimism about production and business expansion plans in the next two years increased rapidly. Nearly a half of respondents in the PCI-FDI survey intended to scale up operations - the highest since 2010.

According to the World Bank’s latest Taking Stock report released in December 2016, despite a fragile global environment, Vietnam’s economy remains resilient, thanks to robust domestic demand and export-oriented manufacturing. Vietnam’s medium-term outlook remains favourable, with GDP expected to expand by 6.21 per cent this year. Vietnam’s growth was accompanied by low inflation and widening current account surplus. And despite price hikes for health and education services, core inflation remains low and headline inflation is expected to stay below the official target of 5 per cent. Vietnam’s fiscal deficit remains sizable and is approaching the statutory limit of 65 per cent of gross domestic product (GDP), but the government has reinforced its commitment to achieving fiscal consolidation in the medium term. The economy’s recent performance is owed in part to rapid credit growth and an accommodative fiscal stance, which may support growth in the short term but also amplifies existing medium-term financial and fiscal risks.

According to the World Economic Forum (WEF)’s Global Enabling Trade Report 2016, Vietnam has improved significantly its capacity to enable trade and climbs 14 ranks in this year’s Enabling Trade Index to the 73rd position out of 136 economies worldwide.

The report said this is largely driven by improvements in border administration, with improved customs efficiency and reduced times for documentary and border compliance for both importing and exporting. These changes reflect recent efforts by the Government to streamline procedures.

In addition, Vietnam has well fulfilled its intellectual property commitments to bilateral and multilateral free trade agreements. This has helped raise the performance of State institutions and build up the confidence of foreign-invested enterprises in areas such as technology, creativity and garment and textile.

Expectations in 2017
Vietnam’s medium-term growth prospects are rated positive by the WB, expected to rise to 6.3 per cent in 2017-2018 on recovered agricultural production and better global economic outlook.

Domestically, inflation has accelerated in recent months after a series of price hikes of State-managed goods and services and headline inflation was estimated to stay below 5 per cent - the target set by the Government. Expected inflation was estimated to moderately pick up in the coming year on recovering prices commodities and fuels. External balance will continue to be strengthened, driven by a better trade balance. Expected inflation was estimated to moderately pick up in the coming year on recovering prices of commodities and fuels. Budget deficits will remain high at about 6 per cent of GDP this year, but will be adjusted in the medium term due to the Government's commitments.

With the pickup in the business environment, a majority of international financial institutions predict better economic performance for Vietnam in 2017 than in 2016 except for the International Monetary Fund (IMF). Specifically, the National Financial Supervisory Commission of Vietnam (NFSC) envisaged an upbeat growth of 6.7 per cent, while the World Bank and the Asian Development Bank (ADB) predicted a growth rate of 6.3 per cent. Meanwhile, IMF forecast that Vietnam may achieve a 6.2 per cent growth.

However, these institutions added that Vietnam may be affected by economic slowdown in China and trade policy changes in the United States.

According to the WB, risks could adversely affect Vietnam’s medium term prospects. Delayed implementation of structural and fiscal reforms may exacerbate existing macroeconomic and financial vulnerabilities and slow down potential growth. Externally, continued global economic slowdown and fading prospect on the Trans-Pacific Partnership (TPP) Agreement may affect Vietnam’s growth prospects driven by trade and investment channels. Meanwhile, the lacklustre global financial markets and the prospect of rising interest rates in the United States on anticipation of tightened monetary policy will also raise numerous concerns, while Vietnam is planning to approach the international market to meet capital needs.

Furthermore, in 2017, a lot of existing concerns will affect Vietnam’s growth such as stronger US dollar and trade deficit pressures on exchange rate. Weakening Chinese yuan may hurt Vietnam’s exports to China and increase Chinese exports to Vietnam. The rigid debt settlement by the commercial banking system may place a rising pressure on the real estate market. The Vietnamese economy is yet to change its capital-intensive development investment method, which may take growth and inflation to tango.

Anh Mai