According to the lastest report of the Asian Development Bank (ADB), Vietnam’s economy continues to perform well against a volatile global back drop.
The Asian Development Outlook (ADO) 2016 of the ADB releasing on March 30, 2016 forecasts the Vietnam’s economy to remain stable in 2016 with growth of 6.7% followed by a modest slowing of growth to 6.5% in 2017. Last year, Vietnam’s economy growth accelerated to 6.7%, the fastest clip since 2008, thanks to vigorous expansion of manufacturing and construction.
Chart 1: GDP growth
The report notes that Vietnam’s economic growth is being driven by foreign direct investment, strengthening domestic consumption and demand, and pro-growth policy settings. In addition, economic experts of the ADB forecast that strong export-orientated manufacturing, FDI inflows, and domestic demand will be partly offset by the effect of slowing expansion of the People’s Republic of China (PRC) on the growth of Vietnam’s economy.
In 2015, new FDI commitments came in relatively flat at $22.8 billion which suggests that disbursements of FDI could level out this year, the ABD foresees. About 60% of the FDI commitments are for export-orientated manufacturing.
Chart 2: Disbursed foreign direct investment
The ADB expects that rising incomes and modest inflation will buoy private consumption in Vietnam. The sales of automobiles in Vietnam raised sharply by 55% in 2015. This figure illustrated the recovery in consumer confidence. Vietnam has become the fastest-growing auto market in Southeast Asia. Business sentiment is similarly buoyant with 41% of businesses expected conditions to improve in 2016, and a further 40% expected stable conditions, according to a survey in December, 2015.
A range of free trade agreements between Vietnam and important trade partners concluded over past 18 months is expected to enhance the private investment.
These include trade agreements with the European Union and Republic of Korea, and commitments to participate in both the Trans-Pacific Partnership led by the US and the Eurasian Economic Union led by the Russian Federation. Vietnam is expected to benefit as well from the ASEAN Economic Community, whose members in the Association of Southeast Asian Nations collectively form Vietnam’s third-largest export market after the US and the European Union.
These agreements will be implemented over several years but are expected to stimulate investment in the near term as business esprepare for expanded trade opportunities. The agreements also signal to the business community the government’s renewed commitment to liberalize 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.
Manufacturing and construction are projected to maintain solid expansion. The purchasing managers’ index of Vietnam in the first 2 months of 2016 showed that business conditions for manufacturers improved, including a rise in new orders. Services are also projected to expand at a robust pace.
Chart 3: PMI
Fiscal policy looks set to tighten gradually but to remain supportive of growth, the ADB estimated. Vietnam’s government aims to narrow the budget deficit to 4.9% of GDP in 2016 and 4.0% in 2017.
Short and long-term challenges for Vietnam economy
Besides well economic performance, Vietnam does face significant short and long-term challenges.
Mr. Eric Sidgwick, ADB Country Director for Vietnam said in the short-term, the Government must navigate the impacts of a slowing global economy, while at the same time rebuilding the macroeconomic buffers that would allow Vietnam to be resilient to any future economic shocks”.
The report emphasizes the importance of deepening the process of state owned enterprise reform, to remove the distorting impact which these firms have on the economy and its competitiveness. The government sold minority equity stakes in some 160 state-owned enterprises in 2015, well below its target of 289. Many individual equitizations fell short of targets.
For the resolving non-performing loans, in 2015, the State Bank of Vietnam (SBV) supported mergers of several banks, following through on its plan for banking sector consolidation. It helped nonperforming loans (NPLs) declined to 2.7% of outstanding loans by the end of 2015, largely through their transfer from banks to the Viet Nam Asset Management Company. However, due to limited capital base and lacking an adequate legal framework for resolving NPLs, it had sold or recovered by the end of December last year just 9% of the NPLs it held.
The ADB’s economic experts suggested the government should also continue to take actions to strengthen the banking system including a clear plan for resolving non-performing loans, as this continues to stifle the creation of an efficient and inclusive financial sector. Further progress on bank consolidation and enhanced transparency, asset classification, NPL resolution, and disclosure requirements will be vital for strengthening the sector.
Plans for fiscal consolidation are at risk from shortfalls in revenue, the ADB said. Over the past 5 years, reductions in corporate income tax rates, the removal of tariffs, and tax exemptions for favored firms have eroded the tax base. Especially, low oil prices are dragging on resource tax revenue, which comprises 10% of the total. Central government revenue and grants fell from the equivalent of 27.6% of GDP in 2010 to 22.0% in 2015. The government could use funds from the equitization of state-owned enterprises and issue more short-term securities to support the budget in the near term, but achieving a more sustainable fiscal position is likely to require tax reform to reverse falls in the ratio of tax to GDP.
Subdued growth will continue for agriculture in the near term under soft global food prices and the effects of El Niđo while the growth of services have be dimmed for tourism from the PRC, the source of one-quarter of Viet Nam’s inbound tourists.
For long-term, greater efforts are also needed to address Vietnam’s low productivity growth, and to support domestic firm’s ability to integrate into global value chains, Mr. Eric Sidgwick said.
While Vietnam will be a major beneficiary of recent free trade agreements, the country will also have to deal with some significant adjustment cost. As the economy opens up to increased competition, and more stringent export standards, domestic firms will face increasing commercial pressures.
To ensure that the economy is able to maximize the benefits from the agreements, the Government must move in parallel to create a more productive and innovative economy that can more readily adapt to increasing competition, added Mr. Sidgwick.
