Vietnam experiences a strong recovery

Sanjay Kalra, group head and lead economist of the ASEAN+3 Macroeconomic Research Office (AMRO) said, “The Vietnamese economy is expected to grow at 6.3 per cent this year and 6.5 per cent in 2023 and inflation is projected to remain contained. This positive outlook rides on strong external demand, a recovery in domestic consumption, and healthy investments inflows bolstered by an appropriate macroeconomic policy stance.”

Thanks to the easing of restrictions and domestic containment measures, the aggregate output gap is expected to narrow significantly by the end of the year. The recovery is, nevertheless, uneven across sectors. While both the manufacturing and service sector outputs have surpassed their 2019 levels, the service sector still has pockets of distress, especially in the tourism, hospitality, and logistics sectors.

Consumer price inflation is projected to remain contained under 3.5 per cent as the authorities plan to utilise their oil price stabilisation fund and administered prices to offset pressures emanating from global developments in energy prices.

Meanwhile, risks to the growth forecast are broadly balanced. The main downside risks stem from global commodity and supply chain disruptions related to geopolitical developments, the tightening of financial conditions in advanced economies, and a persistent increase in global oil prices. Upside risks to the forecast spring from a faster-than-projected growth in private consumption.

From a longer-term perspective, the pandemic may have widened inequalities and placed longer-lasting scars on the more vulnerable segments of society. In the financial sector, the deterioration in bank balance sheets from the effects of the slowdown is likely to take some time to mend. Related to this, potential risks from the real estate sector warrant close monitoring in the near-to-medium term.

Given the economy’s cyclical position, AMRO has made several recommendations.

It suggests a mildly supportive fiscal policy stance in 2022. Given the available fiscal space and the uneven recovery across economic and social sectors, policies should provide targeted support to those that continue to be affected by the pandemic, especially micro, small and medium-sized enterprises (MSME) and low-income households.

Monetary conditions should be normalised to contain inflationary pressures and reduce financial imbalances that emerged in the environment of low interest rates. However, it is essential to ensure that the financing needs of vulnerable MSMEs and households are met and that sufficient funding is available to productive sectors. The State Bank of Vietnam should continue to allow greater exchange rate flexibility as it balances its growth, inflation, and financial sector stability objectives.

On the financial stability front, efforts are needed to increase provisioning and capital buffers to prepare for an increase in impaired assets in view of the impending expiry of the forbearance policy. A macroprudential policy framework needs to be put in place that addresses imbalances in the real estate market.

As Vietnam progresses beyond the lower-middle-income status, it will need to implement reforms across a broad range of sectors to mobilise financing for growth and development and strengthen investor confidence. In this context, the prime minister’s directive to raise Vietnam’s sovereign rating in international capital markets to investment grade by 2030 is a step in the right direction.

Structural reforms need to be accelerated to ensure sustainable and inclusive growth, including by expediting equitisation of and divestment from state-owned enterprises, developing domestic FDI supporting industries through training and skills programmes, and strengthening the social safety net in anticipation of an ageing demographic.