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The international lender published the East Asia and Pacific Economic Update themed “Managing Headwinds,” on April 24.

According to the WB, Viet Nam’s economy continues to show fundamental strength, supported by robust domestic demand and export-oriented manufacturing. The extreme poverty rate is estimated to have declined to below 3%. While the medium-term outlook is broadly favorable, significant downside risks are tied to weak external demand, global financial volatility, and incomplete banking and state-owned enterprise (SOE) reforms. 

On the upside, Viet Nam is strongly positioned to benefit from numerous free trade agreements that are coming into force now and over the forecast period.  

Economic growth in developing East Asia and the Pacific is projected to soften to 6% in 2019 and 2020, down from 6.3% in 2018, largely reflecting global headwinds and a gradual policy-guided slowdown in China, the World Bank said.

After accelerating in the first three quarters of 2018, reflecting hikes in administered prices, the headline CPI moderated significantly in the last quarter of 2018, due to softer food and fuel prices. For the year as a whole, the headline CPI remained moderate at 3.5%, well below the State Bank of Vietnam’s (SBV) inflation target of 4%.

Viet Nam’s monetary policy continues to balance its dual objectives of maintaining stability while supporting economic growth.

Amid tighter financing conditions, credit growth moderated to about 14% (year-on-year) in 2018 from 18% in 2017. Nevertheless, corporate and household balance sheets are increasingly leveraged with Viet Nam’s credit-to-GDP ratio at about 135%. This leaves the economy vulnerable to shocks and potential financial market stress, especially given legacy NPLs and relatively thin capital buffers in some banks.

Viet Nam’s external balances continued to improve in 2018, despite uncertain global trade developments. Vibrant trade activity has positioned Viet Nam as one of the most open economies in the world, with its trade to GDP ratio reaching nearly 200% for the year.

Strong exports also helped Vietnam to sustain a current account surplus for an eighth consecutive year. Viet Nam’s capital account surplus also remains sizeable owing to sustained high FDI inflows. Robust external positions eased foreign exchange pressures, and helped the SBV build up international reserves, which increased from the equivalent of 2.1 months of import cover at end-2015 to about 2.8 months at end-2018.

According to the WB, Viet Nam’s fiscal stance has improved, with the overall fiscal deficit estimated to have narrowed to 4% of GDP in 2018 from 4.3% in 2017 and 4.9%in 2016. Total revenues are estimated to have remained at 23.6% of GDP in 2018—about the shares reported in 2016 and 2017—supported by a cyclical recovery in major tax revenues tied to strong consumption and income growth. Over the same period, total expenditures have declined to an estimated 27.6 percent of GDP in 2018 from 28.5% in 2016 and 27.8% in 2017, to a large extent reflecting lower capital expenditures and rationalization of other discretionary spending items. These measures, while effective in the short term, could hamper needed investments for infrastructure and human capital development. The Government’s commitment to strengthen budgetary discipline, therefore, needs to be balanced with reforms that create fiscal space to maintain critical investments in infrastructure and spending on essential public services.

Outlook

The international bank said that growth is projected to moderate to 6.6 %in 2019, driven by credit tightening, slower private consumption and weaker external demand. Inflationary pressures are projected to remain moderate, due to subdued global demand conditions and moderate global energy and food prices. Over medium term, growth is projected to stay around 6.5%, as the impact of current cyclical uptick dissipates. Poverty is expected to decline further, as labor market conditions remain favorable.

Risks and Challenges

Despite improved short-term prospects, there are significant downside risks. Domestically, a slowdown in the restructuring of SOEs and banking sector could adversely impact the macro-financial situation, undermine growth prospects, and create public sector liabilities. 

A continued slowdown of public investment could undermine long-term development objectives, and further fiscal consolidation should focus on containing recurrent spending while stabilizing revenue performance. 

Viet Nam’s economy also remains susceptible to further volatile developments in the global economy, given its high trade openness and relatively limited fiscal and monetary policy buffers. Weaker external demand and heightened global financial volatility call for a continued focus on sound macroeconomic management to safeguard against possible shocks. Growth is also spatially uneven, which may see regional disparities continue to widen./.