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Vietnam Today

ADB: Economy resilient against unexpected shocks

Released at: 09:45, 27/09/2017

ADB: Economy resilient against unexpected shocks

Photo: Quang Huy

Bank's Asian Development Outlook Update 2017 notes solid performance in Vietnam's economy despite certain setbacks.

by Quang Huy

Vietnam’s economy continues to perform well despite several setbacks, the Asian Development Bank (ADB) said in a new flagship report released on September 26.

As a result of an 8 per cent contraction in mining and oil output in the first half of the year, the Asian Development Outlook Update (ADOU) 2017 forecasts a downward revision in Vietnam’s economic growth to 6.3 per cent in 2017 and 6.5 per cent in 2018.

“Despite the fall in mining and oil output, Vietnam’s economy continues to perform well, driven by its twin engines of export-orientated manufacturing and rising domestic consumption,” said Mr. Eric Sidgwick, ADB Country Director for Vietnam. “Manufacturing expanded by 10.5 per cent in the first half of the year as new foreign-invested factories ramped up production, while the services sector continued to pick up steam as a result of rising retail trade, growing bank lending, and a 30 per cent jump in tourism arrivals.”

Vietnam’s economic growth is expected to rise in the second half of the year, buoyed by further increases in foreign direct investment and exports, domestic credit growth, a further recovery in agriculture from the 2016 drought, and accelerating disbursements of capital expenditure on national infrastructure programs.

The report stressed that while Vietnam’s economy is performing reasonably well against a challenging back-drop, several issues will need to be addressed to ensure growth remains sustainable.

Recent efforts to raise already strong bank lending growth by lowering interest rates to historical lows have the potential to increase financial sector risks, particularly given the large stock of past unresolved bad debts, according to ADB. To ensure these risks are well managed it will be vital to strengthen regulations and supervision on loan quality and to continue the introduction of more stringent, Basel II, regulatory standards over the next 12-18 months.

Further, while recent progress in trimming the budget deficit is commendable, it has also led to a drop in capital spending which if not rebalanced could erode Vietnam’s long-term growth performance. For Vietnam’s fiscal consolidation to be “growth-friendly”, authorities may usefully focus on adopting additional taxation measures while trimming non-core public expenditures such as administrative expenses, which have crowded-out infrastructure in recent years, according to ADB.

The report noted that while export-oriented manufacturing remains a bright spot for Vietnam’s economy, the trade surplus narrowed faster than expected, as surging imports outpaced export growth. In the first six months of the year, the trade surplus shrank to an estimated 1.5 per cent of GDP from 8.1 per cent in the first half of 2016.

“Though the country’s strong trade performance is expected to continue, it may be exposed to increased risks if a slowdown in major industrial economies occurs or from unexpectedly low growth in China, an increasingly important trading partner,” Mr. Sidgwick added.

According to the ADB, the main external risk to the outlook is the continued fragility of the economic recovery in advanced economies. A domestic risk is the possibility that the government may decide to stimulate growth by excessively loosening monetary and fiscal policies.

With public debt now reaching its legislated limit of 65 per cent of GDP, any weakening of budget discipline would derail fiscal consolidation and debt sustainability. Similarly, any continued loosening of monetary policy would compound the already serious problem of bad loans and non-performing assets in the banking system.

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