Issues remain, but confidence is high that Vietnam's economy is in for a positive 2016.
Amid a somewhat shaky global outlook, Mr. Sandeep Mahajan, Lead Economist of the World Bank in Vietnam, told VET that Vietnam has the strongest growth prospects in the region. “Vietnam’s economy has weathered the recent turbulence in the external environment quite well, reflecting resilient domestic demand and robust performance of its export-oriented manufacturing sector,” he explained.
Another year of high growth appears to be on the cards in 2016, he predicted. After a slowdown in 2012 and 2013 growth recovered to 6 per cent in 2014 and further accelerated to an estimated 6.7 per cent in 2015. “Vietnam will likely post 6.9 per cent GDP growth in 2016; higher than the 6.7 per cent in 2015,” said Ms. Eugenia Fabon Victorino, Economist for ASEAN & Pacific at ANZ.
The National Financial Supervisory Commission (NFSC) issued two economic scenarios for Vietnam’s economic growth in 2016 in a report released in June last year. In the first, the economy will grow stably and investment efficiency will improve, with GDP coming in at 6.7 per cent. Agriculture, forestry and fisheries, industry and construction, and services will see growth of 3.31, 8.05, and 6.75 per cent, respectively. The three sectors will contribute 17.55, 41.67, and 40.78 per cent, respectively, to GDP growth. Export turnover will be $189 billion, for a 13.2 per cent increase, while import turnover will be $205 billion, rising 17.61 per cent.
Investment capital is predicted to account for 31 per cent of GDP under the scenario. The CPI will rise 5.1 per cent. Final consumption expenditure will grow 6.37 per cent and private consumption 6.42 per cent, with the latter accounting for 92.45 per cent of total consumption. Credit growth is to rise 13 per cent and the potential growth of the economy, with all factors being at their best, is 6.95 per cent.
In the second scenario, the economy is bolstered by economic forces such as supporting policies and free trade agreements, with GDP forecast to increase 7.1 per cent. The three sectors mentioned above will grow 3.43, 8.32, and 7.36 per cent, respectively, and account for 17.25, 41.91, and 40.84 per cent of GDP growth, respectively.
Total export turnover will be $193 billion, an increase of 15.64 per cent, while total import turnover is estimated at $207 billion, 19.05 per cent higher. Investment capital is to account for 32 per cent of GDP and the CPI will rise 6 per cent.
Final consumption expenditure will grow 6.75 per cent and private consumption 6.87 per cent, of which private consumption will account for 93.03 per cent of the total. Credit growth and potential growth in the economy will be 15 and 7.33 per cent, respectively.
In the World Bank’s “An Update on Vietnam’s Recent Economic Developments - Key Findings” report released in December, GDP in 2016 was forecast at 6.6 per cent, which is quite similar to the NFSC’s first scenario. The ANZ’s prediction of 6.9 per cent growth is more in line with the NFSC’s second economic scenario, but Ms. Victorino said it is still below the country’s growth potential and there is little evidence of overheating.
Mr. Mahajan sees capacity for Vietnam recording high growth in 2016 on two sides: demand and production. “On the demand side, low inflation and strengthening consumer confidence have supported an uptick in private consumption while investment has been lifted by strong foreign direct investment (FDI), rising government expenditures marking the completion of the five-year planning cycle, and a recovery in credit growth,” he said. “At over 30 per cent, the investment rate in Vietnam is relatively healthy and should support continued strong growth in 2016.”
On the production side, the manufacturing and construction sectors are strong performers, with each growing at 11 per cent in 2015, Mr. Mahajan went on. “While foreign-invested manufacturing continues to drive growth in manufacturing activity, it is encouraging that the performance of domestic firms has also picked up recently,” he added. “Continued gradual recovery in the property market, higher investment in infrastructure, and the easing of regulations on foreign investment in real estate have sustained strong performance in construction and also bode well for the sector in 2016.”
The services sector has been growing at around 6 per cent for some time now, he went on, recently aided by buoyant retail sales that helped offset a slowdown in the tourism sector. He hopes that the agriculture sector can more strongly support overall growth in 2016, though it looked a little shaky in 2015 in the face of falling global commodity prices and unfavorable weather conditions related to El Nino.
Vietnam is also strongly positioned to benefit from a number of free trade agreements, starting with the ASEAN Economic Community, which became a functioning trading bloc at the beginning of the year.
The NFSC report pointed out that due to improvements in global economic growth, a stable domestic economy, and the signing of the TPP, Vietnam will attract more FDI. “Private investment will also improve thanks to recent new policies from the government to bolster business confidence,” the report stated. “Measures to restructure the banking sector and resolve bad debts have made the banking system healthier and enhanced credit to the private sector.”
Credit growth will likely continue to pick up over the next 12 months on the back of sustained improvement in banks’ risk appetites, Ms. Victorino said. “The likely pick up in credit should remain within a sustainable range of around 16 per cent,” she added.
Obstacles to overcome
Four main challenges were identified in the NFSC report. Firstly, unpredictable factors in the global economy. Secondly, private investment and private consumption will improve in 2016 but the level of improvement may not be as good as last year due rising interest rates and inflation.
Thirdly, the trade deficit will increase due to net exports being expected to fall compared to 2015. “We expect another minor trade deficit in 2016 driven by record disbursed FDI over the last few months,” Ms. Victorino said. “Despite slipping into a $3.2 billion trade deficit in 2015, it is still around 1.95 per cent of total exports for the year.”
The fourth problem the NSFC report noted was that small and medium-sized domestic enterprises will continue to face a range of difficulties. .
Fiscal risks are also growing on account of sustained high deficits and rising public debt levels, Mr Mahajan said. “Delays in implementing medium-term fiscal consolidation could, therefore, undermine public debt sustainability and investor confidence,” he added. “Fiscal risks are further aggravated by contingent liabilities associated with SOE debt and State-owned banks.”
“With credit growth accelerating, risks in the banking sector (including possible overheating) are also intensifying and - if not managed prudently - could result in renewed instability with adverse impacts on growth. The external environment remains broadly favorable for Vietnam, but emerging external risks call for a continued focus on sound macro-economic management to safeguard against possible shocks. Fiscal consolidation, continued exchange rate flexibility, and the further bolstering of foreign exchange reserves could all help reduce vulnerabilities. And acceleration of reforms in the banking and SOE sectors will help boost investor confidence and thereby further mitigate downside risks.”
Mr. Sandeep Mahajan, Lead Economist at the World Bank in Vietnam
“Although we expect Vietnam to continue to outperform its regional peers in 2016 we recognize that it is still in the process of transforming its production possibility frontier. Thus, to achieve full growth potential, structural changes will need to be implemented in the medium term. It is therefore expected that some new regulatory reforms will be introduced, which would require investors do further due diligence.”
Ms. Eugenia Fabon Victorino, Economist for ASEAN & Pacific at ANZ