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WB: Medium-term outlook positive but risks remain

Released at: 14:40, 05/10/2016

WB: Medium-term outlook positive but risks remain

Photo: Viet Tuan

East Asia and Pacific Economic Update notes strong growth prospects but more reform needed.

by Doanh Doanh

Growth in developing East Asia and Pacific is expected to remain resilient over the next three years at 5.8 per cent in 2016 and 5.7 per cent in 2017-2018, according to the World Bank’s East Asia and Pacific Economic Update (October 2016 edition) released on October 5.

The report said the region still faces significant risks to growth and countries need to take measures to reduce financial and fiscal vulnerabilities.

Economic activity in Vietnam moderated somewhat in the first three quarters of 2016, due to the impact of a severe drought on agricultural production and slower industrial growth. But macro-economic stability has been maintained and inflationary pressures remain subdued.

After accelerating strongly in 2015, GDP growth slowed to 5.5 per cent during the first half of 2016 compared to 6.3 per cent in the first half of 2015. The deceleration is partly due to a severe drought and saltwater intrusion that caused agricultural output to contract by 0.2 per cent.

Industrial growth also moderated on the back of weak commodity prices and sluggish external demand. In contrast, growth picked up further in the construction sector, driven by buoyant credit growth and a recovery in the real estate sector.

The service sector also accelerated, driven by retail trade growth that benefited from resilient domestic consumption.

The impact of the drought on household livelihoods is likely to be greatest among the 2 million ethnic minority people living in the central highlands, for whom agriculture constitutes 80 per cent of household income.

Driven by rising foodstuff and administratively-managed prices (mainly education and healthcare services), headline CPI inflation inched up moderately to 2.6 per cent year-on year in August.

While Vietnam’s trade performance remains relatively strong, the report said, export growth slowed to 6.4 per cent year-on-year in the first eight months, still far above global trade growth but the lowest level in Vietnam since 2009. This is mainly due to a combination of declining oil exports and slower growth in manufacturing exports due to weaker external demand.

FDI has accelerated in recent months, reflecting positive investor sentiment about Vietnam’s deeper economic integration.

In the first eight months foreign investors committed $14.4 billion to Vietnam, an increase of about 8 per cent compared to the same period last year. The foreign-invested sector contributes about 18 per cent of Vietnam’s GDP, nearly a quarter of total investment, two-thirds of total exports, and millions of direct and indirect jobs.

According to the report the medium-term outlook is broadly positive but downside risks remain. GDP is projected to moderate to 6 per cent in 2016 accompanied by moderate inflation and a small current account surplus. The fiscal deficit is projected to remain high this year but then tighten over the medium term, reflecting the government’s fiscal consolidation plans.

The report concluded that a bolder implementation of structural, fiscal and banking sector reforms would help mitigate macro-economic vulnerabilities and sustain higher medium-term growth.

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