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WB: Vietnam bucks trend in GDP

Released at: 23:41, 05/10/2015

WB: Vietnam bucks trend in GDP

Growth remains solid compared to Vietnam's peers in East Asia Pacific, according to World Bank report.

by Quynh Nguyen

While growth in most countries in the East Asia Pacific (EAP) region has declined, Vietnam’s growth has gone against the trend, Mr. Sandeep Mahajan, World Bank Chief Economist in Vietnam, wrote in the East Asia Pacific Economic Update released on October 5.

The report showed that growth in the developing EAP eased over the first half of the year. This reflects the gradual slowdown in China, in line with earlier predictions, stemming from policy efforts to tighten non-bank credit, and from a buildup of excess industrial capacity and decelerating exports.

Growth also slowed in Malaysia and, to a lesser degree in Indonesia, picked up less than expected in Thailand, but was buoyant in Vietnam and the Philippines.

Growth continues

Economic activity in Vietnam continued to firm up in 2015, driven by strengthened domestic demand. GDP accelerated to 6.3 per cent during the first half; the fastest first half growth in the last five years.

The recovery was driven by strong activity in manufacturing and construction, which together contributed nearly half of all GDP growth. Despite a pick up in retail activity, overall services (which account for nearly 40 per cent of GDP) only rose modestly, at 5.9 per cent in the first half.

On the demand side, stronger growth was supported by investment (spurred by strong FDI inflows) and improved private consumption. However, the contribution of net exports turned negative as sluggish external demand weighed on export growth, while strengthened domestic activity continued to fuel import growth.

Shortcomings exist

The report also showed that total public and publicly-guaranteed debt increased to an estimated 59.6 per cent in 2014 (up from 54.5 per cent in 2013). While public debt levels are still within the bounds of sustainability, debt servicing costs are beginning to cut into fiscal space and risk crowding out more productive spending. 

Progress on structural reforms has been mixed, especially with regard to State-owned enterprise (SOE) and banking sector reforms. “An acceleration of these reforms is deemed necessary by both policy makers and private analysts to carry growth closer to the 7 per cent mark and meet Vietnam’s longer-term aspirations to become a modern, industrialized nation,” the report stated.

Outlook and challenges

The medium-term outlook for Vietnam is positive on balance but subject to significant downside risks. Growth is expected to be over 6 per cent in 2015, underpinned by further recovery in domestic demand, in turn reflecting more robust private consumption and investment growth.

Despite the expansionary monetary policy stance, inflation will remain low due to subdued global conditions and low global energy and food prices. The fiscal deficit is expected to start adjusting through consolidation efforts to avoid further increases in public debt.

Meanwhile, the trade balance is projected to turn into a deficit in 2015 due to softer export growth and sustained strong import growth stoked by stronger domestic economic activity. However, robust remittances will keep the current account in surplus, albeit at a much lower level than last year.

Mr. Sandeep Mahajan, World Bank Chief Economist in Vietnam

Do you think Vietnam will reach its target of equitizing 432 SOEs this year?

Divestment in SOEs is a difficult reform. The government has specific targets on the number of equitized enterprises. But in my opinion, Vietnam should not look too seriously at the number and speed of equitization. To December 31 this year it targets equitizing 432 enterprises but I think the quality of equitization is very important. The equitization process is only part of the reform of SOEs. Therefore, the State will need to have other supporting reforms for SOEs, such as improved openness and transparency of information and strengthening their governance. Without these, SOE reform will be incomplete.

All businesses need to have a level playing field. SOEs should not receive greater incentives than foreign enterprises. Creating a level playing field will help Vietnam attract more foreign investment. It should also equitize more strongly, as an SOE equitizing only 1-2 per cent of State capital will not attract private enterprises.

What is your view on the State Bank of Vietnam’s decision to cut interest rates on USD deposits?

I think it is a decision that is consistent with the central bank’s general trend of loosening monetary policy in recent years, creating more flexibility for it to effectively implement its policies.

The TPP is reaching the final stage. What benefits will Vietnam gain from it?

The TPP will be a huge event for Vietnam as it is the less-developed country in the TPP but all countries will benefit. TPP members account for 40 per cent of global GDP. When Vietnam joins it means it is one of 12 countries contributing 40 per cent to global GDP. Vietnam will therefore have a larger market and its GDP may increase by 8-10 per cent by 2020. However, the specific positive impacts are hard to determine because we still don’t have details on the TPP at this time and it will depend on many other factors. But one thing for sure is there will be many foreign corporations moving into Vietnam. Direct investment flows from abroad are a great opportunity for Vietnam in joining the TPP.

What are the most important matters for Vietnam’s economy in the time to come?

Vietnam needs to create a level playing field for domestic enterprises and foreign enterprises. It also needs to revise its land distribution policy, capital allocation, institutional reform, and the ownership of private property, to attract more foreign investment.

  • TAGS
  • GDP
  • Growth
  • World Bank

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