The World Bank (WB) has upgraded its forecast of Vietnam’s gross domestic product (GDP) growth in 2015 to 6% from 5.6% projected earlier.
At a press conference in Hanoi yesterday for the East Asia and Pacific Economic Update report, the WB predicted Vietnam’s economy would expand 6.2% in 2016. Meanwhile, inflation would stand at only 4.5% this year and 5% next year.
WB East Asia and Pacific regional vice president Axel van Trotsenburg attributed the positive forecast for Vietnam to the global oil price plunge. Strong exports and stable incoming remittances also help Vietnam maintain an external surplus.
However, the WB’s new estimation is still lower than Vietnam’s 6.5% target for this year. Despite the long traditional Lunar New Year holiday, or Tet, the nation obtained GDP growth of 6.2% in the first quarter, a record high in many years.
The WB said in the report that after some turbulence in mid-2014, Vietnam’s economic performance rebounded and year-end growth exceeded expectations.
There have been positive signs for Vietnam’s fast economic recovery in Vietnam. GDP picked up to 7% in the fourth quarter of 2014, contributing to 6% growth for the year, the highest since 2011.
The pickup in economic activity was propped up by the manufacturing and agricultural sectors. The services sector grew 6%, slightly higher than in 2013.
Strong export growth, sustained flows of foreign direct investment (FDI) and private remittances and soft imports helped strengthen the external balance, allowing foreign reserves to rise and cover three months of import in 2014, up from 2.4 months in December 2013.
These positive developments contributed to improved sovereign risk ratings and allowed Vietnam to succeed in a US$1 billion bond issue at good coupons on international markets.
However, rising public debt is becoming a major concern for the Government.
The main driver is the budget deficit, financed mostly domestically. Total outstanding public and publicly-guaranteed debt stood at 61% of GDP by end-2014, with domestic debt up from 23% of GDP in 2010 to 32% in 2014. Contingent liabilities in the banking and State-owned enterprise (SOE) sectors are piling pressure on public debt sustainability.
The fiscal deficit rose from 1.1% of GDP in 2011 to an average of 5.9% in 2012-2014, reflecting a countercyclical fiscal stance. The fiscal stimulus has been driven by both a decline in revenue collection and an increase in recurrent spending.
Despite a rise in momentum, SOE reforms are lagging behind targets. A total of 148 SOEs equitized last year doubled the number in 2013 but still falls behind the target of 200 equitized SOEs in 2014.
Vietnam is seen performing below its potential due to slow-moving structural reforms and global uncertainty. Moreover, important questions remain as to how Vietnam would rein in increasing public debt, demonstrate greater credibility in implementing the Government’s ambitious reform agenda (especially in the areas of banking and SOEs) and ensure a more conducive environment for domestic enterprises.
Besides, weak global prices of rice and other agricultural products may adversely affect rural household income and consumption, and widen the urban-rural gap. Domestic private investment is still weighed down by the subdued business confidence.
On the external front, global growth remains sluggish and uncertain, thus denting Vietnam’s exports and FDI flows into the country.
On the upside, emerging trade agreements provide opportunities for Vietnamese enterprises to reach out to much bigger and richer markets. Domestic reforms, including medium-term fiscal consolidation, further improvements in the business climate and more credible and visible SOE and banking sector reforms will send important signals to domestic and international investors and lay the groundwork for stronger future growth.
Source: The Saigon Times