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AMRO: Vietnam needs continued fiscal and structural reforms

Released at: 14:03, 12/09/2019

AMRO: Vietnam needs continued fiscal and structural reforms

Photo: Viet Tuan

2018 Annual Consultation Report on Vietnam released on September 12.

by Doanh Doanh

Vietnam’s economy is expected to grow at 6.6 per cent in 2019 after strong growth of 7.1 per cent in 2018, with inflation contained below the authorities’ target of 4 per cent, according to the 2018 Annual Consultation Report on Vietnam by the ASEAN+3 Macroeconomic Research Office (AMRO) that was released on September 12.

Vietnam’s GDP growth in 2019 is expected to be sustained by continued strong growth in manufacturing and services after robust growth in 2018 that exceeded the authorities’ target of 6.7 per cent. Manufacturing growth was driven by the electronics sector, while the services sector was propelled by the wholesale and retail industry and boosted by tourism. Management of administered prices helped dampen inflationary pressure.

Vietnam’s external position continued to strengthen, benefiting from robust export performance and higher foreign investment. Greater flexibility in exchange rate management also improved the economy’s resilience to external shocks, while allowing the State Bank of Vietnam (SBV) to build up its reserves buffer. Downside risks are mainly external, stemming from the ongoing US-China trade conflict and policy uncertainties in several advanced economies, which could lead to greater volatility in financial markets and capital outflows.

The fiscal deficit was kept at 3.5 per cent of GDP in 2018 and is expected to remain stable in 2019, in line with the government’s fiscal consolidation plan. The authorities’ continued efforts and reform initiatives, in line with the medium-term fiscal plan, are commendable. Continuing policy efforts to enhance revenue potential will be critical in the longer term, particularly to finance growing spending needs on development and social security in a sustainable way. Greater efforts are needed to improve spending efficiency while prioritizing expenditures to enhance long-term growth potential.

Credit growth has moderated, which is in line with the SBV’s lower credit growth target. The central bank’s continued supervision of lending to certain sectors in the economy, such as real estate and construction, is warranted to mitigate the risk of an asset bubble. Recent progress in resolving legacy non-performing loans (NPL) in several banks is commendable. Further efforts to speed up NPL resolution as well as bank recapitalization are strongly encouraged to improve the soundness of the banking system.

Continued structural reforms will help the economy address medium to long-term challenges. Enhanced financial transparency would be greatly beneficial in expediting the progress of State-owned enterprise equitization and the divestment of State assets. Improving tertiary education and vocational training are needed to upskill the workforce and improve productivity, which would help facilitate the country’s ascent along the path of economic development.

AMRO is an international organization established to contribute towards securing macroeconomic and financial stability in the ASEAN+3 region, which includes the ten members of ASEAN and China and Hong Kong (China), Japan, and South Korea. The Annual Consultation Report was prepared in fulfilment of AMRO’s mandate. AMRO is committed to monitoring, analyzing, and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.

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