WB expert: It is not necessary to iment a loose fiscal policy

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Source: WB

Concerns about the quality of banking assets

At the press conference to announce the Review Report - Update on Vietnam's economic situation with the theme "Reaching new heights in the capital market" held on August 26, 2024, Mr. Sebastian Eckardt, Head of the Macroeconomics, Trade and Investment Department for the East Asia and Pacific region of the WB, said that in the first half of this year, Vietnam's economy benefited from the recovery in export demand. However, Vietnam's economic outlook still has risks due to negative impacts from both external and domestic sources.

"To maintain growth momentum from now until the end of the year and in the coming years, competent authorities need to continue institutional reform, promote public investment, and manage and monitor risks in the financial market," Mr. Sebastian Eckardt stated.

According to the WB report, Vietnam is a country with a large openness, its growth model is mainly based on exports, therefore, if major trading partners such as the United States, the EU and China have uncertain factors that cause economic growth to be lower than expected, it will affect Vietnam's exports, not to mention the factor of escalating geopolitical tensions.

Domestically, if the macroeconomic stability situation weakens, consumer confidence continues to be affected, the real estate market may recover longer than expected, climate change, increased natural disasters, shortages of energy supply, etc. are still factors affecting economic growth in the coming time.

WB experts affirm that Vietnam's economy is showing very positive growth potential.

Furthermore, credit growth has improved but is still below the State Bank of Vietnam’s 2024 target of 15% despite a very favorable interest rate environment, indicating that domestic investment demand remains weak. At the same time, bank asset quality remains a concern from 2023 as bad debt ratios and credit loss provisions increase. System-wide bad debt has increased sharply, from 1.9% in 2022 to 4.6% of total outstanding loans in 2023.

The WB also said that debt restructuring measures to respond to the pandemic, which have been extended and are expected to end in December 2024, could push the bad debt ratio even higher. The expected need for increased provisions, supplementing loan loss provisions, is putting additional pressure on banks’ profits, which are already squeezed by slowing net interest, fee and commission income.

The need for economic stimulus packages will gradually decrease

Ms. Dorsati Madani, a senior economist at the World Bank, recommended that in the banking and finance sector, it is necessary to continue to improve the capital adequacy ratio, strengthen the institutional framework, improve the effectiveness of supervision by strengthening legal protection for supervisory agencies, and ensure better policy and institutional infrastructure.

Vietnam also needs to continue to strengthen the legal environment for essential services such as information and communication technology, electricity, transportation, etc., because these are the areas that create future infrastructure to attract private investment - an extremely important point for economic growth. Along with that, it is necessary to continue to promote trade diversification, enhance regional integration and connectivity, seek and diversify export markets. Strengthen the private economic ecosystem in the global supply chain.

Based on the above issues, WB experts forecast that Vietnam's economy would grow by 6.1% in 2024 and 6.5% in 2025 and 2026, higher than the 5% in 2023.

At the press conference, discussing further on the issue of adjusting fiscal policy, Mr. Andrea Coppola, Chief Economist of the WB, emphasized that the Vietnamese Government has implemented a loose fiscal policy in the past to support businesses and people. However, up to now, Vietnam's economy is achieving a fairly positive growth rate, even forecast to reach 6.5% in 2025-2026, so the need to use economic support and stimulus packages will gradually decrease.

Therefore, this person said that the Vietnamese Government was considering bringing fiscal policies back to normal, that is, applying tax and fee policies as before the Covid-19 pandemic.

“In the short term, the current growth potential does not necessarily require a loose fiscal policy. Vietnam can implement a more conservative fiscal policy, which means returning to the pre-Covid-19 situation,” said Mr. Andrea Coppola.