World Bank: VN medium term outlook positive

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Goods are loaded for export at a port in central Quảng Ngãi Province’s Dung Quất Economic Zone. Việt Nam faces strong global headwinds ahead, although its economic outlook is positive in the medium term. — VNA/VNS Photo Thanh Long.

After accelerating strongly last year, Việt Nam’s economic activity moderated this year, with gross domestic product (GDP) expanding by 5.5 per cent during the first half of 2016 compared to 6.3 per cent growth in the same period last year.

A World Bank report released yesterday attributes the slower growth to the impact of a severe drought on agricultural production and slower industrial growth.

World Bank economists expect Việt Nam’s GDP growth of 6 per cent this year, lower than the Government’s target of 6.7 per cent.

“Achieving sustained high growth will depend on Việt Nam’s ability to continue and deepen structural reforms to boost productivity,” Fock said.

According to the report, price pressures remain contained despite a slight pick-up in inflation over recent months. However, credit growth is elevated, expanding at more than 18 per cent since the beginning of the year.

Monetary policy continues to balance growth and stability objectives. To address rising concerns about adverse impacts of rapid credit growth on lending quality, the State Bank of Việt Nam adopted tighter prudential regulations which are expected to mitigate potential asset-liability mismatches and moderate credit growth.

Accumulated fiscal imbalances remain a cause of concern, with the fiscal deficit estimated to have widened to about 6.5 per cent of GDP in 2015.

As a result, the country’s total outstanding public debt was estimated at 62.2 per cent of GDP, inching quickly toward the ceiling of 65 per cent of GDP. Fiscal outturns in the first months of 2016 suggest that budget pressures persist.

“The Government has made commitments to ensure public debt sustainability and rebuild fiscal buffers,” said Sebastian Eckardt, lead economist for the World Bank in Việt Nam. “It is important that this commitment is now followed through with concrete actions to balance the budget over the medium term.”

“Efforts to rein fiscal imbalances will have to be balanced with reforms to create fiscal space to maintain investments in critical infrastructure and public services.

Global headwinds

The report says Việt Nam is facing stronger global headwinds ahead, as strong trade linkages expose its economy to weakening external demand, especially in the United States and EU – its main export markets.

As a net importer of oil products, low commodity prices will strengthen Việt Nam’s external position, but at the same time exacerbate existing fiscal pressures due to declining oil revenues.

While balance of payment risks are contained by resilient foreign direct investment, relatively limited exposure to volatile capital flows and recent steps by the authorities to enhance exchange rate flexibility, hightened financial volatility poses some risk against the backdrop of the country’s weakening current account and low external reserve coverage.

In addition, the anticipated policy rate liftoff in the United States is expected to cause sovereign spreads to rise in the international capital market. This could be a concern for Việt Nam, given its large gross public financing needs, which are expected to be partially met by international bond issuances.

The report also looks at Việt Nam’s rapid aging pace that challenges its economy. While today there are only around 6.5 million people in the country who are 65 years or older, this number is expected to almost triple to 18.4 million by 2040.

“The speed of aging in Việt Nam is among the fastest globally to date and Việt Nam is undergoing this demographic transition at a lower income level than most currently old countries,” said Philip O’Keefe, lead economist for the World Bank.

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“Population aging will have wide ranging implications. It will affect labour markets and pose new challenges for policymakers, employers and the population at large,” he said.