Vietnam’s 2019 inflation forecast at 3.5 per cent: ADB

The announcement by the US Federal Reserve to no longer raise its policy rate in 2019 is likely to relieve pressure on the VND and inflation.

The ADB noted in the Asian Development Outlook 2019 that the announcement by the US Federal Reserve to no longer raise its policy rate in 2019 is likely to relieve pressure on the VND and inflation, as will lower international oil prices.

Meanwhile, upward adjustments to administered fees for public education, health care, and electricity could add to inflationary pressures, as may a higher minimum wage.

The current account surplus is expected to narrow to 2.5 per cent of GDP this year and 2.0 per cent in 2020 as exports decelerate under softening global demand while imports are predicted at a slower pace due to robust domestic consumption and investment.

Remittances may also suffer from slower global growth. If trade tensions between the United States and China drag on, Vietnam could be set to benefit from a trend in trade and production shifting from China to its regional neighbors. This could add as much as 2.0 per cent of GDP over the medium to long term, mostly beyond the forecast horizon.

The ADB expects the resolution of banks’ non-performing loans (NPLs) to continue in 2019 and onto 2020. NPLs, including those warehoused at the Vietnam Assets Management Company and other problem loans not yet classified as non-performing, will be reduced to below 5 per cent of banks’ outstanding loan portfolios in 2019 and to 3 per cent in 2020.

This should aid in making the banking sector more stable and efficient, as should the impending implementation of Basel II standards and its easing of restrictions on foreign ownership of banks, the ADB predicts.

Strong growth remains

Meanwhile, Vietnam’s economic growth is forecast to remain strong at 6.8 per cent in 2019 before slowing a little to 6.7 per cent in 2020, despite slowdown in the global economy and world trade.

The report notes that ongoing reforms to improve the business environment would encourage private investment, as should efforts to forge stronger ties with partners around the world through various trade deals, notably the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA).

According to Eric Sidgwick, ADB Country Director for Vietnam, the country’s economic growth will continue on the back of export-oriented manufacturing, inward FDI, and sustained domestic demand.

Motive force to the growth is forecast to be retained thanks to ongoing reforms to improve local business environment and to facilitate further private investment.

Sidgwick also highlighted greater market access that Vietnamese exports will enjoy through new trade pacts, notably the CPTPP and the EVFTA.

However, the ADB points out policy challenges to integrating private firms into global value chains (GVCs).

According to the ADB, Vietnam is a signatory to 12 free trade agreements that help to leverage its integration in GVCs. But GVC participation has largely been driven by foreign-owned firms while domestic private firms are predominantly operating on a small and medium scale.

It cited the uneven quality of products and services offered by domestic small and medium - sized enterprises (SMEs) as the main constraint to their integration into GVCs.

This could pose many barriers as international markets are increasingly tightening their technical, quarantine, environmental, and health standards. Local SMEs have little access to new technologies that could help them overcome these hindrances.

To address the underlining causes of uneven product quality, policy should encourage and support the adoption of new technology and eventually domestic innovation, the ADB suggested.

Developing the necessary skills requires comprehensive and integrated solutions that bring together governments, schools, and the private sector to provide technical and vocational training in conformity with demand. Without better access to finance and skills, SMEs will continue to lag behind in their integration into GVCs, the ADB noted.