Vietnam’s medium-term outlook remains positive: WB

Vietnam’s medium-term outlook remains positive, albeit subject to downside risks both domestic and external. An acceleration of structural reform to support a more productivity-led growth model would help Vietnam sustain its long-term development. Rising antitrade sentiment and associated risks of protectionist measures in major economies pose significant risks to Vietnam’s highly open economy.

Economic activity in Vietnam moderated in 2016. GDP is estimated to have expanded by 6.2 percent in 2016, below the 6.8 percent in 2015. The slowdown was driven by weakness in the agriculture and mining sectors while manufacturing output and services growth strengthened. The agroforestry-fisheries sector expanded by a mere 1.36 percent, the lowest growth rate since 2011, reflecting unfavorable weather conditions in the first half of the year. 

The industry and construction sector expanded by 7.6 percent, below last year’s 9.6 percent, driven primarily by a 4 percent contraction in the mining sector. By contrast, growth of the services sector accelerated to 7 percent from 6.3 percent last year due to buoyant private consumption and strong tourism receipts.

On the demand side, stronger growth was supported by investment (spurred by strong FDI inflows) and improved private consumption. Healthy labor market developments point to an aggregate improvement in welfare and continued decline in poverty.

Nearly 1 million people moved from agriculture, finding jobs mostly in industry and construction, which saw a 7.6 percent yoy growth, and to a limited extent in the service sectors. Observed growth in nonagricultural jobs is expected to compensate or was a coping mechanism for the stagnation of incomes in agriculture due to El Niño drought.

However, localized increases in poverty are projected in communities (especially ethnic minorities) who are both more dependent on agriculture and less integrated into the rest of the economy, and those affected by the environmental pollution in the central coastal provinces of Vietnam.

Resilient growth was accompanied by moderate inflation and a strengthening external position. After falling to record lows in 2015, inflation has picked up mainly due to administrative price hikes for health and education services but core inflation remains subdued and headline inflation has stayed below the official target of 5 percent.

Despite the unfavorable external economic environment, Vietnam’s exports (in nominal terms) increased 9 percent in 2016, outperforming most competitors in the region. This, combined with a slowdown in import growth, led to a trade surplus in turn widening the current account surplus from 0.5 percent of GDP in 2015 to an estimated 3 percent in 2016.

Foreign direct investment (FDI) remains an important driver of Vietnam’s trade and more generally economic performance. FDI inflows peaked in 2016 at a record level of almost US$16 billion (7.7 percent of GDP). The exchange rate has been relatively stable throughout the year, though the Vietnamese dong started to depreciate in late 2016. The State Bank of Vietnam has gradually rebuilt foreign reserves, albeit they remained at a relatively low 2.8 months of imports at the end of 2016.

In the context of a strengthening U.S. dollar and sharper depreciation of currencies of major Vietnam trading partners, concerns of real exchange rate appreciation of the dong and its possible negative impacts on Vietnam’s export competitiveness remain. While policy rates have remained unchanged, credit growth remains elevated. Credit growth reached about 19 percent (yoy) in December 2016.

This rapid expansion of credit –more than twice the growth rate of nominal GDP - provides some cause for concern, particularly since Vietnam’s credit-to-GDP ratio – about 120 percent in December 2016 - is already high and the overhang of past non-performing loans has not been fully resolved. Sizable and persistent fiscal deficits have emerged in recent years. The fiscal deficit averaged 5.5 percent of GDP during 2011- 16, compared to 2.2 percent of GDP during 2006-10.

Preliminary data show that fiscal pressure remained in 2016, where the fiscal deficit was estimated at 6.5 percent of GDP. Persistently high fiscal deficit is the main reason for accumulating public debt which was estimated to reach the legally mandated ceiling of 65 percent of GDP at the end of 2016.

Vietnam’s medium-term outlook remains favorable. GDP growth is projected to improve gradually during 2017-2019, driven by robust domestic demand and export -oriented manufacturing. Inflation pressures overall are expected to remain moderate thanks to subdued commodity and energy prices globally. On the fiscal front, some fiscal consolidation is expected, as well as acceleration of divestment, though at a gradual pace that would contain the further rise of public debt.

Vietnam’s medium-term outlook remains positive, but pronounced downside risks remain. Domestically, delayed implementation of structural and fiscal reforms could intensify macroeconomic vulnerabilities and lower potential growth. Externally, intensifying uncertainties of the global economy could dim Vietnam’s growth outlook through trade and investment channels. Dealing with vulnerability to shocks – which in recent years are mainly climate and environmental disasters - continues to be a challenge for improving household welfare, particularly in rural areas.