Supportive policies expected to stimulate economy further

What is the assessment of Vietnam’s growth rate of 3.72 per cent in the first half of 2023, considering that the added value of the industrial sector only reached 0.44 per cent on-year, which is relatively low?

Paulo Medas, mission chief for Vietnam at the International Monetary Fund

The very challenging global environment has made the process of exiting the recent pandemic more complex. Vietnam has been hit by both external and domestic headwinds starting from the last quarter of 2022.

On the external front, the sharp and sticky rise in inflation in advanced economies last year prompted central banks to raise interest rates aggressively and fast. At the same time, the global economy is decelerating and that is impacting Asian exporters.

There has been a sharp reduction in the demand from some of Vietnam’s key export markets, including the US and the EU. The fall in exports, which amounted to 12 per cent in the first half of the year, has hit Vietnam’s exporting firms hard and industrial production has suffered.

On the domestic front, problems in the real estate market and turbulence in financial markets, especially the corporate bond market, are weighing on the economy.

What are your projections for Vietnam’s growth and inflation in 2023 and 2024?

We expect a recovery in the second half of the year, as exports start rebounding and supportive policy measures, especially fiscal policy, are expected to stimulate the economy. We project economic activity for the entire year to remain relatively subdued, with economic growth reaching around 4.7 per cent for the year.

This forecast is uncertain and subject to large risks, especially given the challenging global environment.

Inflation is expected to remain contained below the State Bank of Vietnam’s 4.5 per cent ceiling in 2023 and to stay below this level in 2024. We expect the growth momentum to gradually pick up in 2024, reaching close to 6 per cent, and then returning to its medium-term potential in 2025 as structural reforms are implemented further.

What are the current challenges facing Vietnam’s economic growth?

The economy is facing significant headwinds from domestic and external shocks. Until the effects of these shocks dissipate, growth will remain subdued. Vietnam is a very open economy and, as such, its growth prospects depend significantly on the speed of the recovery in exports.

Given the relatively weak outlook for the world economy, there is a risk that economic growth in Vietnam could be lower than what we expect in 2023 and 2024. A faster rebound in exports, on the other hand, could spur a stronger economic rebound.

Another concern is that the problems in the real estate market will continue to hamper short-term growth. However, the sector should recover over time and, given the large needs for affordable housing, it could again become an important driver of growth. The sooner the problems affecting the sector are addressed, the better for growth prospects.

Another important factor for growth is ensuring that domestic capital markets (including the corporate bond market) and banks are healthy enough to provide more credit and capital to the private sector to facilitate higher growth in the medium term.

Looking ahead, achieving Vietnam’s ambitious development and climate objectives will require accelerating reforms to improve the business environment, critical infrastructure, and invest in education. Scaling-up social and infrastructure spending, including to meet Vietnam’s climate objectives, will require increasing tax revenues.

The authorities’ new plans on energy and climate are important steps forward, but concrete actions now need to be implemented, including strengthening the legal and regulatory framework for private investment in renewable energy. With the right policy measures, Vietnam has the potential to achieve the strong, diverse, and green growth that will propel it to achieve its goal of being a modern, developed economy.

What macroeconomic management policies should Vietnam employ in the coming months?

The overarching policy recommendation is to improve the economy’s resilience to shocks and to create an institutional framework that unleashes Vietnam’s full growth potential. In the short term, we do not see much space for further monetary loosening, and we instead recommend relying on fiscal policy to boost economic activity, especially through public investment in critical infrastructure and spending on programmes targeted to the most vulnerable.

The government has been prudent and public debt has been declining in recent years. Therefore, there is a fiscal space that can be used to support the economy at the current juncture if growth disappoints further.

Several structural reforms could also help a stronger and more sustainable recovery. Namely, more actions are needed to restructure the real estate sector and to promote a sound corporate bond market. Vietnam could address legal bottlenecks that are impeding the completion of projects, strengthen the regulation and governance of corporate bonds, and improve the debt enforcement and insolvency framework.

Given the current challenging global and domestic economic environment, it will be important to accelerate reforms to protect financial stability, including enhancing the ability to prevent and manage crises and step-up efforts to improve bank regulation and supervision. In this regard, the ongoing revision of the Law on Credit Institutions is an opportunity to develop more effective bank resolution and emergency liquidity frameworks.

Strategies to best avail of supportive policies In order to support enterprises against the impacts of the pandemic, the Vietnamese government and ministries have issued many supportive policies and tax incentives for enterprises and employees on declaration and payment of corporate income tax (CIT), VAT, and land rent, as well as rules on a 30-per-cent tax reduction for small- and medium-sized enterprises with revenues of less than VND200 million ($8,700).

Markets forecast to get boost from supportive information Shares are forecast to advance this week thanks to the stable macro-economy and positive development of the global socio-economic situation, the area of 1,285 points becomes important for Viet Nam's stock market in September.

Experts call for extension of tax support Enterprises are hoping that supportive policies related to taxes and fees that emerged in 2022 will be maintained to mitigate burdens and help push production and business.

Special consumption tax needs supportive roadmap Experts and businesses have said that amid numerous woes and economic crises, the plan to raise the special consumption tax (SCT) is not suitable at this time.