World Bank reports stronger growth momentum in Vietnam

The World Bank's new report projects that the Vietnamese economy will grow at 6.7 per cent in 2017

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According to the bi-annual economic report, stronger domestic demand, robust export-oriented manufacturing, and a gradual recovery of the agricultural sector are driving the Vietnamese economy, which expanded by 6.4 per cent during the first nine months of the year compared to the same period last year.

The manufacturing and services sectors grew by 12.8 and 7.3 per cent, respectively, during the same period.

According to the report, the pace of growth is expected to increase to 6.7 per cent this year. Over the medium term growth is projected to stabilise at around 6.5 per cent and inflation is projected to remain low.

“The growth momentum picked up across major economies and global trade recovered in 2017,” said Ousmane Dione, World Bank country director for Vietnam. “With incomes rising and poverty falling, the Vietnamese economy had another good year of strong growth and broad macroeconomic stability.”

Low inflation and rising real wages sustained buoyant domestic demand and private consumption, while the stronger global economy helped Vietnam’s export-oriented manufacturing and agricultural sectors.

Job growth continued, with 1.6 million new jobs added in the manufacturing sector over the past three years, and 700,000 additional jobs in the construction, retail, and hospitality sectors, leading to higher aggregate labour productivity. Labour demand also contributed to rapid wage growth, with wages increasing by 15 per cent cumulatively between 2014 and 2016.

Despite progress in resolving non-performing loans, risks remain, including the lack of robust capital buffers in some banks, especially amidst rapid credit growth.

Fiscal tightening is underway, highlights the report, and has led to a leaner budget deficit and containment of public debt accumulation. However, the decline in public investment falling to 16 per cent of total spending in the first nine months of 2017 compared with an average of 25 per cent in recent years may not be sustainable over time, as Vietnam needs significant investments in infrastructure to support future growth.

A slowdown in structural reforms could also impact the on-going recovery, especially given the weaker growth in investment. Enhancing macroeconomic resilience and structural reforms can lift Vietnam's growth potential over the medium term.

“Structural reform remains a central priority in view of tepid productivity growth,” said the World Bank’s lead economỉst for Vietnam, Sebastian Eckardt. “Building on progress already made, Vietnam can further lift productivity growth through investments in needed infrastructure and skills as well as deeper reforms of the business environment, state-owned enterprise and banking sector."

The Taking Stock’s special section focuses on improving efficiency and equity of public spending with public debt close to the statutory limit of 65 per cent of the GDP. The Vietnamese government faces tight budget constraints for several years to come. This special section looks at fundamental expenditure reforms in key public services to identify opportunities for constraining expenditure growth through improvements in expenditure productivity.