This edition of ‘Taking Stock’ – a semi-annual publication from the World Bank – attempts to explain the recent macroeconomic changes in Vietnam and inform policy discussions in the country. The analysis covers recent macroeconomic developments and discusses upcoming challenges and the macroeconomic outlook. Developments in the global economy and in the East Asia and Pacificregion, in, are juxtaposed against Vietnam’s own economic setting.
Global and Regional Developments:
• Vietnam is vulnerable to the effects of the global economic slowdown. There is a need to prioritize the efficiency of public investment, the restructuring of State Owned Enterprises (SOEs), maintenance of financial sector stability, and other structural reforms even if this implies some moderation in short-term growth.
• Growth in developing East Asia has slowed but remains strong, offering trade and investment opportunities for Vietnam. There is a need to invest in regional partnerships and regional infrastructure to help offset effects from slowing demand in advanced economies.
Recent Economic Developments:
• Implementation of Resolution 11 is starting to show results, with month-on-month inflation abating.
• Tight monetary policy has helped to contain credit and money supply growth. However, more transparency is needed in communicating the Government’s overall strategy and policy choices to avoid market uncertainty.
• Economic growth will moderate but is expected to remain strong in 2011 at 5.8 percent. The Industry and Services sectors grew robustly, contributing the most to overall growth. The primary sector grew by 2.4 percent in the first nine months of 2011 despite periods of unfavorable weather. Growth in the construction sector has slowed down.
• High commodity and food prices have boosted Vietnam’s exports and imports.
• The current account deficit has narrowed to 3.8 percent of GDP, due to remittance flows.
• Total committed FDI fell by 22 percent in the first ten months of 2011 compared to the same period last year.
• Foreign investors have shifted from real estate to manufacturing.
• East Asian countries were the biggest foreign investors in Vietnam during the first ten months of 2011.
• There has been some fiscal consolidation thanks to improved revenue collection, but there has been little effort on the expenditure side, which remains high.
• Greater focus is needed to improve the efficiency of public investment through better resource allocation, stronger incentives for improved management of infrastructure services at local government level, and provisions for property rights.
• Vietnam’s debt position has been historically strong but has deteriorated since the onset of the global crisis in late 2008. Total external debt is estimated to have risen to 42 percent of GDP at the end of 2010. This constitutes a 10 percentage point increase since the end of 2007. Although external debt and debt service indicators remain below the applicable debt thresholds for debt sustainability, the situation can deteriorate rapidly as has happened for many developed and developing countries as a result of the global crisis.
• There are potential systemic risks in the financial sector due to: unusually high credit growth of the past years, high lending rates, and weak risk management capacity.
• Credible plans are underway to restructure and consolidate the banking sector. The Government is also making efforts to strengthen the supervisory and regulatory framework in the financial sector.
• There have been important stability gains through the implementation of Resolution 11, but those gains remain fragile.
• Fiscal consolidation and structural reforms, including the restructuring of SOEs and the financial sector should help Vietnam return to a more sustainable macroeconomic environment while laying the foundations for greater efficiency to drive medium term growth.