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Vietnam’s Macroeconomic Stability Continues to Improve, Critical Risks Remain

December 2, 2013

New WB Report says reenergizing medium-term growth will require renewed attention to a number of structural reforms, with focus on state owned banks and enterprises.

Hanoi, December 2, 2013 – A new World Bank report projects GDP growth in Vietnam to rise modestly to 5.5% by 2015, with macroeconomic stability largely restored. The Taking Stock, launched today, also says that the medium-term macroeconomic outlook remains favorable on balance.

“Vietnam has done well in ensuring macroeconomic stability over the past year, which has been underpinned by moderating inflation and strengthening external accounts,” says Victoria Kwakwa, the World Bank’s Country Director for Vietnam. “Focus should now be made on the slow moving structural reforms to reposition Vietnam on a higher growth trajectory.”

The Taking Stock, a bi-annual assessment of Vietnam’s economy, identifies several critical risks to macro-economic stability, including: (i) low foreign exchange reserves; (ii) fragile private sector demand, (iii) possibility of departure from fiscal and monetary discipline; (iv) slow progress on structural reforms; and (v) loss of confidence in a fragile banking sector.

“With rising pressures on the budget, the government is faced with some crucial policy choices, as it seeks to balance the twin objectives of faster growth and macroeconomic stability,” notes Sandeep Mahajan, the World Bank’s Lead Economist for Vietnam.

The Taking Stock further notes that progress on SOE restructuring has been slower than expected, and more work is needed to ensure that the targets chosen for SOE reforms are feasible; proper account is taken of the complexity of the issues and specificity of individual SOEs; and, oversight and coordination mechanisms are strengthened. Non-performing loans (and the uncertainty around their true measure) in the banking sector remain a major concern, and due attention is needed to issues of bankruptcy, insolvency, and creditor rights which will facilitate corporate debt restructuring.

The Report also looks at 3 special topics, namely: 1) Trade facilitation, competitiveness and growth in Vietnam, 2) Corruption and economic growth in Vietnam, and 3) Poverty and inequality in Vietnam.

With regards to trade facilitation, competitiveness and growth in Vietnam, the report notes that while exports have remained strong in recent years despite a difficult external environment, they remain dominated by low value products. The report suggests an enhanced emphasis on greater value added, which requires the strengthening of transport infrastructure and logistics, regulatory procedures for trade, and supply chain organization.

Corruption in Vietnam has long been recognized as a serious problem, which likely undermines the Vietnam’s long-term growth. According to recent survey results, in a majority of instances bribes were initiated not by government officials but rather by firms, often to their own detriment. There are policies, however, that focus on administrative reforms and transparency and simultaneously reduce the bureaucratic problems that hinder firms and the opportunities for corruption that such hindrances create. These would be worth considering for Vietnam.

Based on preliminary analysis that draws on the latest survey data, the report finds the welfare of most Vietnamese improved substantially over 2010-12, even while growth was more modest than previously. This generated a drop in the poverty rate, and likely a decrease in inequality. Ethnic minority welfare has improved greatly over time. However, poverty still remains concentrated among these groups – because they started out much poorer and have lagged behind the spectacular progress made in the country overall. The report suggests that the observed pathways out of poverty for the ethnic minorities are similar to those of the majority group. The process would involve moving to cash crop production, intensifying agricultural production, moving to agricultural diversification and/or trading and services, and investing in education for children.

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