Vietnam Solidifies Macroeconomic Stability, but Economic Growth Continues to Perform Below its Potential

July 8, 2014

Hanoi, July 8, 2014 – A World Bank report released today indicates that Vietnam’s macroeconomic stabilization performance has continued to improve. Growth remains moderate and continues to come in below its potential.

Vietnam’s macroeconomic stability continues, enabled by easing inflation, strengthening external accounts, and stabilizing the foreign exchange market. Real GDP is projected to grow at moderate rate of 5.4 percent in 2014, supported by continued foreign direct investment flows and strong manufacturing exports. But domestic demand in Vietnam remains weak on account of subdued private sector confidence overleveraged SOEs, high non-performing loans of commercial banks, and narrowing fiscal space.

Vietnam faces several challenges on competitiveness. Reenergizing medium-term growth will require renewed attention on a number of structural reforms – with emphasis on restructuring the country’s state owned enterprises and banking sector and removing barriers to domestic private investment.

“Projected growth of 5.4 % is higher than for many of the countries in the region and the world, however it is still below Vietnam’s potential,” says Victoria Kwakwa, the World Bank’s Country Director for Vietnam. “In the short run, the subdued economic growth is linked to soft domestic demand. But longer-term prospects will depend on whether Vietnam can quickly address structural problems that can enhance the economic efficiency and competitiveness of the country.”

White the near term outlook seems favorable; risks exist for Vietnam’s economic growth in the longer term. Slow progress in banking system and SOE reform could prolong sub-par growth and create self-reinforcing adverse feedback, possibly resulting in large contingent liabilities for the public sector, bringing public debt to unsustainable levels. Prolonged tension of territorial disputes in the region also weight on downside risk.

The Report has a special focus on inequality in Vietnam, as the issue has been a topic of public concern in Vietnam and around the world. Social movements linked to concerns about inequality have unfolded in the wake of the 2008 global financial crisis, and perceptions of rising inequality were among the drivers of the Arab Spring revolutions of 2011.

According to Taking Stock, concerns over inequality have arisen despite Vietnam’s rapid long-term growth with only modest increases in income inequality. Mean incomes of the bottom 40 percent of the income distribution grew at 9 percent annually over the 2 decades up to 2012, a tremendous example of shared prosperity. Results from a new perceptions survey reported in the Taking Stock show concern about inequality in Vietnam, especially among urban residents.

The concerns over inequality reflect the substantial differences in economic conditions by geography and ethnic group as well as the significant inequality of opportunity. “Opportunity” refers to children’s circumstances which affect their chances of success later in life. Children from poor households are far less likely to attend secondary school and have access to sanitation facilities and healthcare, and much more likely to be malnourished.

“Popular concern about inequality and demand for policy responses is likely to grow over time as more Vietnamese move to cities and are exposed to visible differences in welfare,” according to Gabriel Demombynes, one of the report’s authors. “There is already substantial demand for redistributive social policy to narrow inequalities in Vietnam; this demand is likely to persist and to rise as Vietnam continues to urbanize.”


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