Vietnam’s economy rebounded strongly in 2017, with a positive short-term outlook aided by improved global prospects and strengthened domestic demand, according to the 2017 Annual Consultation Report on Vietnam released by the ASEAN+3 Macroeconomic Research Office (AMRO) on April 6. 

The report was prepared based on AMRO’s Annual Consultation visit to Vietnam in September and October last year and data available up to December 31.

Real GDP grew 6.8 per cent in 2017, up from 6.2 per cent in the previous year. The recent acceleration in growth momentum was driven by increased domestic consumption and investment and strong exports. 

Headline CPI inflation picked up to 3.5 per cent, which remained within the government’s target of 4 per cent. 

The short-term outlook is positive, with real GDP projected to grow at around 6.6 per cent in 2018 and inflation to remain subdued.

The external position has continued to improve, benefiting from strong export performance and increased foreign investment. 

A surge in information technology and communications (ITC) exports boosted overall exports, while foreign investment inflows have also increased. 

The Vietnam dong (VND) has been stable and foreign exchange reserves have increased significantly.

Credit growth has been buoyant and supportive of economic activity. Domestic credit grew at about 19.1 per cent as of November 2017, compared to the target of 18 per cent. 

A number of institutional changes have been initiated to speed up banking sector reform, including the endorsement of a pilot non-performing loan (NPL) resolution scheme (Resolution No. 42) and a restructuring plan for credit institutions for 2016-2020.

Fiscal developments in 2017 suggest continued improvements from consolidation efforts. Revenue collection exceeded the budget plan, aided by buoyant tax collection and strong land-based revenue. 

Budget expenditure, meanwhile, moderated as current spending normalized from a high base in 2016, while capital expenditure picked up. As a result, the overall fiscal deficit moderated from 5.6 per cent of GDP in 2016 to about 3.5 per cent in 2017, in line with the authorities’ target. 

Public debt moderated to 61.4 per cent of GDP in 2017 on the back of an improved fiscal position.

Downside risks stem from both adverse external shocks and domestic weaknesses. 

Policy surprises from advanced economies could lead to greater volatility in asset prices and capital outflows from emerging and frontier markets, including Vietnam. 

Imposition of protectionist measures in the US and other trading partners leading to weaker-than-expected global demand may adversely affect Vietnam. 

On the domestic front, faster credit growth may undermine the progress made in improving the still-fragile banking system. Medium to long-term challenges could arise from climate and demographic changes, and relatively inefficient State-owned enterprises.

The policy focus on financial soundness and fiscal sustainability should be strengthened. With credit growth exceeding 18 per cent for the last three years and the credit to GDP ratio rising to above 120 per cent of GDP - a relatively high level compared to regional peers - a further boost to domestic credit may lead to imprudent lending with adverse effects on financial soundness. 

Recent efforts to expedite NPL resolution and bank recapitalization should be pursued vigorously. Medium-term fiscal consolidation plans are commendable and should be supported by continued efforts to enhance revenue while giving priority to expenditure adjustments, which are growth promoting and efficiency enhancing. Policy adjustments to tackle medium- to long-term challenges should be well designed and implemented with concerted efforts.

AMRO was established to contribute to securing the economic and financial stability of the ASEAN+3 region, which includes the ten members of ASEAN and China, Hong Kong, Japan, and South Korea. 

As an international organization, AMRO fulfils its mandate by conducting macroeconomic surveillance, supporting the implementation of the regional financial arrangements and the Chiang Mai Initiative Multilateralization (CMIM), and providing technical assistance to members.

The Annual Consultation Report was prepared in accordance with AMRO’s macroeconomic surveillance function.

VN Economic Times