Strong export demand will continue to drive growth in Vietnam during the forecast period of 2018 and 2019, but risks are starting to build as rapid credit growth is fueling vulnerabilities in the financial sector while there are also mounting concerns about the fiscal position, Capital Economics wrote in its latest emerging Asia economic outlook.

Vietnam’s GDP grew 6.81 per cent in 2017; the highest since 2007. A key driver of this growth was exports, which in nominal terms grew by more than 20 per cent.

Exports are likely to remain strong over the next couple of years, given buoyant global demand and a combination of low labor costs, an improving business environment, and rising costs in China that are pushing low-end manufacturing to cheaper locations elsewhere in Asia.

The decision by US President Donald Trump to withdraw from the TPP is a blow to Vietnam, which was expected to be among the main beneficiaries of the deal. Although the remaining eleven members are pushing ahead with plans to ratify the deal, without the US the gains to Vietnam will be much smaller.

In the near term at least, another driver of the economy is likely to be loose monetary policy. Interest rates were cut in July and with inflationary pressures subdued, policy is likely to remain supportive for some time.

While low interest rates should support growth in the short term, they could be storing up problems later in the forecast period. Private sector credit is currently growing by around 20 per cent year-on-year; roughly twice the pace of nominal GDP growth.

“Economic history tells us that a credit boom on the scale that Vietnam is experiencing is not sustainable over the long term. Another sharp rise in non-performing loans looks inevitable,” the report stated.

To make matters worse, the country’s banks have still not fully recovered from the last banking crisis in 2011 and are poorly placed to cope with another hit to their balance sheets.

“Incorporating the risks of another banking crisis into our forecasts is made difficult by the fact that crises do not tend to develop according to fixed timetables,” the report noted. “Previous emerging market crises have been preceded by credit booms that have lasted from as little as two years to as much as nine years.”

The other main risk facing the economy concerns the government’s poor fiscal position, which has deteriorated markedly in recent years. Although economists at the London-based economic research consultancy don’t think the country faces an imminent fiscal crisis, government spending growth will need to slow or taxes will have to be raised to put the finances on a more sustainable footing.

After beating almost all GDP forecasts last year, a gradual slowdown in Vietnam’s economic growth over the next couple of years is expected, according to Capital Economics. “But with risks building, there is a possibility of a much harder landing for the economy,” it believes.

VN Economic Times