Vietnam’s gross domestic product (GDP
) is expected to remain stable in 2016 with growth of 6.7% followed by a modest slowing of growth to 6.5% in 2017, the Asian Development Bank (ADB
) said in a report released in Hanoi on March 30.
Vietnam’s economic growth is being driven by foreign direct investment, strengthening domestic consumption and demand, and pro-growth policy settings, says the report.
New FDI commitments came in relatively flat at $22.8 billion in 2015, which suggests that disbursements of FDI could level out this year and decline in 2017.
Rising incomes and modest (though quickening) inflation
are expected to buoy private consumption. Sharply rising sales of automobiles – which increased 55% in 2015 – illustrate the recovery in consumer confidence.
The Manila-based bank forecasts inflation to average 3% this year and 4% in 2017 as the government is expected to raise administered prices for education and healthcare and boost public sector minimum wages.
Import prices will rise this year with dong depreciation, and higher global food and fuel prices in 2017 will add to inflation next year, it adds.
The Manila-based bank says that prospects for growth in private investment are enhanced by a proliferation of free trade agreements concluded over the past 18 months.
Lending interest rates might come under upward pressure in the forecast period as inflation gradually turns up and rising demand for credit collides with tighter bank liquidity, says the report.
Plans for fiscal consolidation are at risk from shortfalls in revenue. Over the past five years, reductions in corporate income tax rates, the removal of tariff s, and tax exemptions for favored firms have eroded the tax base.
“The government could use funds from the equitization of state-owned enterprises and issue more short-term securities to support the budget in the near term, but achieving a more sustainable fiscal position is likely to require tax reform to reverse falls in the ratio of tax to GDP,” the bank suggests.
ADB Country Director for Vietnam Eric Sidgwick pointed out that Vietnam faced significant short and long-term challenges.
“In the short-term, the government must navigate the impacts of a slowing global economy, while at the same time rebuilding the macroeconomic buffers that would allow Vietnam to be resilient to any future economic shocks,” he said.
Over the long-term, greater efforts are also needed to address Vietnam’s low productivity growth, and to support domestic firm’s ability to integrate into global value chains, he added.