Downside Risks to Vietnam’s Economy Rise, IMF says

Diep Nguyen

14:36 17/07/2019

BizLIVE -

External risks from slower partner country growth and trade policy uncertainty remain elevated; they dominate the balance of risks. Banking sector fragilities continue to pose risks, although the bank recapitalization under way is a mitigating factor.

Downside Risks to Vietnam’s Economy Rise, IMF says

Photo: ShutterStock

Extensive market reforms since the dawn of the doi moi era in 1986, and strict commitment to macroeconomic stability more recently, have laid the ground work for rapid, inclusive growth that averaged 6.6 percent per annum during 2014–18 and reached a 10-year high of 7.1 percent in 2018. 
Reforms in recent years include fiscal consolidation, strengthening of financial buffers and the banking sector and privatization of state-owned enterprises (SOEs). Vietnam signed trade agreements, improved governance and made impressive progress in internet penetration and digitalization. 
Its achievements notwithstanding, however, Vietnam faces important challenges, including tackling residual aspects of dualism in its twin transition from plan to market and from farms to factories and services. 
Vietnam must upgrade its growth model to exploit rapid digital innovation that is reshaping supply chains. Vietnam also has a narrow 20-year window before rapid aging sets. The strong economy provides an opportunity for more ambitious reforms to modernize its economy and enhance its flexibility and resilience to shocks Resilient Growth. 
Rising trade tensions and volatility in emerging economies in 2018 were felt in Vietnam, including through a stock market correction. Nevertheless, the economy remained resilient with growth of about 7 percent continuing into 2019 Q1 (6.8 percent relative to 2018 Q1).
The broad-based expansion was fueled by growth in incomes and consumption and by strong trade, tourism and remittances. Manufacturing surged and direct investment inflows remained strong. The trade surplus widened in 2018 but export growth slowed down in 2019 Q1 reflecting slower smartphone exports. Headline inflation averaged 3.5 percent and core inflation 1.5 percent in 2018.
Inflation remained contained: it reached 2.9 percent in April relative to a year ago, below the 4 percent target. Core inflation remained steady at 1.9 percent.
Trade tensions. The United States and China are important trade and investment partners. Quantitative models suggest a small positive overall impact on Vietnam from trade tensions (- 0.3– 0.8 percent change in exports) because gains in US market share from trade diversion, given that Vietnam’s exports to the U.S. are similar to China’s, are largely offset by lower exports to China of intermediate and capital goods through the regional manufacturing supply chain. 
A potentially larger and more durable impact could come from shifts in investment. In recent years, international firms have been moving facilities to Vietnam in response to rising costs in China and the desire to diversify production locations. Trade policy uncertainty may remain elevated even if negotiations lead to a trade truce. 
Vietnam’s demonstrated ability to move up the manufacturing value chain makes it well placed to benefit from investment redirection.
Outlook. A soft landing of growth is expected in 2019 to 6.5 percent, the economy’s potential, as credit growth tightens and major trading partner growth decelerates. Headline inflation is projected at 3.6 percent, and core inflation at 2.1 percent. 
Over the medium term, growth is expected to slow down to a more sustainable pace of growth of 6.5 percent, the economy’s potential growth rate, consistent with the implementation of ongoing reforms, including privatization and reducing the economic role of the state, and constraints from infrastructure and other structural gaps and fiscal consolidation. Inflation is likely to remain close to target, four percent per annum.
Risks. Downside risks have risen. External risks from slower partner country growth and trade policy uncertainty remain elevated; they dominate the balance of risks. Banking sector fragilities continue to pose risks, although the bank recapitalization under way is a mitigating factor. Bottlenecks related to the anti-corruption campaign could delay investment. On the upside, Vietnam’s numerous free trade agreements (FTAs) could usher in productivity gains. Growth could also surprise on the upside if trade diversion and investment relocation effects continue.

DIEP NGUYEN

Tin liên quan

Cùng dòng sự kiện