Vietnam’s Economy Remains Resilient to Rising Trade Tensions and Heightened Risks

Diep Nguyen

08:17 12/08/2019

BizLIVE - Sound fundamentals, the authorities’ commitment to macroeconomic stability and positive reform momentum are contributing to broad based, private sector-led and noninflationary growth. 

Vietnam’s Economy Remains Resilient to Rising Trade Tensions and Heightened Risks

Photo Courtesy: Reuters

Resilient growth. The economy remains resilient to date to rising trade tensions and heightened external risks, although the weaker external conditions are expected to lead to a soft landing of growth. 
Sound fundamentals, the authorities’ commitment to macroeconomic stability and positive reform momentum are contributing to broad based, private sector-led and noninflationary growth. Rural-urban migration and economic modernization continue, helping to raise wages and total factor productivity.
External Sector Assessment. The external position is substantially stronger than warranted by fundamentals and desirable policies. Removing distortions that inhibit investment and making the exchange rate more flexible within the band should help reduce the external imbalance. Over time, Vietnam’s need for additional international reserves will decline as its monetary framework is modernized and its exchange rate becomes more flexible. In the meantime, over the next several years, it should continue gradual reserve accumulation.
Fiscal sustainability. The countercyclical tightening of fiscal policy in recent years has enabled Vietnam to lower government and PPG debt in relation to GDP and create some fiscal space. The authorities remain committed to further consolidating their public finances over the medium term. 
They are working closely with the Fund to improve fiscal management and policy. Broadening revenue bases and raising the quality of spending and of public financial management are priorities, especially building high quality infrastructure and protecting social spending. They need to create more fiscal space to meet longer term challenges arising from aging and climate change.
Financial discipline and reform. Vietnam’s commitment to macroeconomic stability and reform extends to monetary and credit policies. Tighter limits on credit growth, the shift to retail banking, introduction of Basel II requirements and progress with bank recapitalization and the organic emergence of a capital market are all under way. 
These reforms are allowing Vietnam to strengthen its banks (long the system’s Achilles heel) and improve the quality of intermediation without sacrificing growth. The modernization of the monetary framework is also under way. The authorities should finalize their plans to recapitalize SOCBs. The use of Basel II as an incentive mechanism to liberalize the financial system is welcome. 
Liberalization should go hand in hand with the creation of a modern macro-prudential system to replace the administrative allocation of credit.
Structural reforms. The reform drive needs to be broadened, deepened and accelerated to tackle the remaining barriers to investment. Priority areas include reforms to reduce the concentration of land ownership in state hands; accelerate the creation of high-quality infrastructure; further reductions in regulatory and licensing requirements; and reforms to tertiary and vocational education to prepare the economy for the new digital era.

DIEP NGUYEN

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