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Thursday,  Jul 27,2017,11:53 (GMT+7)

WB advises Vietnam to base growth on market momentum

Tu Hoang
Friday,  Jul 14,2017,14:26 (GMT+7)
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WB advises Vietnam to base growth on market momentum

Tu Hoang

Sebastian Eckardt (L), lead economist and acting country director for the WB in Vietnam, speaks at a meeting announcing the report on Thursday - PHOTO: TU HOANG

HANOI – Vietnam should ensure the sustainable gross domestic product (GDP) growth based on market momentum, according to a World Bank (WB) report on Vietnam’s economic situation in the first half of this year.

Vietnam’s medium-term outlook remains positive, with real GDP growth projected to accelerate slightly to 6.3% this year, as a result of buoyant domestic demand, rebounding agricultural production, and strong export-oriented manufacturing, aided by a recovery in external demand.

Inflationary pressures will remain moderate, reflecting stable core inflation, lower food and energy prices and diminishing administrative price hikes.

The current account is expected to remain in surplus, albeit at a lower level as stronger import growth resumes.

The services sector accounting for about 42% of GDP accelerated in the six-month period, driven by buoyant retail trade growth, as a result of sustained growth of domestic consumption.

Industrial production remains robust despite a significant reduction of output in the oil sector, and growth has gradually recovered in agriculture, though the recovery is still fragile.

Over the medium term, growth is forecast to stabilize at around 6.4% in 2018 and 2019, accompanied by broad macroeconomic stability.

Although many experts advise Vietnam to continue stimulating demand and expanding fiscal and monetary policies, but the country should be cautious to do so, said Sebastian Eckardt, lead economist and acting country director for the global lender in Vietnam.

He warned expansionary fiscal policy would cause disadvantages in the long run, due to decreasing labor productivity growth and economic effectiveness, adding that Vietnam should achieve the sustained economic growth based on market momentum.

Vietnam’s economy is strong, as a result of strong momentum of the country’s fundamental growth drivers – domestic demand and export-oriented manufacturing. These are good conditions to address critical structural bottlenecks to medium term growth while solidifying macroeconomic stability and rebuilding policy buffers, he stressed.

Monetary policy continues to balance growth and stability objectives, with low real interest rates and rapid credit growth of about 20% year-on-year.

However, according to the WB, the sustained acceleration of credit may raise concerns over asset quality, particularly given the past unsolved bad debts.

The report notes that after a large surplus last year, Vietnam’s external current account balance started to decline in early 2017, due to an expected recovery in import growth.

The nominal exchange rate has been relatively stable, but the real exchange rate continues to appreciate. Real exchange rate appreciation is driven by a large external surplus of the foreign direct investment (FDI) sector, but is a concern for Vietnam’s domestic private enterprises, which continue to face significant competitiveness challenges.

The report argues that elevated global uncertainty calls for macroeconomic prudence. In view of sustained growth momentum, solidifying macroeconomic stability and rebuilding policy buffers should remain the foremost priority.

Lowering the fiscal deficit would help to contain rising risks to fiscal sustainability and provide fiscal space to accommodate potential future shocks. Containing risks from rapid credit growth requires continued improvements in supervision and prudential regulation.

The longer term challenge for Vietnam is to sustain rapid growth and poverty reduction. Considerable gains are possible from structural reforms that alleviate constraints on productivity growth, including through State-owned enterprise reforms, further improvements in the business environment and improved factor markets for land and capital.

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