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Vietnam’s economy still resilient to external headwinds: IMF
By Pham Nhat
Wednesday,  Apr 24, 2019,15:42 (GMT+7)

Vietnam’s economy still resilient to external headwinds: IMF

By Pham Nhat

Deputy Prime Minister Vuong Dinh Hue (R) shakes hands with Alex Mourmouras, division chief of the IMF’s Asia and Pacific department, on April 12. The Vietnamese economy remains resilient in the face of external headwinds – PHOTO: VNA

HCMC – The Vietnamese economy is still resilient in the face of external headwinds, supported by robust domestic demand from a growing, urbanizing middle class and by rising inflows from tourism, remittances and direct investment, according to the International Monetary Fund (IMF).

Country surveillance is an ongoing process that culminates in regular comprehensive consultations with individual member countries, with discussions in between as needed. The consultations are known as “Article IV consultations” because they are required by Article IV of the IMF’s old1/Articles04 of Agreement.

An IMF team led by Alex Mourmouras visited Hanoi and HCMC from April 3 to 19 to conduct discussions on the 2019 Article IV consultation with Vietnam. Mourmouras is the division chief of the IMF’s Asia and Pacific department, where he has served as the mission chief for Vietnam, Singapore and Malaysia.

The team exchanged views with senior officials of the State Bank of Vietnam, the Ministry of Finance, the Central Economic Commission and other government agencies. It also met with representatives from the private sector, think tanks, academia and other stakeholders.

Mourmouras offered his insight on the visit: “The trade tensions and financial volatility affecting emerging economies in 2018 were also felt in Vietnam’s highly open economy, including through a stock market correction. Nevertheless, the economy remained resilient, and growth reached a 10-year high of 7.1%, with momentum continuing in the first quarter of 2019.”

The expansion was broad-based, fueled by healthy growth in the incomes and consumption of the growing and urbanizing middle class; a strong harvest; the surging manufacturing sector; and inflows from growing tourism, remittances and direct investment. Inflation averaged 3.5% in 2018.

The outlook for Vietnam’s economy remains sound, aided by its strong fundamentals, diversified trade structure and authorities’ commitment to macroeconomic stability and private sector-led growth.

However, a soft landing for growth is expected, reaching 6.5% in 2019 and over the medium term, reflecting weak external conditions. Inflation is expected to pick up slightly in 2019 on the back of administered price increases but should remain below the authorities’ 4% target.

The budget deficit of the central Government was lowered significantly during the 2016-2018 period relative to the pre-2016 period. The lower deficit together with strict limits on new government guarantees and robust economic growth are helping to place Vietnam’s public finances on a better footing.

Public and publicly guaranteed debt fell to 55.5% of gross domestic product (GDP) in end-2018, from 60% of the GDP in end-2016. The authorities are continuing fiscal consolidation, but the quality of fiscal adjustment should improve to create more fiscal space, narrow infrastructure and social spending gaps and meet the coming challenge of rapid population aging.

The emergence of a corporate bond market and other capital markets in Vietnam is welcome, as are the authorities’ plans to strengthen the infrastructure. Capital markets will help reduce the cost of capital in Vietnam and accelerate the shift to retail banking.

The central bank intends to gradually move from the administrative allocation of credit to market-based means, and banks will adopt Basel II capital standards by January 2020. This will require the strengthening of State-owned commercial banks, including arm’s length governance and higher capital buffers.

Plans to modernize the monetary policy framework, including greater exchange rate flexibility to make the currency a better absorber of external shocks, are welcome. Gradual reserve accumulation should continue. To safeguard monetary and financial stability, the system of macroprudential regulations should be strengthened.

The strong economy provides an opportunity for more ambitious structural reforms to level the playing field for the domestic private sector, tackle economic policy distortions and capacity constraints and increase investment.

Administrative and licensing procedures should be reduced and the domestic private sector’s access to land and credit should be further improved. Greater information sharing and transparency throughout the Government and among public and foreign investors will help Vietnam reach full emerging market status. Ongoing efforts to address corruption are necessary.

The mission will prepare a staff report and present it to the IMF’s Executive Board for discussion in June this year.

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