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IMF projects Vietnam’s economic growth to drop to 6.5%
By Thanh Thom
Wednesday,  Jul 17, 2019,18:38 (GMT+7)

IMF projects Vietnam’s economic growth to drop to 6.5%

By Thanh Thom

File photo of a container vessel docking at Cai Mep International Terminal in Ba Ria-Vung Tau Province - PHOTO: LE ANH

HCMC – Vietnam’s economic growth is expected to fall to 6.5% this year as its credit growth slows and major trading partner growth decelerates, said the International Monetary Fund in a report on the 2019 Article IV Consultation with Vietnam.

Under Article IV of the IMF’s Articles05 of Agreement, the IMF holds bilateral discussions with members, usually every year. In April, a team visited the country, collected economic and financial information and discussed with officials the country’s economic developments and policies.

According to the report, trade tensions and financial volatility affecting emerging economies in 2018 were also felt in Vietnam, including through a stock market correction.

Nevertheless, the economy has remained resilient to date and growth reached a 10-year high of 7.1% last year. The broad-based expansion was fueled by healthy growth in incomes and consumption among the growing and urbanizing middle class, a strong harvest and the surging manufacturing sector.

The strong economic momentum is expected to continue in 2019, aided by competitive labor costs and other strong fundamentals, including a diversified trade structure, and recently signed free trade agreements, which are spurring reforms.

However, a growth rate of 6.5% for 2019 over the medium term reflects weak external conditions. Inflation is also projected to pick up slightly at 3.6% this year on the back of administered price increases but should remain below authorities’ 4% target.

The slowdown in growth is consistent with the execution of ongoing reforms, including equitization and reductions in the economic role of the State, and constraints from infrastructure, other structural gaps and fiscal consolidation.

The United States and China are Vietnam’s most important trade and investment partners. Quantitative models suggest a small positive overall impact on Vietnam from trade tensions, according to the IMF.

The reason is that gains in U.S. market share from trade diversion, given that Vietnam’s exports to the United States are similar to its exports to China, 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.

The IMF stated that Vietnam’s demonstrated ability to move up the manufacturing value chain makes it well placed to benefit from investment redirection.

However, several risks have arisen. External risks from slower partner country growth and trade policy uncertainty remain elevated, dominating the balance of risk.

Also, banking sector fragilities continue to pose risks, though the ongoing bank recapitalization is a mitigating factor. Bottlenecks related to the anticorruption campaign could delay investment.

On the up side, Vietnam’s numerous free trade agreements could usher in productivity gains. Growth could also bring some surprises if trade diversion and investment relocation effects continue.

Vietnamese authorities broadly shared the IMF staff’s assessment. According to the report, they reiterated their commitment to macrofinancial stability and continue to view their 2019 growth target of 6.6%-6.8% as achievable. Inflation could increase due to higher food and administered prices but should remain below target.

Capital Economics said in its recent Emerging Asia Economics Focus report that Vietnam, with its low labor costs, political stability and close integration with the supply chains of southern China, has seen exports to the United States surge since the trade war began.

As a result, the London-based think tank recently raised Vietnam’s growth forecast for this year from 6% to 6.5% to reflect the improved prospects for the export sector.

Fitch Solutions, an arm of U.S.-based credit rating agency Fitch Ratings, pointed out in an earlier report that it expects Vietnam’s economic growth to slow to 6.5% this year in line with a wider trend of slowing global growth but added that the country would remain one of the fastest growing economies in Southeast Asia.

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