The outlook for Vietnam’s economy remains sound, aided by its strong fundamentals, diversified trade structure and the authorities’ commitment to macroeconomic stability and private sector-led growth, according to the IMF.
|Consumers shop at a supermarket in HCM City. IMF forecast inflation to pick up slightly in 2019 due to price increases.
“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 per cent, with the momentum continuing in the first quarter of 2019.
The expansion was broad-based, fueled by healthy growth in incomes and consumption of the growing and urbanising middle class, and by a strong harvest, a surging manufacturing sector, and inflows from growing tourism, remittances and direct investment,” the IMF said in a statement released this week after completing the 2019 Article IV Mission to Vietnam.
However, the fund expected a soft landing of growth to 6.5 per cent in 2019 and over the medium term for Vietnam, reflecting weak external conditions. Inflation is expected to pick up slightly in 2019 due to price increases but should remain below the Government’s 4 per cent target.
“The budget deficit of the general government has been lowered significantly during 2016-18 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 sounder footing.
Public and publicly guaranteed debt fell to 55.5 per cent of GDP at end-2018, from 60 per cent of GDP at 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 fund said.
According to the IMF, the emergence of a corporate bond market and other capital markets in the country is welcome, as are authorities’ plans to strengthen infrastructure.
Capital markets will help cut the cost of capital in Vietnam and accelerate the shift to retail banking. The State Bank of Vietnam intends to gradually move from administrative allocation of credit to market-based means and banks will adopt Basel II capital standards by January 2020. This will require strengthening State-owned commercial banks, including arm’s length governance and capital buffers.
“Plans to modernise 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 IMF suggested.
According to the IMF, the country's strong economy provides an opportunity for 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 facilitated. Greater information sharing and transparency throughout the government and the public and foreign investors will help Vietnam reach full emerging market status.
The IMF also urged improvements in public procurement; strengthening the system of income and asset declarations for public officials; and preparation for peer review of anti-money laundering/combating the financing of terrorism implementation. VNS