“Despite the drop in mining and oil output, Vietnam’s economy continues to perform well, driven by its twin engines of export-orientated manufacturing and rising domestic consumption”, said ADB Country Director for Vietnam, Eric Sidgwick. ”Manufacturing expanded by 10.5% in the first half of the year as new foreign-invested factories ramped up production, while the services sector continued to pick up steam as a result of rising retail trade, growing bank lending and a 30% jump in tourism arrivals.”
Vietnam’s economic growth is expected to rise in the second half of the year, buoyed by further increases in foreign direct investment and exports, domestic credit growth, a further recovery in agriculture from the 2016 drought and accelerating disbursements of capital expenditure on national infrastructure programs.
The report stressed that while Vietnam’s economy is performing reasonably well against a challenging back-drop, several issues will need to be addressed to ensure growth remains sustainable.
Recent efforts to raise already strong bank lending growth by lowering interest rates to historical lows have the potential to increase financial sector risks, particularly given the large stock of past unresolved bad debts. To ensure these risks are well managed it will be vital to strengthen regulations and supervision on loan quality and to continue the introduction of more stringent, Basel II, regulatory standards over the next 12-18 months.
Further, while recent progress in trimming the budget deficit is commendable, it has also led to a drop in capital spending which if not rebalanced could erode Vietnam’s long-term growth performance. For Vietnam’s fiscal consolidation to be ‘growth-friendly’ the authorities may usefully focus on adopting additional taxation measures while trimming non-core public expenditures such as administrative expenses which have crowded-out infrastructure in recent years.
The report noted that while export-oriented manufacturing remains a bright spot for Vietnam’s economy, the trade surplus narrowed faster than expected, as surging imports outpaced export growth. In the first 6 months of the year, the trade surplus shrank to equal an estimated 1.5% of GDP from 8.1% in the first half of 2016.
“Though the country’s strong trade performance is expected to continue, it may be exposed to increased risks if a slowdown in major industrial economies occurs or from unexpectedly low growth in the People’s Republic of China, an increasingly important trading partner,” added Sidgwick.
