VINACHEM

Vietnam’s gross domestic product (GDP) growth is forecast to accelerate from 6.8% last year to 7.1% this year before easing back to 6.8% next year, said the Asian Development Bank (ADB) in its flagship economic publication “Asian Development Outlook” which came out on April 12.

The report provides a comprehensive analysis of macroeconomic issues in developing Asia, including growth projections for 45 economies. This year’s theme, “How Technology Affects Jobs,” explores the role of technological progress and structural transformation in creating quality jobs.

Eric Sidgwick, ADB country director for Vietnam, said Vietnam will become one of the region’s fastest growing economies, backed by effective macroeconomic governance. The high growth rate will be buoyed by vigorous manufacturing and export expansion, rising domestic consumption, strong investment and strengthening agriculture.

Robust private consumption is expected to be supported by rising incomes and stable inflation. Prospects for private investment are bright, the ADB said, adding business sentiment remains buoyant as indicated in December 2017 by upbeat business survey results and in February 2018 by the Nikkei purchasing managers’ index.

Private investment is projected to benefit from Vietnam having risen by 14 places in the World Bank’s “Doing Business” rankings for 2018. The number of startups hit a record high of 126,859 in 2017, up by 15.2% from 2016. The Vietnamese Government aims for an additional 135,000 new enterprises this year.

By sector, the ADB forecast that solid foreign direct investment (FDI) would enable industry to maintain strong growth momentum. Continued strengthening in the United States and the Euro area will further boost the manufacturing sector over the next two years.

The construction sector is projected to pick up in 2018 and 2019, benefiting from last year’s record FDI commitments and disbursements. Meanwhile, the services sector is seen sustaining growth in the two-year period, with tourist arrivals forecast to rise by 15-20% and bank lending to grow by 17-18% this year.

Agriculture is forecast to continue picking up over the next two years, growing broadly in line with the Government target of 2.8-3% this year.

The ADB said the country’s inflation is projected to edge up but remain broadly stable, averaging 3.7% this year and rising to 4% next year, as strong domestic demand and high bank lending are partly offset by stable domestic food and transport costs and smaller increases in administered prices for education, healthcare, electricity and water.

Eric Sidgwick said the Government’s efforts into the 2017 budget collections among various fields helped reduce public debt to 61.3% of GDP last year from the 2016 figure of 63.6%. Fiscal consolidation and low inflation will create favorable conditions for further macroeconomic stability.

Any significant rise in global oil prices would have a particularly major impact on inflation by lifting transport and energy prices, which have been depressed in recent years. For example, headline inflation averaged out at 2.8% in the first quarter of this year.

The current account surplus is projected to narrow to 2.5% of GDP this year and 2% in 2019. Merchandise exports are also forecast to rise by 15-20% in 2018 and 2019.

Remittances are likely to remain strong thanks to improving global prospects and a stable exchange rate. Rising exports will be partly offset by faster import growth driven by rising global oil prices, strengthening domestic consumption, and higher imports of intermediate inputs for export orientated manufacturing.

Strong FDI and portfolio inflows should bolster the capital account balance and further strengthen the balance of payments, according to the ADB.

The bank suggests that monetary policy needs to strike a balance between supporting economic growth and managing inflation. Credit growth is projected to remain high, as in 2017, aided by interest rate cuts late last year. Lending interest rates may rise if inflation edges toward 4%.

The Government has set a fiscal deficit target for 2018 at 3.7% of GDP, seeking to encourage capital investment to support growth while consolidating finances to sustain macroeconomic stability. The budget for 2018 emphasizes capital expenditure by increasing its share of total spending to 26% this year, up from a low of 21% in 2016.

The bank stresses that vulnerability in the financial sector to unresolved non-performing loans (NPL) and undercapitalized banks poses a domestic risk to the outlook, as does unexpectedly rapid credit growth.

However, according to the bank, a newly-passed National Assembly resolution and revisions to the Law on Credit Institutions should remove some legal impediments to effective NPL resolution and bank restructuring.

It also warns that any rise in trade protectionism, such as through the prospect of higher U.S. tariffs on steel and aluminum, would hit Vietnam hard. Significant reliance on South Korea for FDI and trade exposes Vietnam to possible risks from geopolitical tensions. Besides, heightened global financial volatility or disruption of capital flows would have significant spillover into the domestic market.

The ADB report also indicates that Vietnam has an abundance of efficient labor working for relatively low wages. This attracts large FDI inflows, especially for the labor-intensive export-oriented manufacturing sector. Since 2012, manufacturing has absorbed 400,000 workers per year on average.

However, a skills gap is emerging as an obstacle to FDI absorption and to business more generally. In the “Global Competitiveness Report 2017-2018,” the World Economic Forum cited an “inadequately educated workforce” as the second-biggest constraint on doing business in the Southeast Asian nation.

Similarly, a World Bank survey of employers found that filling vacancies for jobs that require higher skills was a major challenge for most firms, with 70-80% of managerial and technical applicants reported as being underqualified.

Therefore, the ADB suggests Vietnam prioritize three sets of initiatives toward strengthening its universities, and technical and vocational education and training system by expanding access, improving quality, and streamlining governance.

The bank emphasizes closing the country’s widening skills gap is key to remaining attractive to foreign investors and sustaining growth.

- SGT -