As a result of an 8% contraction in mining and oil output in the first half of the year, the Asian Development Outlook Update (ADOU) 2017 forecasts a downward revision in Viet Nam’s economic growth to 6.3% in 2017, and 6.5% in 2018.
Viet Nam’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 Viet Nam’s economy is performing reasonably well against a challenging back-drop, several issues will need to be addressed to ensure growth remains sustainable.
Firstly, 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 Viet Nam’s long-term growth performance.
For Viet Nam’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 also noted that while export-oriented manufacturing remains a bright spot for Viet Nam’s economy, the trade surplus narrowed faster than expected, as surging imports outpaced export growth. In the first six 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,” said Sidgwick, ADB Country Director for Viet Nam.