VietNamNet Bridge – Weighing domestic and global trends, the World Bank has predicted that Vietnam’s economy is likely to grow at a moderate rate of around 5.3% in 2013 and edge up 5.4% in 2014.

The World Bank lowers Vietnam's growth forecast for 2013 to 5.3%.

In its economic outlook update released on July 12, the bank said Vietnam’s macroeconomic conditions continue to improve as its economy enters the third year of relative stability.

Slow growth

Vietnam’s moderate inflation, stable exchange rates, increased reserves, and limited risks are attempting to end the recurring episodes of macroeconomic instability that began in 2007.

Inflation has fallen from a peak of 23% in August 2011 to 6.7% in June 2013, and is predicted to amount to approximately 8.2% by the year’s end.

The bank was careful to warn that macroeconomic stability, in the absence of broad structural reforms, has not been sufficient to rebound from the lingering spell of slow economic growth.

Policymakers have devoted almost the entirety of their efforts to stabilising the economy, implicitly hoping the success of that endeavour would automatically jumpstart growth. The growth slump defies their hope.

Growth has failed to breach the 6% benchmark for the sixth consecutive year and 2013’s economic growth estimates are the second slowest since the early 1990s. Efforts to stimulate the economy through tax breaks and accommodative monetary policy have suffered diminishing returns that do not justify widening fiscal deficits and new contingent liabilities.

The World Bank warned that without accelerating structural reforms, especially in the banking and State-owned business sectors, Vietnam faces the risk of a prolonged period of slow growth.

FDI attraction

The WB confirmed that while foreign direct investment remains high, its percentage share of the economy is progressively declining.

Disbursed FDI has hovered between US$10.5-11.5 billion over the past five years, indicating foreign investors’ continued commitment to Vietnam, undeterred by problems of macroeconomic instability or slowdown in structural reforms.

Disbursed FDI as a share of GDP, however, has steadily fallen from a peak of 12% of GDP in 2008 to 7% in 2012.

Despite a falling FDI/GDP ratio, and continued macroeconomic problems, Vietnam is still considered one of East Asia’s most attractive destinations for foreign investors, largely on account of its low wages, demographical potential, ideal location, and political stability.

According to the 2012/13 ASEAN Business Outlook Survey conducted by AmCham Singapore and the US Chamber of Commerce, Vietnam comfortably remains the most popular location for Southeast Asian expansion ahead of second-placed Thailand, Singapore, and the Philippines.

Similarly, the Singapore Business Federation’s 2012/13 National Business Survey showed that Vietnam is its members’ second most favoured overseas investment destination, after Myanmar.  Traditional powerhouses like China and India have seen their popularity ebb.

Indonesia and Thailand are close on Vietnam’s heels in the race for federation members’ investment.

Impressive exports

Vietnam’s exports show no sign of weakening, demonstrating their resilience to domestic problems. Exports grew at a rate of 16% during the first four months of 2013, consolidating the 34.2% and 18.2% rates in 2011 and 2012 respectively.

While commodity exports are declining due to falling prices, Vietnam’s traditional labour-intensive manufacturing exports—such as garments, footwear, and furniture—continue to sustain rapid growth.

Of particular note is the boom enjoyed by hi-tech and high value product exports. Cell phones and parts, computers, electronics and accessories, and automobile parts emerged as 2012’s largest and fastest growing export commodities.

Vietnam’s cell phone and accessories exports were worth US$12.7 billion in 2012, compared to rice’s US$3.7 billion, seafood’s US$6.1 billion, and footwear’s US$7.3 billion.

Cell phone and accessories exports are expected to exceed US$18 billion this year, overtaking garments as the country’s most lucrative export items.

The WB study revealed the quiet but significant ten-year transformation of Vietnam’s export orientations. Crude oil and agriculture including rice, which accounted for 44% of Vietnam’s total export value in 2002, saw their share plummet to 19% by 2012.

The share of low-value manufacturing exports (garments and footwear) also fell from 27% to 20% during the same period. High-value export items, negligible in 2002, now account for more than a fifth of Vietnam’s exports.

Challenges

WB Lead Economist Deepak K. Mishra reiterated slow structural reform could undermine investors’ trust and hamper Vietnam’s growth prospects.

Slower growth may intensify demand for loosening monetary and fiscal policies further, a response that risks stoking inflationary pressure and reversing the recent gains in macroeconomic stability.

The banking system’s tenuous health constrains the effectiveness of monetary easing. The private sector has yet to see the effects of recent interest rate cuts on lending and capital flow. Small and medium-sized enterprises continue to complain about their limited access to bank loans.

Credit activity is subdued. Banks’ reluctance to lend in the face of increased risks has combined with dwindling credit demand arising from weaker business prospects.

Under such circumstances, the impact of further monetary easing on growth is likely to be limited, but could compound credit quality concerns and foster macroeconomic instability.

Vietnam’s economy remains susceptible to global economic fluctuations. Its declining revenue performance and rising public debt leaves little room for significant counter-cyclical policies.

Source: VOV