Five Charts Explain Vietnam's Economic Outlook

IMF News, July 16, 2019

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Despite rising trade tensions and volatility in emerging economies throughout 2018, Vietnam’s economy saw broad-based growth and low inflation.
Government spending and debt remained in check and bank capital rules were strengthened.
Current economic risks relate to geopolitics, trade policy uncertainty, and domestic reform implementation.
Longer-term risks include aging, climate change, and digitalization.

Public and publicly guaranteed debt declined to 55.6 percent of GDP at end-2018, down 4 points of GDP from its 2016 peak.
State budget deficit stabilized to about 4.6 percent of GDP in 2017–18, down from 5.5 percent in 2014–2016, aided by strict limits on government guarantees.
When the surplus of Vietnam Social Security—the pay-go pension system—and other extrabudgetary funds are included, the general government deficit averages 2.7 percent of GDP in 2017–18.
The budget deficit is projected to decline to 4.2 percent in 2020 (2.6 percent, when extrabudgetary funds are included).
Recapitalization of Vietnam’s state-owned commercial banks is identified as a priority.

Continued tightening of credit policies, developing capital markets, and building a modern market infrastructure with adequate tools for financial system supervisors and regulators are recommended to enhance the financial sector’s ability to support sustainable growth.
Strengthening bank capital rules was undertaken.

Government commitment to private-sector–led growth improved the business climate; regulatory quality and ease of doing business generally improved.
Remaining structural problems: land markets, credit markets, and the still-large state-owned-enterprise sector, which continue to be obstacles to the private sector.

Vietnam took steps to strengthen governance and fight corruption.
The revamped 2018 anti-corruption law clarifies and strengthens laws for combating corruption, though further enhancements are needed.
Linking (by end-2019) of databases on taxation, anti-money laundering, customs, and land transactions is expected to facilitate asset verification.
Since 2016, significant sentences have been handed down in several high-level cases, boosting credibility and public trust in anti-corruption investigations.
Additional measures recommended:
- Ensure the independence of the Government Inspectorate of Vietnam against undue political influence.
- Judiciary reform to improve enforcement of contracts, strengthen legal interpretation, and facilitate resolution, restructuring, and bankruptcy proceedings.
- Greater transparency and data availability.

Vietnam’s population will be aging rapidly in coming decades.
The old age dependency ratio (people 60 and older relative to 15–59 year-olds) is expected to double in the next 25 years.
Replacement rates are around 70 percent, above the 54 percent average for countries in the Organization for Economic Cooperation and Development (OECD).
Retirement ages are 55 years for women and 60 years for men, below the OECD average of 67 years and below other Asian countries (between 63 and 65 years on average).
Policy changes under discussion in the National Assembly include raising the retirement ages to 62 for men and 60 for women.
Recommendation: Begin pension reforms as soon as possible to ensure long-term sustainability, with continued monitoring to protect vulnerable groups.

Short- to medium-term risks: geopolitics, trade policy uncertainty, and domestic reform implementation.
Longer-term risks: aging, climate change, and digitalization.
Fiscal space: more favorable fiscal position provides authorities means to step in should downside risks materialize; if growth surprises on the upside, existing debt could be paid down at a faster pace.

Modernize economic institutions, especially fiscal and monetary management.
Continue market-oriented and outward-looking reforms.
Tighten credit policies where appropriate.
Develop capital markets and modern market infrastructure with adequate supervisory and regulatory tools.
Recapitalize state-owned commercial banks.
Strengthen rule of law and continue anti-corruption efforts, including greater transparency and data linkage.
Undertake pension reforms promptly to address rapid aging and ensure sustainability.

Source: Five Charts Explain Vietnam's Economic Outlook, July 16, 2019, IMF.