Vietnam Bucks Asia's Weakening Growth Trend

IMF News, September 6, 2022

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Vietnam’s upbeat growth outlook is bucking the slowing trend elsewhere in Asia, with relatively subdued inflation that’s also an exception to the general rule in the region.
The first half of this year saw a swift economic rebound as Vietnam’s pandemic restrictions eased following the adoption of a living-with-COVID strategy and a robust vaccination drive.
Supportive policies cited include low interest rates, strong credit growth, and the government’s Program for Socioeconomic Recovery and Development, accompanied by strong manufacturing output and a recovery in retail and tourism activity.

IMF growth forecast raised to 7 percent this year, lifted by a full percentage point from three months earlier.
Projection for next year lowered by 0.5 percentage points to 6.7 percent; still the fastest pace among Asia’s major economies according to the IMF assessment.
By way of contrast, growth estimates for Asia were lowered to 4.2 percent and 4.6 percent for this year and next in the IMF’s latest World Economic Outlook Update.
Global growth context: world growth decelerated from 6.1 percent last year to IMF estimates of 3.2 percent this year and 2.9 percent next year.

Inflation pressure has been mostly limited to some goods like fuels and related services like transport.
Consumers are largely insulated from the global surge in food prices because of ample domestic supplies, pork prices declining from last year’s peak, and a preference for rice, which remains cheaper than other grains like wheat.
Price gains for services, such as health and education, have been very mild.
Consumer prices in the first seven months of the year rose, but remain below the central bank’s 4 percent target for the year.
Core inflation, which strips out volatile food and energy costs, remains below regional peers due to the economy’s delayed recovery last year.
Inflation could pick up as economic activity gets back to full speed; higher transportation and commodity costs (fertilizers and animal feed) could raise prices more broadly.

Reduced demand for Vietnam’s exports is a risk due to slowing global growth and weaker prospects in key trade partners: the United States, China, and the European Union.
Financial conditions are tightening as interest rates in the United States and other advanced economies rise to curb inflation, increasing financing costs and potentially leading to capital outflows.
Greater uncertainty about global trade and financial markets could weigh on the recovery, particularly if industries lose access to intermediate goods because of further supply-chain disruptions.
Potential curtailment of foreign investment could slow production and technological growth.

Fiscal policy should take the lead in aiding recovery, yet be flexibly adjusted to evolving economic conditions.
The central bank should focus on rising inflationary risks, communicate readiness to act as needed, and remain committed to meeting its inflation target.
Authorities should continue addressing bad loans in the banking system and closely monitor for potential risks in real estate markets to safeguard financial stability.

Potential growth is reduced by a performance gap between highly productive firms that benefit from foreign direct investment and other less productive companies.
Constraints for businesses, especially small and medium enterprises, include burdensome regulations, cumbersome administrative procedures, weak corporate governance, insufficient infrastructure, and digital connectivity gaps.
Labor market issues: mismatches from workers lacking the right job skills; need to encourage more formal employment by improving skills and lowering costs for companies to formalize.
Social policy: scale up and make social safety net coverage more efficient.
Climate policy: invest in climate adaptation, reduce carbon emissions, and achieve the country’s ambitious environmental agenda.
The country’s development strategy already includes reforms like these; decisive implementation will help foster sustained, inclusive, and green growth.

By Era Dabla-Norris, Federico J. Díez and Giacomo Magistretti; International Monetary Fund.