Production at the Viet Nam National Textile and Garment Group. Weak demand is holding back Viet Nam's economic growth. — Photo bizlive.vn

HA NOI (Biz Hub) — Viet Nam's gross domestic product (GDP) is on a slow and steady path to recovery amid weak domestic demand, ANZ Bank states in a report dated July 8.

The bank forecasts that the GDP will increase by 5.6 per cent this year as weak domestic demand is holding back growth.

The household consumption increased by 5 per cent year on year in the first half of 2014, compared with 4.5 per cent in the same period last year. The year-on-year increase in nominal retail trade sales was 10.7 per cent, but the actual growth was only 5.7 per cent due to muted consumer spending.

Weak credit growth is still blocking economic expansion, with the outstanding loans rising by 3.5 per cent as of July 2. This is lower than the 4.7 per cent rise over the same period last year. The large number of bad debts is still preventing banks from extending credit to local enterprises.

The State Bank of Viet Nam (SBV) announced a 1 per cent devaluation of the dong on June 19 to support the nation's export profile, but the ANZ Bank believes this will have a limited effect on export shipments in the short term.

With a surplus in the balance of payments, the SBV has managed to increase its official foreign exchange (FX) reserves to $35 billion, thanks to an increase of $10 billion since the start of the year, say bank officials.

The bank announced that from July 15, it would include the gold and FX deposits of credit institutions and foreign bank branches at the SBV.

"We ask whether the country's official reserves are enough…Despite the rising levels of official FX reserves over the past three years, they remain low compared with those of its regional peers and in terms of import coverage," the report says.

"Instead of providing clarity, the new definition of official reserve will likely complicate its usefulness as an indicator of the country's ability to generate FX receipts," it adds.

According to the ANZ, Viet Nam's robust external sector is helping counter weak domestic demand. The export outlook is likely to be supported in the coming years by the consistent flow of foreign direct investment, which has reached about $6.8 billion this year.

"Slow and steady seems to be the best strategy for Viet Nam," the ANZ Bank report says. — VNS