Standard Chartered Bank expects Viet Nam to achieve growth of 7 per cent in 2018, higher than its previous forecast of 6.8 per cent, with all domestic engines firing together. Manufacturing and construction are likely to remain the fastest-growing sectors.

The forecast is highlighted in the bank’s recently published Global Focus report for the third quarter of 2018 entitled “Fattening tail risks”.

“We are positive on Viet Nam’s growth in the medium-term on strong manufacturing activity as FDI inflows to manufacturing remain robust. We believe that Viet Nam will remain one of the fastest growing economies in Asia in 2018,” said Chidu Narayanan, Asian Economist at Standard Chartered Bank.

According to the latest macro-economic research report, FDI inflows are set to remain high in 2018, led by manufacturing, which makes up close to 50 per cent of inflows. Implemented FDI rose to US$6.75 billion in January-May, higher than the same period last year. The bank expects both registered and implemented FDI to be close to $15 billion in 2018, unchanged from the previous forecast.

Standard Chartered economists also forecast a mild trade surplus for the rest of the year on strong export growth and slowing import growth. Electronics exports are likely to remain robust in 2018 on strong demand for components, particularly OLED displays used in mobile devices, and expected to grow by over 20 per cent in 2018.

The study also suggests that the State Bank of Viet Nam (SBV) is likely to remain accommodative in the near term to support growth, despite rate hikes from major central banks. Standard Chartered Bank expects unchanged policy rates in 2018 and a mild devaluation of the Vietnamese dong. Specifically, the Bank anticipates a mild move higher in US dollar-Vietnamese dong in the quarters ahead and revised up its USD-VND forecasts to 22,950 for end-third quarter-2018, and 23,000 for end-2018.

More reforms needed: IMF

Viet Nam should undertake more ambitious reforms to tackle remaining distortions and capacity constraints, increase investment and reduce the external surplus amidst strong economic growth, the International Monetary Fund (IMF) recommended in its 2018 Article IV consultation with Viet Nam released recently.

According to the IMF, Viet Nam’s strong economic momentum is expected to continue in 2018, aided by the reform push, higher potential output, the global recovery and commitment to macroeconomic and financial stability.

“Growth is projected at 6.6 per cent in 2018, despite a mild tightening in credit growth targets and a neutral fiscal stance. Inflation is forecast to rise to just under the 4 per cent target, led by higher oil prices and gradual increases in administered prices.”

“On current trends and if reforms continue at their current pace, 6.5 per cent annual growth remains feasible beyond 2018,” IMF’s analysts noted.

However, the IMF said, despite recent economic strength, economic distortions and capacity constraints remain, and external and domestic risks and longer-term challenges loom on the horizon.

“Financial buffers are still thin, macroeconomic policy frameworks remain inflexible to manage possible shocks and the external position is substantially stronger than warranted by fundamentals,” the institution noted, recommending that fiscal policy should emphasise high-quality consolidation to meet large development needs and ensure that Vietnam has the fiscal space to meet longer-term challenges.

A slightly more ambitious consolidation than currently planned, and a lower debt ceiling than the current statutory limit, will be needed to create additional fiscal room before aging sets in the mid-2030s and provision for contingencies. Stronger consolidation could boost medium-term growth if it relies on high quality structural fiscal measures and measures to boost private investment.

The IMF said that reforms should focus on broadening tax bases; reducing administrative and wage-related spending; protecting social spending through well-designed social security and civil service reforms and protecting and improving the quality of public investment. Comprehensive and timely fiscal accounts based on GFSM 2014 (Government Financial Statistics Manual) and improved budget planning and execution should help facilitate consolidation.

To sustain macroeconomic stability, the institution suggested that monetary policy should be tightened by further lowering credit growth to bring it in line with ongoing improvements in financial deepening while greater two-way exchange rate flexibility within the current band should be allowed to reduce speculative inflows, absorb shocks and help bring down the external surplus. In addition, reserve accumulation should continue but more gradually, with fully sterilised interventions. The modernisation of the monetary framework should also start, gradually easing away from credit targets to begin a phased shift to inflation targeting and greater exchange rate flexibility.

Financial sector balance sheets, supervision and risk management need to be further strengthened, IMF said, adding that a stronger financial sector can help improve the efficiency of financial intermediation to service the domestic economy and investment. Strong credit and asset price growth may be contributing to the build-up of risks in the financial system.

“State-owned commercial banks should be capitalised swiftly with government funds, and by raising private sector and foreign ownership limits. It is critical to develop a macro prudential framework and improve data quality on credit aggregates and balance sheet exposures to monitor and proactively manage risks, and ensure that sufficiently robust liquidity and crisis management frameworks are in place to provide legal and operational clarity regarding early intervention and communication to mitigate emerging financial sector risks.”

The reform drive needs to be broadened and accelerated to tackle the remaining barriers to investment and to raise labour productivity, the IMF said. — VNS