Viet Nam’s economic growth is projected to moderate to 6.6 per cent in 2019, driven by credit tightening, slower private consumption and weaker external demand, according to the World Bank (WB).

Under the Managing Headwinds report on East Asia and Pacific update released on Wednesday, WB said Viet Nam’s economy continues to show fundamental strength, supported by robust domestic demand and export-oriented manufacturing.

WB also expected that over the medium term, the country’s growth would stay around 6.5 per cent, as the impact of the current cyclical uptick dissipates.

Poverty is also expected to decline further, as labour market conditions remain favourable.

Inflationary pressures are also projected to remain moderate due to subdued global demand and moderate global energy and food prices.

According to WB, Viet Nam’s monetary policy continues to balance its dual objectives of maintaining stability while supporting economic growth. While the monetary policy stance remains broadly accommodative, the State Bank of Viet Nam (SBV) introduced some tightening of credit in 2018 by setting credit growth limits for commercial banks and controlling lending to high risk sectors (real estate, securities and the consumer market).

Liquidity in the banking sector also tightened markedly due to slower deposit growth pushing up short term interbank interest rates. Amid tighter financing conditions, credit growth moderated to about 14 per cent year on year in 2018 from 18 per cent in 2017. Nevertheless, corporate and household balance sheets are increasingly leveraged with Viet Nam’s credit-to-GDP ratio at about 135 per cent. This leaves the economy vulnerable to shocks and potential financial market stress, especially given legacy non-performing loans (NPLs) and relatively thin capital buffers in some banks.

The WB report showed Viet Nam’s external balances continued to improve in 2018, despite uncertain global trade developments. Viet Nam’s merchandise exports are estimated to have expanded by 13.2 per cent in 2018 – below the 21.8 per cent recorded in 2017, but significantly outperforming global trade growth. Merchandise import growth posted a stronger deceleration to 11.1 per cent in 2018, compared with 21.9 per cent in 2017, reflecting a slowdown in imports of investment and intermediate goods. Vibrant trade activity has positioned Viet Nam as one of the most open economies in the world, with its trade to GDP ratio reaching nearly 200 per cent for the year.

“Strong exports also helped Viet Nam to sustain a current account surplus for an eighth consecutive year,” WB noted. “The country’s capital account surplus also remains sizeable owing to sustained high FDI inflows. Robust external positions eased foreign exchange pressures, and helped the SBV build up international reserves, which increased from the equivalent of 2.1 months of import cover at end-2015 to about 2.8 months at end-2018. Bolstered by strong external positions, the exchange rate has been relatively stable since mid-2018.”

However, it said, there remain concerns about exchange rate appreciation of the dong and its possible negative impacts on Viet Nam’s export competitiveness. Viet Nam’s fiscal stance has improved, with the overall fiscal deficit estimated to have narrowed to 4 per cent of GDP in 2018 from 4.3 per cent in 2017 and 4.9 per cent in 2016.

Total revenues are estimated to have remained at 23.6 per cent of GDP in 2018, supported by a cyclical recovery in major tax revenues tied to strong consumption and income growth. Over the same period, total expenditures have declined to an estimated 27.6 per cent of GDP in 2018 from 28.5 per cent in 2016 and 27.8 per cent in 2017, to a large extent reflecting lower capital expenditures and rationalisation of other discretionary spending items. These measures, while effective in the short term, could hamper investments for infrastructure and human capital development.

The Government’s commitment to strengthen budgetary discipline, therefore, needs to be balanced with reforms that create fiscal space to maintain critical investments in infrastructure and spending on essential public services.

According to WB, despite improved short-term prospects, there are significant downside risks for Viet Nam.

"Domestically, a slowdown in the restructuring of State-owned enterprises and banking sector could adversely impact the macro-financial situation, undermine growth prospects and create public sector liabilities. A continued slowdown of public investment could undermine long-term development objectives, and further fiscal consolidation should focus on containing recurrent spending while stabilising revenue performance," the report said.

Besides, it said, Viet Nam’s economy also remains susceptible to further volatile developments in the global economy, given its high trade openness and relatively limited fiscal and monetary policy buffers. Weaker external demand and heightened global financial volatility call for a continued focus on sound macro-economic management to safeguard against possible shocks. Growth is also spatially uneven, which may see regional disparities continue to widen. — VNS