World Bank Reports Vietnam Economy Continuing to Strengthen

December 10, 2014 Posted by Vietnam Briefing Reading Time: 5 minutes

HCMC – Vietnam is showing continuing signs of economic recovery, with the country’s gross domestic product (GDP) projected to improve 0.2 percent year-on-year (YoY) to 5.6 percent for 2014, according to the World Bank Taking Stock report released last week.

The World Bank’s positive projection is largely attributed to sustained macroeconomic stability and progressive expansion in the country’s foreign invested manufacturing exports sector.

Vietnam’s improved macroeconomic outlook follows a modest increase in GDP growth to 6.2 percent in the third quarter of 2014. The overall growth rate for the first nine months of 2014 was 5.6 percent.

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The report identifies ongoing stability in Vietnam’s macroeconomic environment as a key factor underpinning this recent growth. Lower rates of inflation, stability in the exchange rate, and stronger external account balances were cited as key factors aiding stability.

The key macroeconomic developments identified included:

November headline inflation hit a record five year low of 2.6 percent YoY – owing to ample food supplies, weak energy prices, soft domestic demand, and low output;
The exchange rate has remained mostly stable since the State Bank of Vietnam’s one percent adjustment of the dong reference rate in June, which was aimed at aiding exports, promoting foreign exchange market stability, and ensuring foreign currency liquidity;
Stronger external account balances enabled foreign exchange reserves to build up to imports cover of about 3.1 months in June 2014, up from 2.4 months in December 2013.
Macroeconomic improvements served to raise Vietnam’s sovereign risk ratings, and enabled the country to raise capital in international markets. In November, Vietnam issued government bonds on international capital markets to raise US$1 billion at an annual coupon of 4.8 percent.

In addition, the foreign invested sector was identified as an increasingly significant source of growth for the Vietnamese economy, accounting for nearly 20 percent of GDP and 22 percent of total investment. The sector supplies two-thirds of merchandise exports and provides a quarter of the employment in the enterprise sector. Manufacturing is a key industry, accounting for 70 percent of the country’s registered foreign direct investment.

Not all good news

However, the report highlights that performance in the foreign-invested and domestic sectors remain at sharp odds. Unlike the expanding foreign invested market, the domestic sector continues to experience low growth, with a rising number of domestically-owned businesses closing or suspending operations. A total of 54,000 firms closed in the first 10 months of 2014, rising nine percent YoY from 2013. In addition, the number of newly-established businesses decreased by 6.5 percent YoY in 2014.

Therefore, Vietnam’s road to economic recovery is qualified by the following potential macroeconomic risks identified in the report:

Relatively slow progress on restructuring state-owned enterprises and the banking sector could adversely impact the macro-financial situation, undermine growth prospects, and create large public sector liabilities;
The high export orientation of the Vietnamese economy exposes it to an adverse turn of events in the global economy;
An upturn in global interest rates could prove problematic for the Vietnamese economy, given vulnerabilities in the domestic banking sector and high levels of indebtedness in the economy.

Looking ahead

Consequently, the report stresses that continued economic growth hinges on prompt implementation of the proposed banking and state enterprise reforms set down in the government Resolution 19 issued on March 18, 2014.

Resolution 19 set specific targets to improve the business environment and enhance national competitiveness. The resolution prioritizes establishing a shorter duration for processing and completing administrative procedures, reducing administrative costs and strengthening accountability of state administrative agencies with regard to conducting business in Vietnam.

The report also identified the heavy regulatory burdens in the domestic sector as a significant barrier to faster growth. Private domestic firms are suffering due to constrained access to finance, subdued domestic consumer demand, and an uneven playing field vis-à-vis the state-owned enterprise sector.

Investors at the Vietnam Business Forum (VBF), held in Hanoi last week, adamantly reinforced these sentiments, urging the Vietnam government to speed up institutional and administrative reform in order to improve the business and investment environment. A position paper issued by the VBF Investment and Trade Working Group noted that private businesses in Vietnam are suffering from a lack of access to credit, land, energy, and an enabling state administrative apparatus. Furthermore, poor access to government plans and local administrations has hindered the ability of businesses to prepare for legal change.

Vietnam is on the road to economic recovery. However, further growth will be determined by government implementation of administrative reforms aimed at strengthening the business environment. Foreign investors should expect to benefit significantly from improved efficiency, transparency, and accountability in the private domestic sector. Pending formal implementation, investors should be wary of Vietnam’s heavy economic reliance on the export sector and its ability to leave the country vulnerable to volatility in global markets.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email vietnam@dezshira.com or visit www.dezshira.com.

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