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Vietnam Faces Growing Pains as Manufacturing Demand Ramps Up, World Bank Says

Economic growth in Vietnam has proven resilient, driven by strong domestic demand and a dynamic export-oriented manufacturing sector, even with potentially harmful external conditions working against it, a new World Bank Report said.

“Taking Stock,” the World Bank’s bi-annual economic report on Vietnam, forecasts the pace of expansion to remain at 6.8 percent this year, higher than the projected 6.3 percent for emerging markets in East Asia and the Pacific. In the medium term, Vietnam should see a slower pace of 6.6 percent in 2019 and 6.5 percent in 2020, in line with the global trend. Inflation is expected to remain at 4 percent as a result of tightening monetary policies.

“Despite a challenging global context, Vietnam continues to achieve robust growth accompanied by moderate inflation and a relatively stable exchange rate,” said Ousmane Dione, World Bank country director for Vietnam. “Policy makers should take advantage of the still favorable growth dynamics to advance structural reforms to enhance private sector driven investment and growth, along with improving efficiency in public sector investment.”

Given Vietnam’s high trade exposure and limited fiscal and monetary policy buffers, World Bank said the country remains susceptible to external volatilities. Escalating global trade tensions such as the U.S.-China trade war could cause a decline in export demands, while tightening global liquidity could reduce capital inflows and foreign investment.

In the apparel export sector, however, Vietnam has taken advantage of importers’ flight from China. Apparel imports from Vietnam to the U.S. jumped 16.9 percent to $1.33 billion worth of goods in October compared to year earlier. For the year to date through Oct. 31, Vietnam’s shipments rose 7.35 percent to $10.65 billion and the country’s market share gained 7.48 percent–No. 2 behind China–to garner a 14.82 percent share.

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However, Sebastian Eckardt, World Bank lead economist for Vietnam, said, “Slower global growth, ongoing trade tensions and heightened financial volatility cloud the global outlook. As an open economy, Vietnam needs to maintain a responsive monetary policy, exchange rate flexibility and low fiscal deficits to enhance its resilience against potential shocks.”

In light of the recently ratified Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the EU-Vietnam Free Trade Agreement, the Taking Stock report stressed streamlining non-tariff measures to help boost Vietnam’s export competitiveness. And while tariffs are rapidly declining, the number of non-tariff measures is increasing. According to this report’s assessment, the non-tariff measures system in Vietnam “remains complicated, opaque, and costly, resulting in high cost of compliance.”