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Vietnam’s Economy Going Strong but Global Forces Could Curtail Growth

Vietnam‘s economic growth has been driven by renewed strength in foreign direct investment (FDI) and an ongoing shift in labor away from agriculture into more productive manufacturing and service sectors.

The country’s broad macroeconomic stability and a cyclical increase in global demand has also boosted its economy, however, “Taking Stock,” the World Bank’s latest economic update for Vietnam, said external risks, include “escalating trade protectionism, heightened geopolitical tensions and faster-than-expected monetary tightening” could lead to disorderly financial market movements and stall the country’s momentum.

“Vietnam’s high economic growth in 2017 and in the first quarter of 2018 is impressive and gives the country a firm foundation to move forward,” Ousmane Dione, the World Bank country director for Vietnam, said. “This period of robust economic activity is a great opportunity to invest in human capital, so that the country can address the challenge of maintaining this growth momentum.”

Vietnam’s real gross domestic product (GDP) expanded nearly 7.4% during the first quarter of 2018, benefiting from a favorable external environment, with global GDP growth expected to peak at 3.1% percent this year, the report noted. Vietnam’s trade balance improved thanks to strong exports and FDI inflows, contributing to a current account surplus estimated at 6.8% GDP in the first quarter, the World Bank said. The country’s exchange rate has been relatively stable, while reserves continued to rise, reaching roughly $63 billion in the first four months of 2018—equal to around 3.6 months of imports.

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Vietnam was the third-largest U.S. supplier of apparel and textiles for the year through April, with imports hitting 4.88 million square meter equivalents, representing a 7.41% market share. The Southeast Asian nation holds a 14.48% market share of apparel imports to the U.S., worth $11.71 billion for the same time period.

Against the backdrop of low inflation, monetary policy remains accommodative, the report said. Vietnam’s consumer price index has been ticking up slightly, rising to 2.8% year on year in April, pushed up by electricity and health services price hikes. Rapid credit growth and abundant liquidity could worsen volatility in Vietnam’s financial markets, especially against the anticipated tightening of global monetary conditions, the Work Bank warned.

Real GDP is projected to expand 6.85 this year from 6.5% percent in the previous World Bank forecast in December, before moderating to 6.6% in 2019 and 6.5% in 2020, based on an expected slowdown in global demand. Inflation is expected to remain around the 4 percent government target.

“The current favorable economic conditions with high growth and low inflation offer a unique opportunity to push ahead with reforms,” Sebastian Eckardt, lead economist for the World Bank in Vietnam, said. “Prudent macroeconomic policies should be accompanied by comprehensive and deep structural reforms, including regulatory reforms to remove barriers to and reduce the cost of private sector activity, human capital and high-quality infrastructure investments, and further reforms to enhance productivity of state-owned enterprises.”

World Bank said risks remain significant, despite improved short-term prospects. Slow progress in restructuring state-owned enterprises and banking sectors could adversely impact the overall financial situation, undermine growth prospects and create large public-sector liabilities, the Taking Stock report noted.

Looking at reform priorities for reducing trade costs and enhancing competitiveness in Vietnam, World Bank noted that while Vietnam has made progress in reducing tariffs, there is still significant potential to reduce trade cost through rationalization of non-tariff measures or specialized controls, more efficient border management and logistics. This can be achieved by a comprehensive program comprising four pillars–reducing trade cost related to time-consuming measures and procedures before and at the border, improving trade-related infrastructure and quality of connectivity, building a competitive logistics service sector and strengthening interagency coordination and partnership with the private sector.

The report argued that the National Logistics Action Plan has been issued as an initial effort toward implementing reform priorities on trade facilitation and logistics, but it can be further improved to better reflect an integrated approach.