Viet Nam Rising foreign direct investment helped to accelerate economic growth to 6. in 1. Inflation abated, and robust external accounts enabled the rebuilding of foreign reserves. Growth is forecast to edge higher again this year and next, while inflation remains relatively low. Policy challenges are to reform banks and state enterprises and to integrate domestic firms into global value chains. Economic performance The economy grew by 6. in 1, the strongest pace since 11 (Figure 3.31.1). Industry expanded by 7.1, against 5. in 13, benefitting from foreign direct investment (FDI) that boosted growth in manufacturing to.5. Recovery in demand for property lifted growth in construction to 7.1. Agriculture picked up to grow by 3.5, supported by higher exports of fish and shrimp. By contrast, growth in services eased from the previous year to 6., partly a result of fewer visitors from the People s Republic of China (PRC), which hurt tourism. Total visitor arrivals increased by. in 1 a deceleration from 1.6 in 13. On the demand side, private consumption accelerated by almost a percentage point to 6.1, reflecting improved consumer sentiment. Growth in public consumption eased to 7. as the government reduced capital expenditure and contained increases in public sector wages. Investment strengthened last year as gross capital formation rose by.9, spurred by an estimated 16 increase in FDI disbursements and lower domestic interest rates. However, net external demand weighed on GDP growth because imports of goods and services rose in volume terms at a faster pace than exports. Inflation decelerated to average.1 in 1, the lowest in 1 years, owing to better food production and lower global prices for oil and commodities. By the end of 1, inflation was just 1. year on year (Figure 3.31.). Moderating inflation paved the way for the State Bank of Viet Nam, the central bank, to reduce policy interest rates by a further 5 basis points, to 6.5 for the refinancing rate and to.5 for the discount rate. Commercial banks lowered lending rates, which helped to stimulate credit growth to an estimated 1.6, meeting the central bank s 1 1 target for 1 (Figure 3.31.3). M money supply grew by an estimated 16, also in line with the official target. International reserves recovered by the end of 1 to an estimated 3 months of import cover (Figure 3.31.). Merchandise exports rose by an estimated 13.7 on a balance-of-payments basis and in US dollars, supported by further gains in shipments of manufactured products 3.31.1 Supply-side contributions to growth Agriculture Industry and construction Services Gross domestic product Percentage points 6 6. 6. 5. 5. 6. 1 11 1 13 1 Source: General Statistics Office of Viet Nam. 3.31. Inflation Overall Food Core, year on year 5 15 1 5 5 1 Jul Jul Jul 13 1 Source: General Statistics Office of Viet Nam. Feb 15 This chapter was written by Dominic Mellor, Aaron Batten, Chu Hong Minh, and Nguyen Luu Thuc Phuong of the Viet Nam Resident Mission, ADB, Ha Noi.
Asian Development Outlook 15 such as mobile phones from foreign-invested factories. Measured the same way, imports rose by 1.1, so that the trade surplus increased to an estimated $11.9 billion. Exports benefitted from a 1 devaluation of the Viet Nam dong against the US dollar in June 1, which followed a similar devaluation in mid-13. The current account recorded its fourth consecutive surplus, estimated at $.1 billion or. of GDP. On the capital account, the 16 increase in FDI disbursements to $.1 billion more than offset a drop in portfolio inflows (Figure 3.31.5). Fiscal policy was moderately expansionary in 1. The fiscal deficit, excluding off-budget and on-lending items, widened to. of GDP from 3.9 in 13. Preliminary figures show that budget expenditure remained at the equivalent of 5.9 of GDP, but revenue and grants fell to 1.5 of GDP, mostly a result of weak growth in tax collection. Moody s Investors Service raised Viet Nam s sovereign credit rating by one notch to B1, and Fitch upgraded its rating to BB, citing improved macroeconomic stability and stronger external accounts. These actions supported the government s sale of $1 billion in 1-year bonds at an annual coupon rate of., the lowest rate of its three issuances of offshore debt denominated in US dollars since 5. The Viet Nam Asset Management Company acquired from banks an estimated $5.7 billion in nonperforming loans by the end of 1, a key part of the government s efforts to mend a banking system handicapped by impaired balance sheets and insufficient capital. However, the government has yet to outline a clear strategy to resolve the nonperforming loans. Further, the extent of bad loans remaining with the banks is unclear. Full enforcement of new guidelines on loan loss classification and provisioning was delayed until April 15. Cross holdings between banks, as well as between banks and nonbanks, pose risks to the financial sector. The central bank introduced new prudential regulations to address this issue which, if effectively implemented, will improve financial stability. Addressing the reform of underperforming state-owned enterprises (SOEs), the government approved new laws to guide divestment of SOE assets and accelerate their commercialization. The number of SOEs equitized or partly privatized rose in 1, though it fell short of the official target (Figure 3.31.6). Economic prospects GDP growth is forecast to edge up to 6.1 in 15 and 6. in 16, with FDI an important driver (Figure 3.31.7). Data from the Foreign Investment Agency show that new FDI commitments rose to $15.6 billion in 1, while an additional $.6 billion was committed to existing foreign-funded projects. Better economic performance in the major industrial economies particularly the US, Viet Nam s biggest export market will spur exports, but this positive effect will be partly offset by slowing growth in the PRC. Exports of manufactured products will continue to expand, given that 76 of last year s disbursed FDI was directed into manufacturing. 3.31.3 Interest rates and credit 16 1 Refinancing rate Discount rate Credit to the economy 1 13 Source: State Bank of Viet Nam. 1 3.31. Gross international reserves Goods import cover Goods and services import cover Months of imports 3 1 Q1 11 Q3 Q1 Q3 Q1 Q3 Q1 Q3 1 13 1 Dec Note: Data exclude government foreign exchange deposits at the State Bank of Viet Nam and the foreign exchange counterpart of swap operations. Imports are on free-onboard basis. Sources: State Bank of Viet Nam; International Monetary Fund; ADB estimates. 3.31.5 Balance of payments indicators of GDP 15 1 5 5 1 Financial and capital account Current account Errors and ommissions Balance of payments 1 11 1 13 1 Sources: State Bank of Viet Nam; International Monetary Fund, ADB estimates.
Economic trends and prospects in developing Asia: Southeast Asia Viet Nam 5 Factors bolstering private consumption will be expanded employment, low inflation, and growth in remittances, which reached almost $1 billion last year. In uary 15, ahead of the lunar new year, retail sales jumped by 13 in nominal terms. Lower interest rates, ratings upgrades, and brighter prospects for manufactured exports have improved the outlook for investment. The central bank targets credit growth of 13 15 in 15, slightly above last year s estimated outcome. Restrictions on foreign investment in real estate will be eased from July 15, which should support other measures taken by the government to revive the property market. The drop in global oil prices from last year is a positive development for this economy. Though Viet Nam produces about 35, barrels of oil per day and is a net exporter of crude oil, it is a net importer of refined petroleum products. Lower fuel prices boost household disposable income, stimulate consumption, and reduce costs for many businesses, supporting profits and investment. The National Financial Supervisory Commission estimates that savings on domestic production costs could reach 3 this year. The fall in oil prices dents government revenue, but fiscal policy is still likely to promote economic growth. On a sector basis, industry is expected to be the major driver of growth. FDI and government investment will spur construction while recent increases in imports of manufacturing inputs including chemicals, cotton, and plastics signal strength in industry. The HSBC Purchasing Managers Index showed that new orders, output, and employment in manufacturing continued to rise through February 15 (Figure 3.31.). The service sector stands to gain from lower fuel and transport costs, as well as from recovery in tourism from the PRC. Stepping up progress on SOE reform would spur growth in other service industries. Agriculture, too, has been helped by the decline in fuel and transport costs, but its expansion is impeded by sluggish global food prices and bottlenecks in transport and trade infrastructure. Fiscal policy looks set to remain expansionary in light of a planned budget deficit of 5. of GDP in 15 and a similar deficit likely in 16. Budget priorities include greater emphasis on capital expenditure, which is slated to rise by nearly after years of absolute declines. Current expenditure is expected to rise at a more modest rate of 1, including increases of 11 for health care and 5 for education. The government may struggle to meet its revenue target. Reductions in corporate income tax rates, the removal of tariffs, and exemptions for favored firms have eroded the tax base. From 1 to 1, central government revenue and grants fell from 7.6 of GDP to an estimated 1.5. During the forecast period, the lower oil prices will hurt corporate and resource tax collections. The outlook assumes that, if revenue is weaker than anticipated, the authorities will opt for a moderately wider budget deficit rather than significant cuts in expenditure. Under this scenario, public debt may rise toward 6 of GDP by the end of 16. This prospect highlights the importance of correcting fiscal imbalances over the medium term to avoid running up unsustainable debt or jeopardizing investor confidence. Inflation ebbed further in the first months of 15 to average just.6 as food and transport costs declined. For the full year, inflation 3.31.6 State-owned enterprises equitized Number 1, 6 5 11 1 Source: Ministry of Finance. 3.31.7 GDP growth 6 5 year moving average 1 11 1 13 1 15 16 3.31. Purchasing managers index Index 5 5 5 6 1 13 indicates expansion indicates contraction 1 Note: HSBC-Markit Manufacturing. Source: Bloomberg (accessed 5 March 15). Feb 15
6 Asian Development Outlook 15 is projected to average.5. It is seen quickening to. in 16 as domestic demand and global oil prices rise (Figure 3.31.9). The forecasts assume the government will maintain expansionary monetary policies in a low-inflation environment. The central bank wants banks to trim deposit and lending interest rates by 1. 1.5 percentage points in 15, after cuts of around percentage points made in 1. In uary this year, the central bank devalued the dong by a further 1 against the US dollar and it might devalue by up to in 15. Export receipts from agricultural products and crude oil will likely decline as imports expand to meet stronger domestic demand and to supply inputs for manufacturing albeit partly offset by lower prices for imported petroleum and commodities. Trade and current account surpluses are projected to fall through the forecast period (Figure 3.31.1). Additional impetus for trade and investment should come in the medium term from new trade agreements, Viet Nam s integration into the Association of Southeast Asian Nations (ASEAN) Economic Community from late 15, and the planned easing of restrictions on foreign ownership of property and companies listed on the stock exchange. Gradual progress is being achieved toward strengthening the banking system though the encouragement of mergers and the state s acquisition of bad debt held by banks. More SOEs will be partly privatized. The banking system and SOEs nevertheless continue to pose risks to the economy. Undercapitalized banks with deficient financial transparency remain exposed to shocks. Finding sufficient investors to participate in share sales of SOEs is hampered by their complex ownership structures and opaque financial accounts. Over the longer term, achieving higher rates of economic growth depends on Viet Nam s ability to undertake deeper structural and corporate governance reform, and to facilitate local firms integration into global value chains. 3.31.9 Inflation 16 1 5 year moving average 1 11 1 13 1 15 16 3.31.1 Current account balance of GDP 1 11 1 13 1 15 16 Policy challenge linking local firms to global value chains The gradual opening of Viet Nam s economy over the past 3 years, including through trade pacts that culminated in membership of the World Trade Organization in 7, has spurred FDI, exports, and economic development. FDI inflows averaged $7.3 billion annually from 7 to 1. Rising international trade has lifted the ratio of trade to GDP to 17. Exports of manufactures have surged in the past 5 years as multinational companies built factories to assemble products such as mobile telephones and electronics, or to fabricate parts, as part of their global production chains (Figure 3.31.11). However, Viet Nam s main contribution to these production chains is low-skilled labor. The cost of imported materials and components is estimated to equal 9 of the value of Viet Nam s exports of manufactured goods. Future economic prosperity will depend in large part on involving more domestic firms in global value chains so they can 3.31.11 Manufacturing exports $ billion 16 1 Total exports Total manufacturing exports 7 9 1 11 1 13 1 Estimate Sources: General Statistics Office of Viet Nam; ADB estimates.
Economic trends and prospects in developing Asia: Southeast Asia Viet Nam 7 benefit from foreign funding and technology and gain access to global markets, as well as generate spillover to benefit the whole economy. At this stage, small and medium-sized enterprises (SMEs) in Viet Nam generally lack the capacity to participate in supply chains for foreigninvested factories. Only 36 of all Vietnamese firms are integrated into export-oriented production networks, compared with nearly 6 in Malaysia and Thailand. Just 1 of Vietnamese SMEs participate in global supply chains, and SMEs contribution to exports from Viet Nam is significantly less than in other countries (Figure 3.31.1). While the government supports industrial deepening and the development of SMEs, insufficient interagency coordination often fragments policies and weakens implementation. A proposed new law on SMEs provides an opportunity to correct some of these shortcomings. Moreover, greater consultation with the private sector would better inform the government about constraints that inhibit links with production networks. The private sector needs to be closely involved as well in initiatives intended for its own development. For example, the success of the proposed Institute of Directors, which aims to improve corporate governance, will depend on attracting funding and support from the private sector. Industry-specific strategies are also needed. For manufacturers, encouraging the development of more industry clusters could allow for economies of scale, shared learning, and lowered transaction and transportation costs. Agribusinesses would benefit from improved product certification standards and better regulation of aquatic resources. Early in 15, the Prime Minister endorsed the selection of five industries as priorities for developing industry clusters and value-chain products: electronics, textiles, food processing, agricultural machinery, and tourism. Action plans should now be drawn up for these industries with the aim of targeting support to those supply chains with maximum potential for FDI spillover into the domestic private sector, as measured by domestic value added, job creation, and tax revenue. 3.31.1 Selected economic indicators () 15 16 GDP growth 6.1 6. Inflation.5. Current account balance (share of GDP) Source: ADB estimates. 3.31.1 SME share of total exports 5 3 1 SME share of total exports SME in global production networks 3.1 1.5 Malaysia Thailand Philippines Viet Nam Source: Asian Development Bank Institute.