World Bank warns of pitfalls despite fast recovery

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The World Bank's latest update is upbeat about Vietnam's rapid recovery from the global economic crisis, but it cautions that the tepid growth of advanced economies will pose stiff challenges.

The bank's East Asia and Pacific Update released earlier this week also notes that Vietnam's recovery has been uneven.

The update expects the growth rates of key economic indicators, including real GDP, industrial production, investment and exports this year to recover to near pre-crisis levels.

"The real economy has bounced back quite rapidly," the report says. It estimates that Vietnam's real GDP is back on track to achieve this year's annual growth target of 6.5 percent, which is modest compared with the 8.9 percent enjoyed by the whole East Asian region. In a report issued a few weeks ago, the Vietnam Ministry of Planning and Investment announced that the country's actual annual growth will reach 6.75 percent.

After last year's slump, the country's industrial production is expected to grow 12.5 percent this year and 14.5 percent in 2011, approaching pre-crisis growth rates.

Exports have also recovered back to the 20- percent annual growth rate observed before the crisis. The absolute export value this year will top the prosperity seen in 2006 to reach US$68 billion. The trend will continue next year, the bank predicts.

Foreign direct investment could reach $7.6 billion, compared to $6.9 billion last year, the report says.

"Anecdotal evidence indicates that the ongoing relocation by manufacturing firms from higher wage countries in East Asia is beginning to benefit Vietnam, which with its relatively low wages and easy access to coast is well positioned to absorb such investments," said Vikram Nehru, World Bank chief economist for the East Asia and Pacific region.

Pitfalls ahead

On the other hand, the report points out that the tepid economic expansion in advanced economies also requires a delicate balancing act by Vietnam, in particular, on the return of large capital inflows and appreciating currencies.

Import values continue to increase, from $42.6 billion in 2006, to $65.4 billion in 2009 and $78.9 billion this year.

Consequently, the current account balance is set to plunge to minus $9.3 billion this year, accounting for 9 percent of GDP.

Standing at almost $42 billion, this year's external debt will be more than twice that of 2006. Its ratio to the GDP has also been growing, from about 31 percent in 2006 to over 40 percent this year.

In that context, households and businesses are continuing to stockpile foreign currency and gold, putting persistent pressure on the local currency. There are concerns that the rapid expansion of domestic credit to stimulate the economy will weaken some banks' balance sheet, the report says.

The phasing out of the stimulus package, part of which is directly financed through the budget, will help reduce the overall fiscal deficit from 8.9 percent of GDP last year to under 6 percent this year.

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