Driven by foreign direct investment, strengthening domestic consumption and demand, and pro-growth policies, Vietnam’s economy is expected to perform well despite a volatile global backdrop.
It is forecast to grow at 6.7 percent in 2016, the same as last year, the fastest clip since 2008, the Asian Development Bank said in its 2016 Asian Development Outlook (ADO) launched in Hanoi Wednesday.
But it is expected to see a modest slowdown to 6.5 percent in 2017.
Rising incomes and modest inflation are expected to buoy private consumption. Inflation is forecast to average 3 percent this year and 4 percent in 2017.
Strong export-oriented manufacturing, FDI inflows, and domestic demand will be partly offset by the effect of slowing expansion in China.
Yet, while the economy is performing reasonably well, Vietnam does face significant short- and long-term challenges.
Sluggish progress in reforming banks and state-owned enterprises poses risks to the outlook. Undercapitalized banks with poor financial transparency remain exposed to shocks. The upswing in credit growth could spark a new round of speculation in risky real estate.
“In the short term, the government must navigate the impacts of a slowing global economy while at the same time rebuilding the macroeconomic buffers that would allow Vietnam to be resilient to any future economic shocks,” Eric Sidgwick, ADB country director for Vietnam, said.
“Over the long term, greater efforts are also needed to address Vietnam’s low productivity growth and support domestic firms’ ability to integrate into global value chains.”
The report emphasizes the importance of deepening the reform of state-owned enterprises to remove the distorting impacts these firms have on the economy and its competitiveness.
The government should also continue to take actions to strengthen the banking system, including rolling out a clear plan to resolve non-performing loans since this continues to stifle the creation of an efficient and inclusive financial sector, it said.
While Vietnam will be a major beneficiary of recent free trade agreements, the country will also have to deal with some significant adjustment costs.
As the economy opens up to increased competition and more stringent export standards, domestic firms will face increasing commercial pressures.
“To ensure that the economy is able to maximize the benefits from the agreements, the government must move in parallel to create a more productive and innovative economy that can more readily adapt to increasing competition,” Sidgwick said.