- Living-with-COVID strategy and supportive policies, along with strong manufacturing output and a retail and tourism rebound, help Vietnam buck Asian weakening trend
- But IMF report cautions the country’s subdued inflation could rise as economic activity ramps up and headwinds from slowing global growth affect its exports
- The Fund says Vietnam should undertake broad economic reforms to insulate it from the impact of a global slowing to achieve its developmental goals
Vietnam is defying an Asia-wide slowing trend with a swift economic rebound after adopting a living-with-COVID strategy and supportive policies accompanied by strong manufacturing output and a recovery in retail and tourism, International Monetary Fund experts say.
A country report entitled “Vietnam Bucks Asia’s Weakening Growth Trend” published September 6 on IMF’s website cautioned that the country’s subdued inflation could rise as economic activity returns to full speed and headwinds from slowing global growth reaches its shores.
Economists Era Dabla-Norris, Federico J. Díez and Giacomo Magistretti, who wrote the report, said financial conditions are tightening as the United States and other advanced economies raise interest rates to curb inflation. They said this can lead to capital outflows, as already seen in many Asian emerging markets.
They said greater uncertainty about global trade and financial markets could weigh on Vietnam’s recovery, especially if some industries lose access to needed intermediate goods due to further supply-chain disruptions. That, in return, could curtail foreign investment, slowing the country’s production and technological growth.
“The first half of this year saw a swift economic rebound as Vietnam’s pandemic restrictions eased following the adoption of a living-with-COVID strategy and a robust vaccination drive,” the IMF team wrote.
“Supportive policies such as low interest rates, strong credit growth, and the government’s Program for Socioeconomic Recovery and Development have been accompanied by strong manufacturing output and a recovery in retail and tourism activity.”
The IMF accordingly raised its Vietnam growth forecast to 7% this year, lifting it by a full percentage point from three months earlier. It was the only significant upward revision among major Asian economies.
The Fund cut the forecast for next year by 0.5 percentage point to 6.7%, but the economists said that still contrasts with dimming prospects elsewhere and would be the fastest pace among Asia’s major economies. In contrast, growth estimates for Asia were lowered to 4.2% and 4.6% for this year and next in the IMF’s latest World Economic Outlook Update, the authors said.
Inflation pressure has been mostly limited to some goods like fuels and related services like transport, as Vietnam has ample domestic food supplies, pork prices are declining, and people prefer rice than other grains like wheat. Price gains for services, such as health and education, have also been very mild.
Consumer prices rose in January- July but remain below the central bank’s 4% target for the year while the economy’s delayed recovery last year has kept core inflation, which strips out volatile food and energy costs, below regional peers.
The report said inflation could pick up as economic activity returns to full speed. Higher costs for transport and commodities such as fertilizers and animal feed could also raise prices for a broader range of goods and services.
Vietnam’s recovery also faces headwinds from global growth slowing from 6.1% last year. The IMF’s World Economic Outlook cut estimates to 3.2% this year and 2.9% next year amid the impact of Russia’s invasion of Ukraine and the slowdown in China and major economies. Such a slowdown implies reduced demand for Vietnam’s exports, especially from key trade partners like the US, China, and European Union.
Amid all these challenges, the report said policymakers must be agile and make timely changes:
- Fiscal policy should take the lead in aiding recovery, yet flexibly adjusted to evolving economic conditions
- The central bank should focus on rising inflationary risks and communicate that it’s ready to act as needed and remains committed to meeting its inflation target
- Authorities should also continue addressing bad loans in the banking system and closely monitoring for potential risks in property markets to safeguard financial stability.
Even after decades of impressive gains, Vietnam still faces challenges, and broad economic reforms will be needed for it to achieve its developmental goals, the economists said.
For example, potential economic growth is reduced by a performance gap between highly productive firms that benefit from foreign direct investment and other less productive companies. Labor markets would gain from reducing mismatches that result if workers don’t have the right job skills. Elsewhere, social safety net coverage should be scaled up and be made more efficient.
IMF said tackling these challenges will further unleash Vietnam to its considerable growth potential and continue advancing on a sustainable development path toward higher income status. Importantly, its development strategy already includes reforms like these. Decisive implementation will help foster sustained, inclusive, and green growth.