Alexander Mourmouras

Alexander Mourmouras and Jonathan Dunn*

The outlook for Asia and the Pacific is the strongest in the world, but it is shrouded by challenges at home and abroad, according to the latest IMF report for the region. The April 2017 Regional Economic Outlook for Asia and Pacific: Preparing for Choppy Seas finds that policy stimulus continues to support healthy domestic demand in China and Japan in the near term, which is good for other economies in Asia as well. Broader global conditions are also favorable. Growth is accelerating in many major advanced and emerging market economies, notably the United States and commodity exporters, and financial markets are still resilient for the most part. Nonetheless, there are challenges ahead. Particularly, over the medium term, there are fundamental headwinds to sustained strong growth, including from aging populations in some countries and a slower catch-up in productivity. Việt Nam is in a strong position to tackle these challenges, but implementation of an ambitious reform agenda is needed for faster, sustainable growth.

After a slowdown in 2016, regional growth is forecast to speed up in 2017. Growth in the region decelerated to 5.3 percent in 2016 from 5.6 percent in 2015 despite broad improvement in economic activity in the second half of 2016. Net exports continued to pull down growth; domestic demand remained strong, supported by robust private consumption. GDP growth is forecast to reach 5.5 percent in 2017, revised up by 0.1 percentage point compared to the estimate in the IMF’s October 2016 World Economic Outlook, and 5.4 percent in 2018. Accommodative policies will underpin domestic demand, offsetting tighter global financial conditions. The acceleration in 2017 reflects expected recovery in Asian trade, resilient domestic demand, and continued policy support.

The aggregate outlook for the region, however, masks differences across countries. Among the larger economies, projected growth in China and Japan for 2017 was revised up because of continued policy support and strong data toward the end of 2016. China’s GDP growth is expected to stay strong but continue to slow gradually to 6.6 percent in 2017 as recent tightening measures take effect—and to 6.2 percent in 2018. Japan’s growth is projected at 1.2 percent, with momentum set to continue into 2017, but will probably then weaken along with fiscal policy consolidation and the planned consumption tax increase. Some of the upward revision in Japan reflects the comprehensive revision of the national accounts in 2016. In India, temporary disruptions (primarily to private consumption) caused by cash shortages accompanying the currency exchange initiative are expected to gradually dissipate in 2017. Thus, growth is projected to rebound to 7.2 percent in FY2017/18 and to 7.7 percent in FY2018/19. In Korea, growth is expected to remain subdued at 2.7 percent in 2017, owing to geopolitical uncertainty, and increase to 2.8 percent in 2018. Projected growth for Asia, excluding India and Korea, was revised up in 2017 by 0.3 percentage point compared to the estimate in the October 2016 World Economic Outlook. 

Việt Nam’s near-term outlook is positive with robust growth and sound economic fundamentals. Growth decelerated to 6.2 percent in 2016, 0.5 percentage point lower than in 2015, reflecting the impact of a drought and soil salinization on agriculture and lower oil production. Nevertheless, the underlying growth momentum appears intact and the economy is projected to expand strongly in 2017 and beyond. Activity should be underpinned by healthy domestic demand, rebounding agricultural production and strong FDI and manufacturing growth, although falling oil production will be a drag on growth. Inflation is projected to remain stable, with headline inflation around 5 percent reflecting further increases in health care prices and core inflation below 2 percent. The current account balance, after posting a surplus of 4.1 percent in 2016, is projected to moderate slightly, reflecting a pick-up in import growth.

Near-term growth is encouraging, but downside risks continue to dominate the economic landscape. Global growth could get a boost from economic stimulus in some large economies, particularly the United States. However, continued tightening in global financial conditions could trigger further capital flow volatility. Private debt has risen in many economies in the region including Việt Nam over the past decade, and higher borrowing costs could tip some companies and households over the edge and constrain growth. More inward-looking policies in major global economies would significantly impact Asia given that the region has benefited substantially from cross-border economic integration. Việt Nam’s highly open economy in particular could be vulnerable to slower trade growth and FDI, but new trade agreements also provide upside opportunities. While a bumpier-than-expected transition in China would also have serious repercussions, Việt Nam stands to benefit from faster rebalancing toward consumption in China.

Medium-term regional growth faces challenges from population aging and slowing productivity. Asia is a diverse region, and some areas risk growing old before becoming rich. This is because the pace of aging is faster in Asia compared with the experience in Europe and the United States. For many countries in the region, on current trends, per capita income (benchmarked against the United States) will be much lower than that reached by advanced economies at a similar peak in their aging cycle. While Việt Nam’s population is still young, the pace of aging is projected to be rapid after 2035. The demographic tailwinds during the next two decades must be used wisely to raise living standards and prepare for population aging. Slowing productivity growth since the global financial crisis, which kept the region from catching up with the United States and other countries at the technological frontier, has made matters worse. The slowdown has been most severe in the advanced economies of the region. Without reforms, productivity growth will likely remain low for some time, with headwinds from rapid aging becoming increasingly important.

Việt Nam needs to strengthen its resilience to shocks and upgrade its growth drivers. Fiscal deficits have been high; public and publicly guaranteed debt is relatively large; and international reserve coverage needs further strengthening. Legacy issues in the financial sector and in the State-Owned Enterprises (SOEs) require attention. While the FDI sector is highly productive, large shares of the labor force still work in small informal firms and agriculture. The role of the state in the economy looms large and the playing field is not level, with SOEs and other connected firms continuing to benefit from access to credit and other advantages.

The Vietnamese authorities are cognizant of these challenges and reforms are underway. An appropriate amount of fiscal consolidation is planned that will strengthen the public finances. It should be accompanied by deeper tax and expenditure reforms to raise efficiency and generate funds for important infrastructure and social spending. The new, more flexible exchange rate mechanism introduced in 2016 has been a success. Further gradual increases in exchange rate flexibility along with a broader modernization of the monetary policy framework would provide a shock absorber and enhance policy effectiveness. Faster recapitalization of banks would make the financial system more resilient. A further priority is to reduce resource misallocation by creating a level playing field for access to credit, land and other factors. This requires faster progress in state owned enterprise reforms including reductions in state ownership, better governance, and separating state regulatory and ownership functions. Forceful implementation of reforms would raise the economy’s long-term growth potential, allow for faster real convergence with more advanced economies, and help shift away from natural resources and abundant labor as growth drivers.

*Alexander Mourmouras is the IMF headquarters team leader for Việt Nam; Jonathan Dunn is the IMF Regional Resident Representative for the Lao PDR and Việt Nam.