Domestic demand to fuel Việt Nam economy in 2018

Update: January, 25/2018 - 09:00
Sebastian Eckardt
Viet Nam News

Growth prospects for Việt Nam this year are bolstered by strong domestic demand and prospects of a global economic revival.  However, protectionism, fiscal deficit, public debt and low productivity raise questions about a possible middle-income trap - and the means to overcome it. Sebastian Eckardt, the World Bank’s leading economist in Việt Nam, speaks to Việt Nam News reporter Phương Uyên on the country’s medium-term economic progress.

What is your view on Viet Nam’s economic achievements last year?

Viet Nam’s economy had indeed a good year. We have seen a broad-based acceleration of economic activity, aided by a number positive external and domestic developments. Domestically, conditions also were supportive. Private consumption remained buoyant, bolstered by low inflation and growing wages. Investment also held up well thanks to a combination of accommodative monetary policy and ample liquidity in the banking system as well as record FDI inflows. Externally, 2017 was also a good year. Global GDP growth exceeded expectations, trade recovered and financial conditions remained quite favorable. This has clearly helped Viet Nam’s economy which is one of the most open economies in the world. Export turn over expanded by 21.1 percent with both manufacturing (outside oil and mining) and agricultural exports posting strong growth. Importantly, fast growth was accompanied by now the sixth consecutive year of macroeconomic stability with inflation below 4 percent, a relatively stable exchange rate, and a strengthening external position.

What is your view on recent economic and institutional reforms and in particular improvements in the business environment in Viet Nam?

Building a facilitating state is setting the right strategic direction for reforms in Viet Nam. Clearly, there has been progress in recent years, but I think we all agree that the agenda remains unfinished. Let me highlight three key areas of structural reforms. First, banking sector reforms need to continue building on the recently adopted resolution 42 and the law on credit institutions. Remaining NPLs should be resolved and capital buffers in some banks should be reinforced. This is important to remove risks of instability but it is also crucial to enable the banking system to allocate of capital efficiently in the economy. Second, there has been progress on SOE reforms which needs to be sustained through implementation of a credible and high quality equitization program as well as further steps to enhance management and corporate governance of remining SOEs. Third, regulatory reforms remain critical. Vietnam’s improvement in the World Bank Doing Business Assessment and the World Economic Forum Competitiveness Index show that Vietnam is making progress. Despite steady progress, Viet Nam still has room to improve the regulatory environment in a number areas, including resolving insolvency, investor protection, paying taxes, trading across borders and starting a business. In the area of trade facilitation, swift implementation of the ASEAN single window and further modernization of the customs and more importantly the inspection regime offer a unique opportunity to lower the cost of trade. Continuing reforms to improve regulatory quality and to ensure consistent. efficient and fair enforcement is crucial for Viet Nam to create an enabling environment for private sector investment, growth and job creation.

Do you think that unlocking the potential of the private sector is the key to sustainable growth and if so how?

Viet Nam has put a lot focus on the enabling private sector investment and growth. This priority is well placed: the private sector -both foreign and domestic- has become the main engine of the economy – accounting for over 70 percent of GDP and 85 percent of jobs. But there is room for the private sector to further contribute to sustained growth and prosperity. Especially, the domestic private sector continues to perform below its potential. Household enterprises and corporates account for over 70 percent of private sector firms. Production is dominated by family farms in agriculture and small workshops in manufacturing. Most of these firms are inward oriented, serving the domestic market. Only about 17 percent of domestic private sector firms are directly engaged in export activities. Many of these firms simply lack the scale, access to technology and competitive pressure needed to boost productivity and few of these enterprises ever reach medium size. As a result, larger, technologically more advanced firms engaging in manufacturing and higher value services linked to export markets and global value chains are largely missing. So it indeed important to create an environment where firm are not only created but where successful firms have access to the resources they need to grow their business. This includes improving access to finance, which remain key constraint especially for domestic SMEs in Viet Nam. There is also room to enhance linkages of SME and FDI enterprises. And finally, there are opportunities to enable more private sector participation in infrastructure financing and delivery. This is an ambitious reform agenda, but the current economic upswing has opened a window of opportunity to deepen and accelerate structural reforms and to lift Viet Nam’s medium-term growth potential.

Do you agree with the Government’s policy on inclusive growth, focusing on technology development and education?

If we look at the driving force behind Viet Nam’s growth and prosperity, we will find that people are Viet Nam’s most important asset. Viet Nam’s comparative advantage is based on the fact that the country has a relatively well-educated workforce on relatively low wages. And Viet Nam has invested in its education system. It has achieved virtually full enrolment and completion at primary school level. There is also evidence that quality of schooling is relatively strong, including the fact that Viet Nam ranked number 8th in the latest OECD PISA assessment which measures student achievement in Math, Science and reading. However, challenges remain. As it moves up the value chain, its skills level must be continuously upgraded. So that Viet Nam workforce can form higher value-added activities, so I think it is very important to prioritize further skill development. This includes achieving full completion at secondary school level -Vietnam should basically aim to have all its student complete at least high school as well as improvements in the quality and relevance of university and vocational education and training to equip Viet Nam’s workforce with skills needed to compete in the 21st century economy.

What is your view on Viet Nam’s economic prospects in 2018?

Viet Nam is starting off the new year with strong momentum and our outlook for 2018 is positive. In the absence of major shocks, we expect economic momentum to remain strong with growth of at least 6.5 percent, underpinned to a large extend by domestic demand and export oriented manufacturing. While our outlook is generally favorable, risks remain elevated and we should not take these positive developments for granted. There are clearly risks -both domestically and externally- that could dampen growth if not this year then over the medium term. Globally, we are seeing high levels of policy uncertainty and we expect a further tightening of liquidity. There are still domestic vulnerabilities, including high public debt and sizable NPLs in the banking system as well as a lot of uncertainty in the global environment. This reinforces the focus on prudent macroeconomic policies to enhance Viet Nam’s resilience to withstand shocks as well as further structural reforms to lift Viet Nam’s medium term growth potential. So I would argue that the current uptick provides a window of opportunity to further accelerate and deepen reforms to solidify macroeconomic stability and lift Viet Nam’s future growth potential. Viet Nam should continue to act on these fronts now while times are good. — VNS