The International Monetary Fund (IMF) estimates Vietnam’s 2023 growth at 4.7%, aided by a second-half recovery led by a rebound in exports and expansionary domestic policies.
The growth estimate is part of conclusions made by an IMF team that conducted its 2023 Article IV consultation with Vietnam from June 14-29. Under Article IV of the IMF’s Articles of Agreement, the fund holds bilateral discussions with members, usually every year.
The team held discussions with Prime Minister Pham Minh Chinh, senior officials of the State Bank of Vietnam (SBV), Ministry of Finance, Ministry of Planning and Investment, Central Economic Commission, National Assembly, and other government agencies. It also met with representatives from the private sector, think tanks, academia, and other stakeholders.
“Inflation [this year] is expected to remain contained below the SBV’s 4.5% ceiling. Over the medium term, Vietnam can return to high growth rates as structural reforms are implemented,” Paulo Medas, head of the IMF team, said in a statement released Friday at the end of the visit.
In the short term, downside risks to growth remain large, the statement noted. It said growth could disappoint if weakness in external demand persisted or investment remained subdued.
A deepening of the ongoing real estate and corporate bond market problems, along with rising non-performing loans, could harm banks’ ability to support growth, it cautioned.
“Decisive actions to restructure the real estate sector and to promote a sound corporate bond market are warranted,” it said.
It also noted that further monetary policy easing and measures to boost credit growth at this stage were likely less effective and more risky, given that global rates were likely to stay high for long, and banks in Vietnam were already facing rising non-performing loans and high loan-to-deposit ratios.
“The measures taken by the SBV and the government have helped soften the impact of headwinds. Further efforts to safeguard macroeconomic and financial stability and accelerate reforms would ensure that the economy remains on a secure footing. The policy mix should be re-balanced with greater emphasis on fiscal support to the economy and the most vulnerable,” the statement said.
It lauded the central bank for containing price and liquidity pressures in a very challenging environment.
Greater exchange rate flexibility and continued efforts to modernize the monetary policy framework would provide significant dividends, the IMF advised.
It said the government has “fiscal space” to have fiscal policies take the lead in providing support to the economy and the poorest and most vulnerable groups.
“The planned increase in spending (wages and public investment) and cut in taxes will help boost domestic demand. However, some tax cuts are regressive and have negative effects on climate (for example, car registration fees).
“Instead, given taxes are relatively low in Vietnam, the authorities could instead consider boosting spending to address infrastructure, strengthen the social safety net, and address other social needs. Further fiscal support should be considered, especially if the recovery disappoints.”
The IMF stressed that the current challenging economic environment and rising non-performing loans required “the swift development of an action plan to protect financial stability and accelerate needed reforms.”
This would include strengthening the bank crisis management framework and improving bank regulation and supervision. Vietnamese authorities should take advantage of the ongoing revision of the Law on Credit Institutions to develop more effective bank resolution and emergency liquidity frameworks, the fund advised.
Medas noted that while authorities have taken actions to reduce short-term risks, they had to prioritize more structural solutions.
The authorities should address legal bottlenecks that are impeding completion of real estate projects, strengthen the regulation and governance of the corporate bond market, and improve the debt enforcement and insolvency framework.
Accelerating reforms
Vietnam will need to accelerate reforms to improve its business environment, build critical infrastructure and increase investment in education to achieve its ambitious development and climate objectives, Medas said.
“Scaling-up social and infrastructure spending, including meeting Vietnam’s climate objectives, will require revenue mobilization efforts. The authorities’ new plans on energy and climate are an important step forward, and the priority should now be on implementing concrete actions.”
Vietnam experienced a strong post-pandemic economic recovery last year. Its GDP rose by a historically high 8%, driven by strong domestic and external demand. Average inflation was contained at 3.2%, although price pressures picked up steadily during the year.
The economy expanded by 4.14% in the second quarter, from a year ago, despite slowing global demand for imports, the General Statistics Office said Thursday. The first quarter saw a slow growth rate of 3.31%.
Meanwhile, the World Bank has estimated Vietnam's 2023 growth at 6%, among the highest in Asia and on par with the Philippines.
In its latest report last week, the Standard Chartered Bank also said it expected Vietnam’s slowing economy to recover in the second half of this year.
An HSBC Vietnam update this month trimmed the country's 2023 growth forecast to 5% from the previous 5.2%, taking into account a protracted and deeper-than-expected trade downturn.