Vietnam’s economic expansion might ease to 6.3% in 2023 from a robust 8% last year, reflecting domestic and external headwinds, the World Bank said in Hanoi on Monday.
"Vietnam has the fiscal space to implement measures to boost growth, unlike many other countries," said Carolyn Turk, World Bank country director for Vietnam.
"Effective implementation of priority public investments is key to support growth, both in the short-term and in the longer term. Also, fiscal and monetary policies must be synchronized to ensure that support to the economy and macroeconomic stability are achieved effectively," she added.
The country’s services-sector growth will this year moderate as low base effects from post-Covid-19 fade, according to the March 2023 report, entitled "Harnessing the potential of the services sector for future growth".
The main driver of growth will be domestic demand, which may be affected by higher estimated inflation (4.5%) in 2023. Given softer external demand, the contribution of net exports will weigh on growth, it noted.
Vietnam’s economy is expected to benefit from the partial implementation of the capital investment of the government’s 2022-2023 Economic Support Program. An agile monetary policy, closely coordinated with fiscal policy objectives, would help keep domestic inflation under control.
Risks to the outlook are broadly balanced in Vietnam this year, the bank highlighted. The reason is on the downside, weaker than expected growth in Vietnam’s major export markets - the U.S., China, and the eurozone - could affect export prospects. Potentially higher inflation could affect domestic demand.
Further tightening of global financial conditions could affect Vietnam’s financial sector, which suffers from weaknesses in the balance sheets in the corporate, banking and household sectors, affecting domestic investor and consumer sentiment, and from incomplete reforms.
As for public funding, implementation challenges could also hamper the execution of the planned public investment program, the World Bank report said.
On the upside, improved growth prospects in China, the U.S., or the EU and stronger than expected global demand could lift exports and hence growth above the baseline projection.
Harnessing services sector’s potential for growth
The services sector has become the largest sector of Vietnam's economy, growing from 40.7% of the GDP in 2010 to 44.6% in 2019. The sector's share of employment has increased from 29.6% in 2010 and 35.3% in 2019. As the second-largest source of jobs, the sector has absorbed a significant portion of labor leaving the agriculture sector.
However, Vietnam's services sector's productivity and employment performance lags behind its peers, the study noted.
Despite increasing by 34.3% between 2011-2019, this sector’s labor productivity (measured by value-added per worker) remains well below that of many regional and aspirational peers. It was $5,000 (constant dollar) per worker in 2019, now it is still well below comparators, including Malaysia ($20,900), the Philippines ($9,300), and Indonesia ($7,300).
Looking ahead, if properly leveraged, services can play a crucial role in supporting Vietnam's sustained productivity growth and achieving its goal of becoming a high-income economy by 2045, according to the World Bank.
“All high-income economies have a large services sector that provides the largest sources of employment and value addition. The small scale of firms, restrictions to services trade, low technological adoption and few inter-sectoral linkages affect the productivity of the services sector,” the bank said.
Therefore, policy reforms are necessary to unlock the sector's potential to contribute to Vietnam's sustained economic growth.
Priority actions and questions for further investigation suggested for Vietnam by the World Bank include reducing restrictions to services trade and the entry for foreign investment, undertaking business environment reforms to enhance competition and access to finance for domestic firms.
Vietnam should focus reforms in services subsectors that can promote further growth of other sectors of the economy, particularly manufacturing.
The country should brainstorm how to encourage firm-level incremental innovation of products and processes and adoption of existing technologies, including digital technologies; as well as how policymakers can support an upgrade of managerial skills and practices.
In January, the Standard Chartered, HSBC, and Singapore's United Overseas Bank (UOB) put their Vietnam 2023 GDP growth prediction at 7.2%, 5.8% and 6.62%, respectively.
With last year’s 8.02% expansion, the highest in 12 years, Vietnam was one of Asia’s fastest-growing economies.
However, the high growth rate in 2022 is partly derived from the low growth base in the two pandemic years 2020-2021, at 2.91% and 2.58% respectively.