Vietnam to grow 7% on strong recovery amid external headwinds: AMRO

Vietnam’s GDP growth is expected to rebound to 7% this year on the back of strong external demand, a recovery in domestic demand, and strong foreign direct investment inflows, says the ASEAN+3 Macroeconomic Research Office (AMRO).

In its 2022 Annual Consultation Report on Vietnam issued Wednesday in Singapore, the international organization says the Vietnamese economy is predicted to expand 6.5% in 2023 due to this year’s strong recovery despite global uncertainties.

“Headline and core inflation have remained low, reflecting price subsidies to contain the pass-through of high global oil prices. Meanwhile, the large GDP revaluation calls for a reassessment of the policy space,” AMRO says.

Vietnamese authorities have employed fiscal policy judiciously since the onset of the pandemic to support growth. The budget shifted to deficits in 2020 and 2021, from near balance in the pre-pandemic period. In January 2022, the National Assembly approved an economic stimulus package, to promote economic recovery and raise growth potential.

As a result, the 2022 budget, with the stimulus package that is to be implemented over 2022 and 2023, is set to deliver a strongly expansionary fiscal impulse, according to the report.

The State Bank of Vietnam (SBV) has maintained an accommodative policy stance in 2021 and 2022. Credit growth has been brisk, against the backdrop of the SBV’s targeted growth rate of 14%. The exchange rate has remained broadly stable against the U.S. dollar.

In the financial sector, regulatory forbearance ended in late June, but interest rate subsidies are provided to borrowers that are adversely affected by the pandemic under the stimulus package.

However, AMRO notes that key external risks stem from global supply chain disruptions, flare-ups in more vaccine-resistant Covid-19 variants, tightening of financial conditions in advanced economies, and elevated global oil and food prices related to geopolitical developments. China’s dynamic zero-Covid approach is likely to continue to strain exports of agricultural products, in addition to creating supply bottlenecks for a range of intermediate goods imports.

In the financial sector, the report says the relatively low non-performing loan (NPL) ratio reflects in part the SBV’s forbearance policy that expired at the end June and could unmask weaker underlying credit quality. Separately, potential risks from the real estate sector development warrant close monitoring in the near-to-medium term.

In terms of policy, AMRO recommends Vietnam’s fiscal policy should continue to support economic recovery but should target those that continue to be dislocated by the pandemic. Support measures like a value-added tax rate cut and delays in tax and rental payments should be allowed to terminate once the recovery is solid. Infrastructure development would play a critical role in revitalizing the economy going forward. Meanwhile, revenue mobilization should be enhanced to support funding for infrastructure development.

The SBV should normalize monetary policy in tandem with economic recovery, especially in light of rising inflationary pressures, according to the international organization, established to contribute toward securing macroeconomic and financial stability of the ASEAN+3 region, comprising the 10 ASEAN members and China (including Hong Kong), Japan, and Korea.

On October 5, Singapore’s United Overseas Bank (UOB) revised up its 2022 growth forecast for Vietnam to 8.2% from the previous 7%, following the country’s nine-month economic expansion of 8.8% from a year earlier.

On September 27, the World Bank revised up Vietnam’s 2022 GDP forecast from 5.8% in early June to 7.2% and forecast 6.7% for next year, the highest in Southeast Asia.

The Asian Development Bank on September 21 put the country’s growth prediction at 6.5% this year and 6.7% next year on strong economic fundamentals, key to fast recovery.