August 18, 2019 15:36

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ANZ expert highlights Vietnam’s path to success

16:27 | 14/08/2019

The Vietnam Government’s commitment to broad-based economic reforms bodes well for the country’s longer term prospects and look to have it on the path to upper middle-income status, said Khoon Goh, head of Asia Research at ANZ.

anz expert highlights vietnams path to success

Illustrative photo (Source: VOV)

Goh noted in an article on the website bluenotes.anz.com that Vietnam's gross domestic product growth in the first half of 2019 was solid amidst the downturn in global trade and the impact of African swine fever (ASF) on the agriculture sector.

ANZ Research maintains its full-year 2019 GDP growth forecast for Vietnam of 6.7 per cent. Although this is lower than the 7.1 per cent growth rate achieved in 2018, it reinforces Vietnam’s place as one of the fastest-growing economies in Asia.

Inflation is expected to remain manageable, averaging 2.8 per cent in 2019 which is below the State Bank of Vietnam’s 4 per cent target. ANZ Research sees monetary policy being on hold this year.

This adds up to a solid performance considering the headwinds from the external sector and the ongoing impact on the domestic agricultural sector from ASF.

He believes that Vietnam continues to reap the benefits of past reforms and commit to further ongoing reforms. The country is on track to double its per capita gross national income from US$2,400 in 2018 to US$4,800 by 2028, graduating to upper middle income status.

Vietnam has managed to avoid the deeper slowdown seen in other Asian economies thanks to continued foreign direct investment (FDI) flows and export growth - which also bucks the regional trend.

He urged Vietnam - an alleged beneficiary of US-China trade tensions

- to manage the strong FDI inflows to ensure adequate resource allocation while preventing overheating.

The Government’s shift towards a focus on attracting new-generation FDI is needed to ensure sustainable economic development.

Goh asserted that strong FDI inflows and the rapid shift in the mix of manufacturing towards higher-value-added products during the current decade has helped lift labour productivity growth, which is soon expected to average 6.4 per cent a year.

However, the slowdown in population growth means it will contribute less to growth in the coming decade. Sustaining strong productivity growth will be important to maintain sustainable growth.

ANZ Research believes with the Government’s focus on attracting new-generation FDI, high rates of productivity growth can be sustained, though some slowing from the high rates seen this decade is likely.

The rising trade surplus with the US is starting to attract attention. Vietnam has been placed on the US Treasury’s Monitoring List and there could be pressure to allow the Vietnamese dong to become more flexible.

ANZ Research does not expect Vietnam to be labelled a currency manipulator as the VND has largely been moving in line with regional currencies. But the country should continue to build its foreign exchange (FX) reserves given the low adequacy level at present.

The ANZ expert said that growth in Vietnam’s services sector has remained robust at 6.83 per cent year on year in the second quarter, as strong wage growth and growing urbanization helped boost wholesale and retail trade.

Expanding manufacturing and external trade activity has also ensured strong growth for both the transport and warehouse sectors, while the financial services sector continues to benefit from growth in the overall economy.

Demographics is another issue that requires increasing policymaker attention. Although the working age population is still growing in absolute numbers, it peaked in 2015 as a proportion of the total population.

Vietnam is aging, the number of people over the age of 60 will rise rapidly, resulting in the dependency ratio doubling within 20 years. This is one key reason why ANZ Research expects to see a slowing in Vietnam’s medium-term potential growth rate towards 6 per cent over the next decade.

Managing this structural change requires timely measures in areas such as the retirement age and pension reforms. If successful, such reforms could be sufficient to move the country into the upper-middle income category.

Source: VOV