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Vietnam on Course Despite External Headwinds

Inflation was moderate throughout 2017 at 3%  with a core inflation rate of 1.3%.Inflation was moderate throughout 2017 at 3%  with a core inflation rate of 1.3%.

Things got off to a bad start for Vietnam’s economy in 2017 with the shock withdrawal of the United States from the Trans-Pacific Partnership. Subsequent uncertainties about Canada’s participation in a potential TPP-11 agreement that excludes the United States were a further disappointment.

Other more positive economic indicators have offset this initial set-back. The broad-based recovery in the global economy throughout 2017 provided welcome support for Vietnam. Despite disappointing growth of 5.1% in the first half of 2017, GDP growth in Vietnam recovered to nearly 6.8%, which was supported mainly by growth in domestic demand, manufacturing and exports, the EastAsiaForum reported.

Inflation was moderate throughout 2017 at 3% with a core inflation rate (excluding administrative prices) of 1.3%. As a result, the State Bank of Vietnam cut its benchmark interest rate by 25 basis points to 4.25%. The bank also raised its annual credit growth target to 20–21%, and actual credit growth remained high at 18.5%.

While this is currently supporting Vietnam’s growth in domestic demand, it could pose a risk to financial stability if continued for any length of time—particularly when such growth is based on administrative edict rather than on fundamentals in the economy.

The end of 2016 saw strong growth in tourism receipts and manufacturing exports, and remittances saw improvements in Vietnam’s current account surplus and foreign exchange reserves. This has somewhat eroded in 2017 due to increases in imports of raw materials and capital equipment to service the country’s export growth, which reflects the ‘assembly’ nature of much of Vietnam’s current manufacturing industry.

Nevertheless, continued strong growth in goods and service exports (including a recovery of agricultural exports) resulted in a small current account surplus and saw international reserves rising to just below 3% of imports. The nominal exchange rate has remained relatively stable with a small devaluation of about 1.4%. This helped to stem the continued appreciation of the real exchange rate and to improve competitiveness for the domestic sector.

For the past five years, Vietnam’s budget deficits have exceeded 6% of GDP every year. Public sector debt has resultantly come close to the 65% of GDP limit set by Vietnam’s National Assembly. The government managed to cut the budget deficit to around 4% of GDP in 2017, which was achieved largely through slashing capital spending.

Fortunately for the government, this seems to be an opportune time to accelerate state-owned enterprises divestment. Merger and acquisition activity with foreign investors is high, the stock market is gaining momentum and blue-chip companies have high valuations.

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