The World Bank (WB) has forecast Vietnam’s gross domestic product (GDP) will expand 6.7% this year and stabilize at around 6.5% in the medium term while inflation is projected to remain low.

The WB said in its Taking Stock – An Update on Vietnam’s Recent Economic Developments released on December 11 that stronger domestic demand, robust export-oriented manufacturing, and a gradual recovery of the agriculture sector are driving Vietnam’s economy, which expanded 6.4% in the year to September compared to the same period last year.

Besides, the manufacturing and services sector respectively grew 12.8% and 7.3% during the same period.
“With incomes rising and poverty falling, Vietnam’s economy had another good year of strong growth and broad macroeconomic stability,” said Ousmane Dione, the WB Country Director for Vietnam.

Low inflation and rising real wages sustained buoyant domestic demand and private consumption, while the stronger global economy helped Vietnam’s export-oriented manufacturing and agricultural sectors.

Job growth continued, with 1.6 million new jobs added in the manufacturing sector over the past three years, and 700,000 additional jobs in the construction, retail, and hospitality sectors, leading to higher aggregate labor productivity.

Labor demand also contributed to rapid wage growth, with wages increasing 15% cumulatively between 2014 and 2016, according to the global lender.

Despite progress in resolving non-performing loans, risks remain, including the lack of robust capital buffers in some banks, especially amidst rapid credit growth.

Fiscal tightening is underway, highlights the report, and has led to a leaner budget deficit and containment of public debt accumulation.

However, the decline in public investment – falling to 16% of total spending in the nine-month period compared with an average of 25% in recent years – may not be sustainable over time, as Vietnam needs significant investments in infrastructure to support future growth.

A slow-down in structural reforms could also impact the ongoing recovery, especially given the weaker growth in investment. Enhancing macroeconomic resilience and structural reforms can lift Vietnam’s growth potential over the medium term.

“Structural reform remains a central priority in view of tepid productivity growth,” said Sebastian Eckardt, the WB Lead Economist for Vietnam.

“Building on progress already made, Vietnam can further lift productivity growth through investments in needed infrastructure and skills as well as deeper reforms of the business environment, SOE and banking sector,” he added.

Taking Stock’s special section focuses on improving efficiency and equity of public spending. With public debt close to the statutory limit of 65% of GDP, Vietnam’s Government faces tight budget constraints in several years to come.

This special topic section looks at fundamental expenditure reforms in key public services to identify opportunities for constraining expenditure growth through improvements in expenditure productivity.