According to the World Bank's latest East Asia and Pacific Economic Update, Vietnam's economy is on a strong recovery track but is yet to fully recover, with the current total output still below pre-COVID-19 levels.
The WB's report said, the economy rebounded strongly from COVID-19 lockdowns in the third quarter of 2021, expanding by 6.4% in the first half of 2022. The rebound was attributed to a recovery of exports and the release of pent-up demand following the lifting of COVID-19 mobility restrictions and, more recently, the gradual return of foreign tourists. The service sector grew by 6.6% in the first half of 2022 after witnessing a record 8.6% growth in the second quarter of 2022. The industrial manufacturing sector (excluding construction) grew by 8.4% in the first half of 2022, driven by steady demand from abroad. Inflation inched up to 3.1% (year on year) in July 2022, mainly due to higher transport costs, which climbed 15.2%, despite efforts by regulators to curb upward pressures on petrol prices by cutting fuel consumption tax.
Notably, the Economic Recovery Support Program (accounting for 4.5% of GDP), approved in January 2022, has expanded the space for additional financial assistance programs, but progress remains slow. Vietnam's debt of 39.9% of GDP is sustainable and significantly lower than the 60% threshold set by the National Assembly.
According to the World Bank, like other East Asia Pacific (EAP) countries (except China), Vietnam's economy was forecast to recover in 2022, growing by 7.2%, largely due to the low level of COVID-19 pandemic lockdown measures which resulted in economic decline last year before returning to growth momentum in the medium term. Growth drivers are expected to revolve around demand from both domestic and foreign markets, from manufacturing to services, as exports to major markets (the United States, the eurozone and China) moderate. Inflation is forecast to rise to 3.8% in 2022 and 4% in 2023 due to the second wave of commodity price volatility before falling to 3.3% in 2024.
Besides, public spending is expected to increase rapidly in the second half of 2022 and the fiscal deficit is estimated at 2.8% of GDP in the year to support economic growth. The deficit is forecasted to increase slightly to 3.2% of GDP if support programs are accelerated in 2022-2023.
Nevertheless, according to the WB, the economic outlook shows that there are still many potential risks ahead. External risks include persistent global inflationary pressures and a deeper-than-expected economic slowdown in Vietnam's main trading partners (the United States, the eurozone and China), and global value chain (GVC) disruptions. Regarding internal risks, higher-than-expected inflation, labor shortages in manufacturing sectors and increased financial risks could weigh on growth prospects.
In the short term, given that the economy is recovering and inflation is under control, accommodative monetary policies which are in force remain appropriate, while a more accommodative fiscal stance will help prevent deterioration in growth.
In the medium to long term, achieving Vietnam’s goal to become an upper-middle income economy will depend on transitioning to a productivity and innovation-led growth model based on more efficient use of productive, human, and natural capital, the bank said. This transition requires enhanced institutional capacity to approve and implement structural reforms to build a more competitive and resilient economy.
Source: Vietnam Business Forum
