Vietnam’s economy to slow down but remain strong

Speaking at a press conference held today, April 3, on Vietnam’s economy and the launch of the Asian Development Outlook 2019, Eric Sidgwick, ADB country director for Vietnam, said that Vietnam will remain the fastest growing Southeast Asian economy despite the predicted slowdown.

“The economic performance in Vietnam reached a sweet spot in 2018, driven by strong exports and domestic demand,” Sidgwick said.

“The economic growth will likely hold up well in the near term, supported by export-oriented manufacturing, foreign direct investment and sustained domestic demand. The growth momentum is expected to continue, thanks to ongoing reforms to improve the business environment and encourage private investment.” 

Meanwhile, if trade tensions between China and the United States drag on, Vietnam may benefit from the trade war, resulting in a 2% rise in gross domestic product (GDP) in 2020.

However, a report prepared by ADB indicates that risks facing the local economy remain. The world’s major economies, of which Vietnam is a key trading partner, are weakening. Vietnam is one of the most trade-dependent economies in the region, with trade double the size of its GDP. Domestically, lackluster progress in State-owned enterprises’ reform could be a drag on growth.

The report underlined the importance of strengthening private firms’ integration with global value chains, which is a key policy challenge for Vietnam’s long-term growth. Further, ADB suggested improving small- and medium-sized enterprises’ (SMEs’) access to capital and enhancing SMEs’ capabilities, including workers’ skills, to enable SMEs to better adopt new technologies.

CPI to rise slightly

The recent 8% hike in the local prices of electricity and fuel will affect enterprises’ production activities in the long term, driving up the country’s consumer price index (CPI) in the coming period.

ADB forecast that inflation will continue to grow slightly by some 3.5% this year before edging up 3.8% in 2020, as domestic demand is sustained.

The forecast might have been made before the prices of electricity and fuels were adjusted upward. The Ministries of Industry-Trade and Finance recently issued an announcement on the spike.

Sidgwick said that given the tight budget, the Government has steadily revised up the prices of fuels and power over the past few years.

Such adjustments will hurt the prices of many other items and firms’ production and business costs, the representative of ADB said.

In the short term, the latest adjustment is expected to affect product prices and fuel and power-based services only slightly, but in the long run, the impact on firms could be strong.

However, ADB said that the price hike was “necessary” as whether the prices were revised upward or not, the whole economy would absorb the costs. The problem lies in making the State or residents and firms bear those costs, the representative stressed, adding that the time needed to make adjustments should be carefully considered.

Nguyen Minh Cuong, an economic expert, said that the two key factors that might affect inflation were the exchange rate and global oil price.

Last year, the U.S. Federal Reserve (Fed) continuously raised interest rates, which led investors to transfer dollars back to the United States. The move put the domestic currency under pressure and affected inflation.

But the Fed recently signaled the end of interest rate hikes by suspending its previous plans to continue raising rates this year.