News Room - Business/Economics

Posted on 03 Apr 2008

Economic outlook for Vietnam positive despite global woes: WB

Vietnam’s economic growth is predicted to top a healthy 8 percent this year despite the US recession and resultant global downturn, a World Bank report says.

Though Vietnam’s economic growth may not match last year’s 8.5 percent, the country is part of a region that is emerging as a “growth pole in the world economy, providing a possible counterweight to the slowing industrial economies,” the World Bank has said.

In its semi-annual report on East Asia and the Pacific, titled East Asia: Testing Times Ahead, the bank forecast East Asia, excluding Japan, to grow at 7.3 percent this year against an estimated 1 percent for the U.S and Japan, and a slightly higher 1.5 percent for the Eurozone.

Though US recession has resulted in lower exports to that market, East Asian economic growth would continue to be supported by strong demand from local consumers and markets outside the US including Europe and developing countries.

For the third year in a row, the Vietnamese economy would maintain its 8 percent GDP growth benchmark, with a 22 percent growth projected for real export, and a 10.8 percent growth in fixed investment, or investment in physical assets such as machinery and factories.

The trade deficit would continue to be around 9 percent of GDP, and the government’s budget deficit was likely to double to 2 percent of GDP.

In his report on the local economic outlook, the World Bank’s chief economist in Vietnam, Martin Rama, cautioned the country against signs of an overheating economy – signs such as rising inflation, a widening trade deficit, and “bubbles” in the stock and property markets.

Challenging times ahead

Inflation was one of the major challenges threatening East Asian economic health, the bank’s report said.

Rising fuel and food prices, coupled with increasing monetary and credit growth fed by substantial capital inflows had contributed to pushing up inflation to “uncomfortable levels” in almost every East Asian country.

In Vietnam, inflation skyrocketed from 6.6 percent in December 2006 to 15.7 percent last February.

The report said on the one hand, high inflation reflected a less controlled exchange rate and the Vietnamese economy’s openness and, consequently, receptiveness to global prices.

On the other hand, with food comprising a large percentage of consumption, Vietnam, and the rest of Asia, should be careful lest rising food and other commodity prices affect the poor.

Rama said incredible credit growth was a major challenge for Vietnam.

In just a year, credit grew by more than 50 percent, “fueling prices, imports and the real estate bubble.”

Credit growth was fed by an increase in money supply due to a record build-up in foreign exchange reserves, he said.

The central bank has been purchasing foreign currency to prevent the dong from appreciating in the face of growing capital inflows.

Rama suggested tightening credit for ineffective and “dubious” investments in the public sector though he said this might not be the best way if export growth was slowing down.

Last month the government announced a new package to help cool down the economy but the World Bank said its success would depend in large part on how it was actually implemented and the government’s nimbleness in tackling the evolving situation.