The Asian Development Outlook (ADO) 2015 forecast Vietnam’s Gross Domestic Product (GDP) growth to edge up to 6.1 percent in 2015 and 6.2 percent in 2016, the Asian Development Bank (ADB) said in a news flagship report released yesterday.
The report also assumed that the Government maintains expansionary monetary and fiscal policies and continues to accelerate structural reforms. Annual inflation is projected at 2.5 percent in 2015, quickening to 4.0 percent in 2016 as domestic demand and global oil prices pick up.
The ADO highlights that while Vietnam’s economic performance slowly improves, a number of structural factors continue to limit its ability to reach its full growth potential.
In the short term, priority should be placed on strengthening the banking system and outlining a clear strategy to resolve non-performing loans. Growth will also be supported by new laws to guide divestment of state owned enterprises and accelerate their commercialization.
According to ADB experts, lifting economic growth over the longer term however will rely on Vietnam’s ability to undertake deeper structural reform, in particular to support local firms’ integration into global value chains.
Currently, Only 36 percent of all Vietnamese firms are integrated into export-oriented production networks, compared with nearly 60 percent in Malaysia and Thailand. Just 21 percent of Vietnamese SMEs participate in global supply chains, and SMEs’ contribution to exports from Viet Nam is significantly less than in other countries.
ADB expert, Dominic Mellor said that fiscal policy looks set to remain expansionary in light of a planned budget deficit of 5.0 percent of GDP in 2015 and a similar deficit likely in 2016. Budget priorities include greater emphasis on capital expenditure, which is slated to rise by nearly 20 percent after 2 years of absolute declines.
Current expenditure is expected to rise at a more modest rate of 10 percent, including increases of 11 percent for health care and 5 percent for education.
Reductions in corporate income tax rates, the removal of tariff s, and exemptions for favored firms have eroded the tax base. From 2010 to 2014, central government revenue and grants fell from 27.6 percent of GDP to an estimated 21.5 percent.
During the forecast period, the lower oil prices will hurt corporate and resource tax collections. The outlook assumes that, if revenue is weaker than anticipated, the authorities will opt for a moderately wider budget deficit rather than significant cuts in expenditure.
Under this scenario, public debt may rise toward 60 percent of GDP by the end of 2016. This prospect highlights the importance of correcting fiscal imbalances over the medium term to avoid running up unsustainable debt or jeopardizing investor confidence, said Mr. Mellor.