ANZ expert opinion: Sustainable growth in Vietnam

16:07 | 22/10/2015 Finance - Banking

The Vietnamese economy is steadily recovering, but growth remains below the country’s real potential. Keeping a flexible monetary policy will help the economy grow sustainably. Eugenia Fabon Victorino, economist of ANZ in the ASEAN and Pacific, shares her views.

ANZ expert opinion: Sustainable growth in Vietnam

ANZ last month reported that the Vietnamese consumer confidence index advanced to 135.3. The ADB has also raised its 2015 forecast for Vietnam to 6.5 per cent and 6.6 per cent for 2016. It is said that the economic growth is supported by local consumption and low fuel prices. How does the price of oil impact the Vietnamese economy?

As we have published earlier in the year, low oil prices will have a barbell effect on external trade and the government’s fiscal balance. Meanwhile, the low inflation rate is freeing up space in consumer’s disposable income. Thus, retail sales are supported. The September improvement in the ANZ-Roy Morgan consumer confidence index was driven by a gain in confidence in the country’s medium to long-term economic outlook, despite the waning personal financial assessment. In our view, consumers recognise that the policies in place are fundamentally supportive of a more sustainable growth path.

What is your forecast for the Vietnamese economy this year? What will be the driving forces for the economy?

We stand by our view that GDP growth in Vietnam will likely reach 6.5 per cent in 2015 and 2016. Assessing the momentum of various activity indicators, we now acknowledge upside risks to our own bullish forecast. Export growth in Vietnam continues to buck the regional export contraction. Clearly, the transformation of Vietnam’s production possibility frontier is unhindered by the slowdown of China’s growth.

The inflation this year is very low. Do you think Vietnam will face deflation in the upcoming time, and if so, why?

The favourable base effects of the low oil prices will start to wane over the next few months. This dynamic will be present through 2016, despite market expectations of oil prices staying low for a longer period. Low oil prices should also give the government space to review its price stabilisation policies on other goods in the CPI basket. Meanwhile, official estimates of core inflation, which strips out the volatile items of food and oil items that are state-controlled, suggest that core demand is easing. This supports our view that the central bank has enough policy space to ease monetary conditions as growth remains below potential.

Vietnam's economic recovery is broadening, but what are the major risks the economy is facing?

We believe that the improvement in economic growth is broadening to now extend into domestic demand. Until a year ago, the main engine of growth had been external demand. However, at the start of 2015, we noted that private consumption has started to gain traction. Yet, this is not without risks. As we still expect a narrow current account deficit of around 0.5 per cent and 1.0 per cent of the GDP for 2015 and 2016, respectively, we remain watchful of unhealthy aspects of importation that could sneak into the current account.

What should Vietnam do to reduce these risks?

In our view, allowing the VND to reflect the reality of the current account deficit is in line with policies that would support a sustainable growth model. There are risks to maintaining an FX rate that is not consistent with the country’s balance of payments situation. A more flexible exchange rate regime would allow the currency to act as a natural stabiliser to external trade without straining the country’s stock of foreign reserves. For this reason, we view the devaluation and widening of the trading band on August 19 as a positive and prompt response to the change in China’s FX policy./.

Source Vir

Theo ven.vn