Economy to grow further in 2016

08:05 | 06/02/2016 Society

(VEN) - 2015’s economic growth, stable inflation, and the positive impacts of free trade agreements have given economists grounds for confidence and optimism about the prospects for Vietnam’s economy in 2016.

Economy to grow further in 2016

Inflation to be curbed at 2-3 percent

In its 2016 Economic Outlook Report, the National Financial Supervisory Commission (NFSC) forecast that global trade would be more favorable to Vietnamese exports. The global trade volume of goods is forecast to grow at a higher rate, 3.9 percent, compared with 2015 (three percent). Prices of goods in the world market are forecast to continue falling but at lower rates compared with 2015.

In 2015, Vietnam’s gross domestic product (GDP) grew an estimated 6.68 percent while the inflation rate was curbed at 0.6 percent, the lowest level since 2011. These results created a driving force for economic growth in 2016 and ensuing years. Trade agreements signed in 2015 will take effect in 2016, helping expand the markets for Vietnamese exports.

However, NFSC also indicated difficulties that would face the Vietnamese economy in 2016. These difficulties are mostly related to macroeconomic stability and the budgets for business support under fiscal and monetary policies. NFSC analyses show that the budgets for business support under fiscal and monetary policies in 2016 are limited, while the pressure on public debt repayment continues to increase, restricting the possibilities for reducing taxes as well as for increasing state investment. Meanwhile, prices of goods in the world market are forecast to continue falling but at lower rates compared with 2015, so the gap between actual inflation and core inflation is predicted to be not as big as in 2015.

In 2016, interest rates will suffer pressures from many factors. Specifically, a rise in inflation will increase public expectations, creating pressures requiring banks and credit institutions to raise deposit interest rates; the private sector’s demand for credit continues growing while the demand for issuance of government bonds does not decrease; increases in US interest rates reduce the gap between domestic and foreign currency interest rates. These factors will discourage the State Bank of Vietnam from reducing interest rates in order to stabilize foreign exchange rates. The demand for provision for credit risks also restricts the possibilities of reducing bank loan interest rates. Moreover, foreign exchange rates will be affected by the balance of payments despite optimistic forecasts about foreign currency incomes from foreign direct investment (FDI), exports, overseas remittances, because trade deficit increases and the depreciation of other currencies in comparison with the US dollar will create pressures on the balance of trade and foreign exchange rates.

Based on these analyses, NFSC forecast that in 2016 the core inflation rate would be about three percent, and the actual inflation rate would be curbed at 2-3 percent. Higher foreign exchange rate pressures require policy makers to be more flexible and cautious.

Favorable conditions for growth

According to NFSC, although investment from the state budget is forecast to decrease, from 11.5 percent of GDP in 2015 to 10.5 percent of GDP in 2016, total investment in development is predicted to reach the annual target of 31 percent of GDP thanks to optimistic forecasts about FDI and private sector investment. In 2016, opportunities from the signing of the Trans-Pacific Partnership will create favorable conditions for Vietnam to attract FDI; private sector investment will also improve thanks to state policies and solutions that had been implemented in the recent period to support businesses and improve the business environment. Meanwhile, efforts to restructure the banking system and deal with bad debts will make the financial system healthier, enhancing its capability of providing credit for the private sector.

State budget revenue in 2016 is forecast to reach annual estimates thanks to macroeconomic stability, improvements in production and trade, and export growth. Public debts and the government’s direct obligation to repay debts are predicted to continue rising due to the issuance of international bonds aiming to restructure mature domestic debts and increases in the disbursement of official development assistance (ODA) capital to ensure sufficient investment in development.

NFSC also indicated difficulties that would possibly face Vietnam in 2016. These include unexpected changes in the global economic situation that will have a certain impact on domestic forecasts and the guidance for implementing the economic development plan for 2016. Private investment and consumption are predicted to continue rising but at lower rates compared with 2015 due to the pressure on interest rates and inflation rises restricting public purchasing power. The trade deficit is forecast to increase, while businesses continue to face difficulties, especially small and medium-sized companies.

2016’s exports are expected to grow at higher rates compared with 2015 thanks to rises in global trade. Free trade agreements that take effect in 2016 will help Vietnam expand its export markets, especially for textiles, garments, footwear, agricultural, forest products and seafood. NFSC forecast annual economic growth would reach 6.7-6.8 percent.

The National Financial Supervisory Commission forecast that the Vietnamese economy would grow 6.7-6.8 percent in 2016; macroeconomic stability would continue to be maintained with the inflation rate to be curbed at 2-3 percent, creating room for adjusting prices of basic goods and services as well as foreign exchange rates. However, policy makers still need to beware of pressures from the global economy on domestic interest and foreign exchange rates, as well as increases in domestic public debts.


Thuy Linh