Although the outlook for Vietnam’s economy is positive, it is important to manage strong growth and avoid the build-up of imbalances to ensure the sustainability of the expansion.
In February 2011, the Vietnamese dong (VND) was devalued by 8.5 per cent to restore macroeconomic stability. Inflation was running at double digits, credit growth was expanding at over 30 per cent year-on-year (y/y), and the current account deficit had blown out to 11 per cent of GDP a few years earlier.
The current situation is very different. Although inflation is currently 4.5 per cent y/y - above the State Bank of Vietnam’s (SBV) inflation target of 4 per cent - this is expected to moderate later in the year. Inflation is expected to remain contained.
While the country’s trade balance swings between surplus and deficit, the main cause for the deficit is large imports of capital equipment for the construction of new manufacturing plants. Once these are completed, the imports will reduce and the exports will rise as the new factories ramp up production.
Vietnam is expected to maintain current account surpluses, as the majority of FDI that it attracts are in the manufacturing sector for the production of goods for export. Credit expansion is now at more manageable growth rates but there is still a need to ensure the private sector credit to GDP ratio, currently 132 per cent, does not rise too far.
Apart from anchoring inflation expectations and addressing excessive credit growth, allowing the Vietnamese dong to be more flexible has been an important move towards better macroeconomic management.
The authorities changed the exchange rate regime in early 2016. Previously it had been fixed to the USD but with frequent bouts of devaluations. Allowing the dong to adjust ensures changes in the global economic environment can be captured and a more rapid adjustment in the currency ensures the country’s relative competitiveness is maintained.
In terms of further efforts to sustain strong growth, deeper integration by domestic private-sector firms into the supply chain of multinationals operating in Vietnam is crucial.
Accelerating the knowledge spill-overs of FDIs into domestic firms, including the development of management skills to enable Vietnamese firms to progress from supplying intermediate inputs into engaging in direct exports themselves will help take Vietnam’s economy to the next level.
Khoon Goh is Head of Asia Research, Institutional at ANZ