ADB: Bad debt, low productivity the main challenges for Vietnam this year

Eric Sidgwick, ADB Country Director for Vietnam, said the government should be "resolving the existing stock of non-performing loans and preventing the build-up of new ones, as this continues to stifle the creation of an efficient and inclusive financial sector". 

In a press conference today, the ADB forecast Vietnam's economy to remain stable in 2016 with growth of 6.7 percent followed by a modest slowing of growth to 6.5% in 2017. Growth will be driven by continued high levels of foreign direct investment, rising domestic consumption and demand, and a pro-growth policy. Vietnam is also expected to benefit from new free trade agreements which, once implemented, would create new business opportunities. 

The Asian Development Outlook 2016 on Vietnam Economic Update and Prospects 2016 – 2017 says the stable development of manufacturing and construction in 2015 helped to keep the economy growing at its fastest rate in over seven years.

Although the economy seems set to be stable in 2016 with low inflation of three percent and private consumption growth at 9.3 percent, it does face significant short and long-term challenges which require reforms for banks and state owned enterprises and better urbanization management.

According to ADB’s report, FDI inflow continues to be flat after a record high FDI commitment ($22.8 billion) in 2015 and disbursements are likely to decline in 2017.

While Vietnam will be a major beneficiary of recent free trade agreements, the country will also have to deal with some significant adjustment costs. As the economy opens up to increased competition and more stringent export standards, domestic firms will face increasing commercial pressures. 

“In the short-term, the Government must navigate the impacts of a slowing global economy, while at the same time rebuilding the macroeconomic buffers that would allow Vietnam to be resilient to any future economic shocks,” Sidgwick said.

“Over the long-term, greater efforts are also needed to address Vietnam low’s productivity growth, and to support domestic firms’ ability to integrate into the global value chain. Central to this task will be speeding up, and deepening, the process of state owned enterprise reform – beyond just equitization - to remove the distorting impact which these firms have on the economy and its competitiveness.”

“To ensure that the economy is able to maximize the benefits from the agreements, the government must move in parallel to create a more productive and innovative economy that can more readily adapt to increasing competition,” he said.