Vietnam’s economy strengthens but concerns remain: World Bank

Vietnam’s economic growth continued to strengthen in the first half of the year, but the progress on structural reforms remained slow, the World Bank said in a report released on July 20.

Workers at the Garment 10 Company in Hanoi
Workers at the Garment 10 Company in Hanoi

According to the Taking Stock report, Vietnam’s total economic output in the six months through June grew at the fastest rate compared to the same period over the past five years, expanding by 6.28%, driven mainly by strong factory activity.

However, the economy is still facing serious structural problems, particularly State-owned enterprises (SOEs) and the banking sector, whose reform progress has subdued.

SOE reform was slowing with only 29 enterprises having completed equitisation in the first three months of 2015, far below the annual target of 289.

The World Bank noted that implementing the legal and regulatory framework of SOE management and corporate governance issued last year, and increasing ownership of the private sector in SOEs, should remain key priorities.

At the same time, banking reforms showed some progress with a number of smaller banks acquired by major State-owned commercial lenders, but the lack of an appropriate legal framework was constraining the resolution of bad debt, said World Bank’s economist Sandeep Mahajan.

He added that the Vietnam Asset Management Company (VAMC)’s limited capital base and operational capacity were also hampering the efforts to resolve non-performing loans.

VAMC claimed to have resolved VND4.8 trillion out of VND123 trillion in assets transferred to the company as of the end of 2014. It also reported to have accumulated assets of VND152 trillion and resolved an additional VND3 trillion from the beginning of this year to the end of May.

The World Bank, however, stated that the majority of these assets were transferred in exchange for bonds, and risks have not been fully removed from the banking system as some unresolved assets may return as bonds mature.

The semi-annual review of the Vietnamese economy also pointed out that the country’s fiscal situation has emerged as a source of concern, with public debt rising rapidly in recent years from 50% of GDP in 2011, to 59.6% in 2014.

Public debt payments also rose from 22% of revenue in 2010 to about 26% in 2014, with interest payments alone accounting for 7.2% of budget expenditure, eating into other more productive spending.

In addition, export slowdown and strong import growth have led to the return of a trade deficit, with an estimated gap of US$3 billion in the first five months of 2015 compared with a surplus of US$2.1 billion in the whole of 2014.