It should be noted that growth in the first quarter of 2015 was much higher than the same period of 2011-2013, by nearly one percentage point, indicating that the Vietnamese economy has made a strong recovery from the third quarter of 2014.
The question is whether this recovery trend is sustainable or not. On the supply side, growth in 2014 and the first quarter of 2015 was led by industrial production and construction, especially manufacturing, which is not affected by seasonal factors. The index of industrial production in the first quarter of 2015 rose by 9.1%, nearly the same as the average increase during the previous boom and much higher than the growth rate in the first three months of 2014. The purchasing managers index had a reading of 53.5 in April, up from 50.7 in March. On the demand side, domestic demand is gradually improving. Seasonally adjusted retail revenues in the first quarter of 2014 went up 9.1%, a significant improvement from the 5.1% rate posted in the same period in 2013 and 2014.
There are also a number of positive changes to drivers of growth. First, credit growth in the first quarter and April of 2015 was 1.25% and 1.51% respectively, compared with 0.52% and 0.91% in the same periods last year. Moreover, monthly credit growth has stabilised since June 2014. In 2014, there was also a marked increase in the percentage of both domestic and foreign enterprises planning to expand their business. Since February 2015, the number of dissolved and temporarily suspended companies has been on the decline and lower than the number of newly established ones, a major difference from previous months. Capital productivity has also increased with the ICOR, a measure of how efficient capital is used, falling from 6.2 in 2010 to 5.18 in 2014.
Foundations of growth, notably the business environment, have improved remarkably. Macroeconomic stability has been increasingly strengthened. Inflation has been declining and stabilised, which is essential for long-term investment and expansion. On the microeconomic aspect, the government is implementing Resolution 19 on improving the business environment and enhancing national capacity, and has achieved encouraging results. Last year also marked breakthroughs in institutional reform. Thanks to the adoption of new laws, the freedom to do business has been expanded to the maximum and protected in a better way while business risks, legal risks and compliance costs have also been reduced.
The above-mentioned changes make the market operate better, creating favourable conditions for enterprises and encouraging their entrepreneurship.
Nonetheless, there remains many concerns. The budget spending structure is unreasonable with a rapid increase in recurrent spending and spending on debt payment, while spending on investment and development is shrinking. Budget deficit is running high, exceeding the threshold allowed by the National Assembly, while budget management remains poor and investment efficiency of the State sector has yet to improve. Public debt is rising quickly in recent years and bad debt is far from being resolved. These factors risk causing macroeconomic instability and undermine the growth potential of the Vietnamese economy.
Although Vietnam’s economy is showing strong signs of recovery, there remains factors that could clog up and slow down that trend. Besides continuing to promote institutional reforms, improving the business climate and reinforcing macroeconomic stability, it is necessary for the government to make greater efforts to reform budget management mechanisms, improve the efficiency of public spending, reduce budget deficit and manage public debt in a better way.
