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Stronger domestic demand, robust export-oriented manufacturing, and a gradual recovery of the agriculture sector, are driving Vietnam’s economy, which expanded by 6.4 percent during the first nine months of the year compared to the same period last year, says a new World Bank report.

The manufacturing and services sector respectively grew by 12.8 percent and 7.3 percent during the same period. According to Taking Stock, the World Bank’s bi-annual economic report on Vietnam released today, the pace of growth is expected to increase to 6.7 percent this year. Over the medium term, growth is projected to stabilize at around 6.5 percent, and inflation is projected to remain low.

“Growth momentum picked up across major economies and global trade recovered in 2017,” said Ousmane Dione, the World Bank Country Director for Vietnam. “With incomes rising and poverty falling, Vietnam’s economy had another good year of strong growth and broad macroeconomic stability.

Low inflation and rising real wages sustained buoyant domestic demand and private consumption, while the stronger global economy helped Vietnam’s export-oriented manufacturing and agricultural sectors. Job growth continued, with 1.6 million new jobs added in the manufacturing sector over the past three years, and 700,000 additional jobs in the construction, retail, and hospitality sectors, leading to higher aggregate labor productivity. Labor demand also contributed to rapid wage growth, with wages increasing by 15 percent cumulatively between 2014 and 2016.

Despite progress in resolving non-performing loans, risks remain, including the lack of robust capital buffers in some banks, especially amidst rapid credit growth.

Fiscal tightening is underway, highlights the report, and has led to a leaner budget deficit and containment of public debt accumulation. However, the decline in public investment – falling to 16 percent of total spending in the first nine months of 2017 compared with an average of 25 percent in recent years – may not be sustainable over time, as Vietnam needs significant investments in infrastructure to support future growth.

A slow-down in structural reforms could also impact the ongoing recovery, especially given the weaker growth in investment.  Enhancing macroeconomic resilience and structural reforms can liftVietnam’s growth potential over the medium term.

“Structural reform remains a central priority in view of tepid productivity growth” said Sebastian Eckardt, the World Bank Lead Economist for Vietnam, “Building on progress already made, Vietnam can further lift productivity growth through investments in needed infrastructure and skills as well as deeper reforms of the business environment, SOE and banking sector.” 

Taking Stock’s special section focuses on improving efficiency and equity of public spending. With public debt closes to the statutory limit of 65 percent of GDP, Vietnam’s government faces tight budget constraints for several years to come. This special topic section looks at fundamental expenditure reforms in key public services to identify opportunities for constraining expenditure growth through improvements in expenditure productivity.

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