According to its East Asia and Pacific Economic Update 2012, the WB says after  a  prolonged  period  of  heightened  turbulence, Vietnam’s  economy  is  gradually  entering  a  more stable  macroeconomic  environment, especially after the government introduced Resolution 11 in February 2011 to stabilize the economy and to ensure social stability. 

 While  Vietnam’s  economy  has  started  to  stabilize, the  significant  tightening  of macroeconomic  policies, along with uncertain global economic environment, are beginning  to  take a  toll on  its economic growth, the report says.

Real GDP growth decelerated  from 6.8 percent  in 2010  to 5.9 percent  in 2011  and  further  to 4.0 percent  in  the first  quarter  of  2012  as  domestic  demand  slowed, affecting  construction,  services,  and  utilities. 

Thanks to a combination of these measures and falling food prices, it says, inflation declined to 10.5 percent year-on-year in April 2012 from a peak of 23 percent in August 2011.

In the meantime, export earnings in the first quarter of 2012 increased by 23.6 percent with key labor intensive manufacturing exports such as garments, footwear, and furniture growing by 14-18 percent.

Pressures on the exchange rate have continued to decline in the first quarter of 2012, as confidence in the domestic currency has gradually picked up. The unofficial exchange rate has remained close to the lower edge of the plus/minus 1 percent band around the official rate since the 8.5 percent devaluation of the VND against the US dollar in February 2011.

The increased supply of US dollars  in  the market  has  enabled  the  State  Bank  of Vietnam (SBV) to replenish foreign exchange reserves in  the  first months  of  2012, which  are  reportedly  at nearly 7.5 weeks of imports.

Regarding the credit market, it says the government measures have led to a sharp decline in credit growth, from 32.4 percent at the end of 2010 to 14.3 percent by the end of last year. However, asset quality has deteriorated in part due to rapid credit growth before 2011 and the slowdown in the real estate sector. Official non-performing loans have increased from 2.2 percent of assets at the end of 2010 to 3.6 percent in March 2012, but are likely to be higher if measured by international accepted standards.

Monetary tightening has also added liquidity stress in some smaller banks. In response to this, the authorities have provided liquidity and other support to ailing banks.

In a move  to  shore  up  the  economy, SBV  reduced  policy interest  rates  by  200  basic  points  in  March  and April  (from  15  to  13  percent)  and  announced  further reductions  of  at  least  100  basis  points  every  quarter during 2012.

According to the WB, Vietnam’s public debt is likely to remain sustainable if the economic recovery continues and the authorities remain on the current path of fiscal consolidation. The WB’s Low-Income Country Debt Sustainability Analysis shows that the Southeast Asian nation remains at a low risk of debt distress and the largest source of uncertainty to debt sustainability comes from implicit obligations to state-owned enterprises (SOEs), which are not captured under government and government-guaranteed debt statistics.

A reliable estimate of such liabilities is not available, which limits the government’s ability to manage associated risks.

The authorities are stepping up efforts to collect reliable and up-to-date information on contingent liabilities (mostly in the SOEs and State economic sector) and to monitor and manage potential fiscal risks.

The WB supposed that in the short run, Vietnam should maintain macroeconomic stability and restore investors’ confidence, while addressing longer-term structural reforms. 

Even if  only  a  subset  of  the  announced  structural  reforms is  implemented  steadfastly,  Vietnam  should  return to  a  more  sustainable  macroeconomic  environment while laying the foundations for greater efficiency and productivity to drive medium- and longer-term growth, it says.

(VOV)