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The latest Taking Stock, the World Bank’s bi-annual economic report on Vietnam released today, emphasizes the resilience of the Vietnamese economy. GDP growth has continued to be driven by a strong external sector with exports expanding by about 8 percent in 2019 – nearly 4 times faster than the world average.
The country has also remained an attractive destination for foreign investors, with foreign direct investment (FDI) inflows averaging US$3 billion per month. In addition, private consumption has emerged as an important contributor to GDP growth as the result of an expanding middle-income class and rising wages. Private firms also increased investment by 17 percent during the same period.
According to the report, Vietnam’s economic fundamentals appear robust, and the government has built some fiscal space through its prudent fiscal policy. However, the country is not completely immune to external shocks as demonstrated by the gradual decline in export growth from 21 percent to 8 percent between 2017 and 2019. This decline in export growth has been even more pronounced in non-US markets, up by only 3.6 percent during the first 11 months of 2019. Greenfield FDI has also slowed by about 30 percent over the past two years, even if it has been compensated by an increase in mergers and acquisitions.
To account for these external risks, and to bring an additional engine of growth to the economy, the report recommends making the development of a strong and dynamic private sector a priority. “Addressing the financing constraint of firms should receive the greatest attention from policy makers if Vietnam wants to continue on its trajectory of rapid and inclusive growth and reach high-income status in the coming decades,” said Ousmane Dione, World Bank Country Director for Vietnam.
The report advocates for the development of well-functioning capital markets as a foundation for Vietnam’s future prosperity. However, while capital markets have expanded rapidly in Vietnam over the past few years, they remain 1.5 to 2 times smaller than in Thailand and Malaysia respectively, and are largely dominated by a few big players, including the government.
The report suggests five areas policy makers should focus on to advance the development of the capital markets: modernizing the legal and regulatory foundation of the capital markets; improving governance and information disclosure; broadening the investor base; developing innovative products; and strengthening the government’s role in the development of long-term finance.
