Mr. Sebastian Eckardt, the World Bank’s Lead Economist for Vietnam, talks about the successes and shortcomings of the new government in macroeconomic management during its first year.

■ What are your thoughts on the government’s macroeconomic policies over the last 12 months?

Authorities are continuing to focus on maintaining macroeconomic stability in a challenging global and domestic context. 

There was a lot of global financial volatility following the US elections as well as continued weaknesses in global trade and soft commodity prices. 

All this affects Vietnam, being an open economy with strong trade linkages. But, overall, we are seeing relatively resilient growth despite the somewhat disappointing first quarter results. 

While inflation has picked up due to administrative price hikes, overall price pressures remain moderate. Vietnam’s external position also remains strong, with a current account surplus and rising reserves. 

■ What macroeconomic policies have positively impacted on Vietnam’s macroeconomic environment and how have they added value to the economy?

Macroeconomic policies, including more flexible management of the exchange rate, responsive monetary policies, and gradual structural reforms to boost productivity in the economy all contributed to these solid economic outcomes. 

Among others, the series of Resolutions No.19 that have been issued by the government annually since 2014 have shown that it continues to put priority on improving the business environment and national competitiveness by shortening the time for processing and completion of administrative procedures, reducing administrative costs, and strengthening transparency and accountability at State administrative agencies, have helped Vietnam improve its ranking in the World Bank’s Doing Business report.

■ Which policies have had a negative impact on Vietnam’s economy over the last year and what has been their impact? 

Vietnam’s economy is really doing well. So this is a good time to address some of the remaining macroeconomic vulnerabilities. 

First and foremost, there have been large and persistent fiscal deficits in recent years and public debt has been rising fast. 

This is mainly because the revenue-to-GDP ratio has been falling and recurrent spending, including for public sector wages, has been rising fast. 

At the same time, fiscal space for public investment, which is necessary for growth, is increasingly limited. 

So there is a clear need to adjust the fiscal position by boosting revenues through tax policy reforms and containing recurrent spending growth while protecting critical investment in infrastructure and social services.

Secondly, despite some progress over recent years, problems in the banking sector are not fully resolved and there are still significant issues with the quality of some assets. So these reforms need to continue. 

Finally, structural reforms, including of the State-owned enterprise (SOE) sector, remain a priority, to revive productivity growth in the economy.

■ What are the challenges Vietnam’s economy will deal with from now to 2020 and can the government resolve them? 

While the outlook is generally quite positive there are risks on both the domestic and external fronts! 

The key domestic challenges originate from delays in structural reforms that could lead to further declines in productivity growth. 

This is a concern, since wages are rising and if they rise faster than productivity over extended periods of time this may undercut Vietnam’s competitiveness. 

Slower-than-expected fiscal consolidation could heighten public debt sustainability. Lack of skills in the workforce continues to impede productivity growth. 

Poor environmental protection could erode the longer-term sustainability of socioeconomic development. 

On the external front, Vietnam’s open and export-oriented economy may expose it to adverse turns of events in the global economy, such as rising protectionism and uncertain financial conditions, especially with expected changes in monetary policies in major economies. 

■ If foreign investors were to ask you about doing business in Vietnam over the next five to ten years, what would you advise them? 

I think the strong fundamentals of Vietnam speak for themselves. Vietnam has a lot to offer: a young and relatively skilled workforce and still competitive wages, a good geographic location, a strong outward orientation with many free trade agreements with major economies, and a policy environment that is quite friendly to foreign investors. 

Now, of course, these strong fundamentals need to be reinforced by good policies and institutions for Vietnam to realize its full potential. 

So it is crucial to continue and accelerate reforms aimed at solidifying macroeconomic stability, enhancing productivity growth, and laying the foundations for Vietnam to move up the value chain and continue to prosper. 

VN Economic Times