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Viet Nam Needs Slow 2009 for Robust 2010-2011 - ADB Release New Economic Update

HA NOI, VIET NAM (16 September 2008) – Viet Nam has effectively managed this year's economic turbulence, but its difficulties are not over and with uncertain global economic prospects, it is important for the country to continue measures to stabilize its economy, the Asian Development Bank (ADB) said in a major new report.

The Asian Development Outlook 2008 Update (ADO Update) says targeting a lower growth rate of 6.0% next year, as compared to the projected 2008 growth of 6.5%, will allow Viet Nam to be better prepared to resume strong economic growth in 2010-2011.

"While we congratulate the Government for the improving economic statistics in recent months, in absolute terms, inflation and the trade deficit are still very high and it will still take some more time to firmly stabilize the situation," says Ayumi Konishi, ADB Country Director for Viet Nam.

"It should be clearly realized that there is a trade-off between the growth target for next year and the growth potential for subsequent years. Knowing that there are more challenges ahead for the economy, Viet Nam should be patient in shifting its policies towards economic recovery," Konishi said.

In addition to cutting its growth forecasts from 7.0% in 2008 and 8.1% in 2009, the ADO Update revised up its inflation projections for 2008 and 2009 to 25.0% and 17.5%, respectively, from its previous estimates in April of 18.3% and 10.2%. The current account deficit for this year is now seen at 13.5% of GDP, up from 10.3% previously; and for 2009 at 7%, down from 9.4% earlier.

The Government has been giving priority to curbing inflation over stimulating growth, in order to bring it to single-digit levels, but as price pressures are projected to ease, along with a slowdown in growth and a narrower trade deficit, the Government may be tempted to loosen its fiscal and monetary policies and boost public investment in an effort to spur the economic growth rate again. If this occurs, the GDP growth rate will increase, but so will inflation, and the current account deficit in 2009 will also be larger than in the baseline scenario, says the report.

"At some stage, adjustments in wages, power tariffs and other key prices will be essential. Another surge in global commodity prices cannot be ruled out and there are also concerns about several aspects of the domestic economy," says Mr. Konishi.

The report notes that the State Bank of Viet Nam needs to continue strengthening its prudential supervision of banks and —should any bank become financially distressed— act swiftly to prevent a systemic banking crisis.

Despite near-term risks and challenges, Viet Nam's medium- to long-term economic prospects remain good, with a diligent labor force, moderate external debt burden, rising foreign direct investment inflows, and significant growth potential, the report says.

While economic and institutional reforms have slowed in recent months, they are expected to speed up again once Viet Nam's macroeconomic situation stabilizes and market conditions become more favorable.

ADB, based in Manila, is dedicated to reducing poverty in the Asia and Pacific region through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region. In 2007, it approved $10.1 billion of loans, $673 million of grant projects, and technical assistance amounting to $243 million.

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