WB Expert: Vietnam Sees Strong Rebound, Momentum Remains Strong
The conference on "Maintaining macroeconomic stability, controlling inflation, promoting growth and ensuring major balances of the economy in the current situation" was chaired by Prime Minister Pham Minh Chinh on September 12.
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| (Photo: tuoitre.vn). |
World Bank's representative, Mr. Andrea Coppola spoke at the event that the second quarter surprised on the upside and momentum remains strong.
In particular, industrial production registered 2.9 % growth in August, driven by food and beverages, footwear and machinery subsectors.
From the demand side, stronger domestic demand and the continued recovery of consumption could also further compound price pressures.
Lower global growth is expected to weigh on industrial production and exports which have been major drivers of the recovery, said Andrea.
Also persistent COVID-19 related disruptions may affect domestic recovery especially in the service sector and core inflation has been accelerating since the beginning of the conflict in Ukraine and will need to be closely monitored.
World Bank's recommendations for Vietnam's policymakers
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| Mr. Andrea Coppola (left) at the "Maintaining macroeconomic stability, controlling inflation, promoting growth and ensuring major balances of the economy in the current situation" conference on September 12 (Photo: VGP). |
A full utilization of the Recovery policy package
Amore supportive fiscal policy stance could hedge against downside risks to growth, recommended the WB specialist, adding that addressing the under-execution of the public investment program would make fiscal policies more effective.
In the short run, the focus should be on full utilization of the Recovery policy package adopted earlier this year, with a strong push on project implementation.
This would help bolster the domestic demand recovery in the near-term while also boosting Viet Nam's long-term potential growth.
Andrea also advices Vietnam's policymakers to expand targeted social safety nets to help buffer the effects of rising inflation on poor and vulnerable households and to cushion impacts on private consumption more effectively than untargeted subsidies and cuts in taxes.
Agile monetary policies
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| Inflation expectations coule rise and feed into destabilizing pressures on nominal wages and production costs due to persistent price increases (Photo: VNA). |
Since core inflation remains in check and the economy is still below potential, current accommodative monetary policies appear appropriate for the time being, exclaimed Andrea.
In case side risks to inflation materialize -with core inflation accelerating and headline inflation moving above the 4 % target set by the government – the State Bank of Viet Nam could consider monetary tightening to quell inflationary pressures.
Cear and forward-looking communication of monetary policy decisions would help guide market participants and ensure inflation expectations remain well anchored.
To enhance monetary policy transmission and effectiveness over the medium term, Vietnam needs to systemize monetary policy framework and move towards inflation targeting.
Agile monetary policies could include steps to expand the tools available to manage liquidity as well as enhanced macro prudential measures.
Manage financial risks of impaired loeans
Emerging financial risks also need to be managed proactively to strengthen the resilience of the financial system, Andrea suggested.
The roll back of forbearance at end of June 2022 was an important step to enable the better recognition of impaired loans.
Andrea suggested bank to conduct more prudential supervision and closer compliance with Non-Performing Loans reporting and provisioning requirements to enhance their loss-absorbing capacity and resilience. If capital shortfalls arise, banks should develop specific and time bound recapitalization plans.
An effective corporate insolvency regime and a functioning banking sector resolution framework are also important to deal with potential insolvencies and also to promote a more efficient allocation of private capital in Vietnam.
Deeper structural reforms
The last suggestion from WB program leader in Vietnam is that deeper structural reforms are critical to supporting potential growth in the medium run and making the economy more resilient and inclusive.
Fiscal reforms could focus on stabilizing revenue generation through tax policy reforms and enhancing spending efficiency to expand the fiscal space for spending on Viet Nam's social, climate, and other development objectives. Promoting more public and private investment in climate change adaptation would help make Vietnam's economy more resilient.
He added that this could be accompanied by policies to move towards Vietnam's carbon neutrality target –including expansion of renewable energy and carbon pricing- which could also enhance the competitiveness in growing markets for green products and technologies.
Also, policymakers could also consider taking steps to reduce skill-mismatches and improve the quality of Viet Nam's labor force.
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