Policy supports steady recovery this year
Last year’s inflation slowdown will enable monetary and fiscal relaxation in 2013. This should lift growth from about 5% last year toward the 6.5%-7% target range by 2014. However, an overhang of bad debt will hold back the pickup in private sector credit, tilting the recovery toward public sector investment and sharply reducing export growth. The consequent return to current account deficit in 2014 will leave growth more dependent on the recovery of inward investment.
There is a risk of reigniting inflation if the Government opts to promote exports by accelerating the Vietnamese Dong’s depreciation. However, the requirement to service foreign debt and the import needs of industry will keep monetary policy focused on currency stability.
Inward investment is set to revive sufficiently fast to finance the re-opening current account deficit in 2015. But to attract investors, the Government must upgrade infrastructure and skills to promote higher-tech industry, as textile and basic assembly FDI shifts toward lower-cost neighbors.
With the growing internal market boosting FDI, tourism and agricultural exports helping to finance industrial upgrades, and new power plants ending the perennial energy shortages, GDP growth of at least 6.5% remains sustainable in the medium term.
Real GDP Growth
Source: Oxford Economics.
Inflation
Source: Oxford Economics.
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