The update set out that extreme poverty in Vietnam continued to fall to less than 3% in 2014, poverty remains high among ethnic minorities. Mid-term challenges include containing public debt while implementing structural reforms (especially in banking sector and SOEs) and creating an environment more conducive to private-sector-led growth. Vietnam's continued international economic integration is expected to further boost trade and investment.

Recent economic developments

Economic activity continued to firm up in 2015, driven by strengthening domestic demand. GDP accelerated to 6.3% during the first half of 2015, the fastest first-half-of-the-year growth rate in the last 5 years, driven by strong activity in manufacturing and construction, which together contributed nearly half of overall GDP growth. Despite the pickup in retail activity, overall services (accounting for nearly 40% of GDP) rose modestly at 5.9% in the first half of 2015. On the demand side, stronger growth was supported by investment and improved private consumption. However, the contribution of net exports turned negative as sluggish external demand weighed on export growth, while strengthened domestic activity continued to fuel import growth.

Preliminary analysis of new data from the 2014 Vietnam Household Living Standards Survey confirms that poverty for the country is dropping, and extreme poverty using the new US$1.9 a day, 2011 PPP line is below 3%. Concerns about poverty are increasingly focused on the 15% of the population who are members of ethnic minority groups. Ethnic minorities now account for more than half the poor, and progress on ethnic minority poverty reduction has slowed.

A low inflation environment has enabled the State Bank of Vietnam to loosen its monetary policy stance. The consumer price index rose only 0.6% year-on-year in August 2015, down from 4.3% a year earlier. Interest rate cuts were aided by macro prudential measures, including relaxation of limits on short-term deposits, and risk weights for certain lending activities, simulating credit growth to an estimated 7.9% (year-to-date) in June 2015, consistent with the SBV's target range for the whole year.

Persistent fiscal imbalances are a concern against the backdrop of rising public debt and persistent fiscal pressures, with an estimated deficit (including principal payment) of the first half 2015, reflecting weak revenue outturn and increased current and capital spending. Total public and publicly guaranteed debts increased further to an estimated 59.6% in 2014 (up from 54.5% in 2013).

The external trade balance weakened, causing the current account to move into deficit in QI of 2015. A trade deficit of US$3.5 billion was recorded in the first seven months of 2015 (as compared to a surplus of US$2.1 billion in entire 2014). The outturn reflected a slowdown in export growth and stronger growth in imports, especially in intermediate and capital goods.

Progress on structural reforms has been mixed, especially with regard to SOE and banking sector reforms. An acceleration of these reforms is deemed necessary – by both policy makers and private analysts – to carry growth closer to the 7% and meets Vietnam's long-term aspirations to become a modern, industrialized nation. SOE equitization has slowed in 2015. Consolidation of the banking sector (mergers and acquisitions of commercial banks) accelerated during the first half of 2015, but resolution of bad debts remain a concern.

Outlook and challenges

The update assessed that the medium-term outlook for Vietnam is positive on balance but subject to significant downside risks. Growth is expected to be over 6% in 2015, underpinned by further recovery in domestic demand. Despite the expansionary monetary policy stance, inflation would remain low due to subdued global conditions and low global energy and food prices.

The fiscal deficit is expected to start adjusting through consolidation efforts to avoid further increases in public debt. The trade balance is projected to turn into a deficit in 2015 due to softer export growth and sustained strong import growth stoked by stronger domestic economic activity. However, robust remittances will keep the current account in surplus, albeit at a much lower level than last year.

Poverty is expected to continue to decline. Extreme poverty is expected to decline from 2.8% in 2012 to 1% in 2017, while the percentage of the population living below US$3.1 a day would fall from 12.3% in 2012 to 6.7% in 2017. While the strengthening recovery combined with stable macroeconomic conditions is expected to help sustain positive poverty trends, slower agricultural growth may dampen rural income growth and widen the rural-urban income gap. It is also expected that ethnic minorities will account for a growing share of the poor.