Country briefing note <download pdf file>
Economic growth slows amid cyclical and structural challenges
- Economic growth rate decelerated further to 5.0% in 2012, the slowest pace since 1999, following rates of 5.9% in 2011 and 6.8% in 2010.
- Weak growth was partly cyclical, resulting from the need to stabilize the economy and curb inflation, but also partly structural, as side effects of heavy investment-driven growth became more visible in State enterprises and the banking sector.
- Industrial activity was particularly weak at the beginning of 2012, but improved as the year progressed.
- A bright spot in the economy was the buoyant services sector, which continued to expand at a rapid rate, with tourism, hotels and restaurants growing more than 20% faster in 2012 than in 2011.
- Continued strong agricultural production also contributed to growth.
- Although facing significant challenges in stabilizing the economy and restructuring the financial sector, the country possesses a dynamic workforce and a relatively diversified economy.
- The economy expanded by 4.9% in the first quarter of 2013, down from 5.4% in the fourth quarter of 2012. The economy is expected to regain its momentum in the second half of 2013, resulting in a slight acceleration in output growth to 5.5% in 2013. Much will depend on restoring confidence in the economy through keeping inflation in check, addressing vulnerabilities in the banking sector and restructuring less efficient State enterprises, as emphasized in the government directive approved in February 2013.
Inflation declines significantly but pressures remain
- Average annual inflation rate declined significantly from 18.7% in 2011 to 9.3% in 2012, under the Government's effort to stabilize the economy from the side effects of earlier expansionary policies. However, inflation still remained high in health services, education and transport, leaving average households exposed to large price increases.
Monetary policy aims for low inflation and banking sector recovery
- The country maintained a generally tight monetary stance in 2012, but some of the earlier stabilization measures were relaxed, with the refinance and discount rates falling to 10% and 8% respectively by July 2012, from 15% and 13% at the end of 2011.
- In late March 2013, the refinance and discount rates were further brought down to 8% and 6% respectively.
- Vulnerabilities in the banking sector have emerged as a major concern. In March 2012, the Government approved a plan to buy non-performing assets from commercial banks. The central bank announced in February 2013 that non-performing loans had fallen to 6% of banks' total loans, compared with nearly 9% in September 2012. A government directive approved in that same month said that bad debt should be cut to below 3% of loans by 2015.
Fiscal policy focuses on the vulnerable and state-owned enterprises reform
- Fiscal deficit widened from 2.5% of GDP in 2011 to 4.8% of GDP in 2012.
- The Government raised its health insurance subsidy for the poor from 50% to 70% of the premium in June 2012, as part of its efforts to achieve universal health care coverage by 2014.
- The Government approved an economic plan for 2013-2020 that is designed to roll back some of the state-owned enterprises, with the aim of opening up more opportunities for private sector businesses, allowing them to enter a wider variety of businesses and potentially to produce more of the kind of goods that the country currently imports.
Exports remains strong but FDI inflows decline
- A small trade surplus was recorded in 2012, with export growth accelerating despite the United States and the European Union being the country's leading export markets.
- Foreign direct investment inflows in 2012 were 15.3% below 2011 levels. The Government is reviewing ways to modernize the management of foreign investment inflows as part of its efforts to shift focus from quantity to quality of investment.
- Remittance inflows in 2012 increased by more than 10% compared with 2011, that is, to more than $10 billion, providing an important source of income from abroad.
Social insurance scheme is being expanded
- Informal employment as a share of non-agricultural employment remains as high as 68.2%. Workers in informal employment suffer from lower wages, lower productivity and a lack of job security.
- This becomes a greater challenge when social protection schemes are inadequate. According to a 2011 ILO report, Viet Nam spent around 4.9% of GDP on social security expenditures compared to an average of 5.3% for Asia and the Pacific.
- But progress in being made. Viet Nam introduced an unemployment insurance scheme in 2009, and decided in 2012 to extend social security to half the labour force by 2020.