Viet Nam experiences strong rebound, momentum remains strong
In a recent meeting held this week, Andrea Coppola said the second quarter surprised on the upside and momentum remained strong.
Industrial production grew 2.9% in August, led by the food and drink, footwear and machinery subsectors.
However, for the future, headwinds are brewing. Weaker global growth is expected to weigh on industrial production and exports, which have been the main drivers of the recovery, while ongoing COVID-19-related disruptions could affect domestic recovery, particularly in the services sector.
Inflation eased in August due to lower fuel prices. On the other hand, underlying inflation has been accelerating since the start of the conflict in Ukraine and will have to be watched closely.
Nevertheless, persistent price increases are likely to raise inflation expectations and fuel destabilizing pressures on nominal wages and production costs.
On the demand side, firming domestic demand and a continued recovery in consumption could also add to price pressures.
According to Andrea Coppola, the current situation confronts Vietnamese policymakers with the difficult task of balancing the need to provide continued political support to consolidate the recovery with the need to contain emerging inflation and financial risks.
High uncertainty will require the policy mix to be adapted to changing circumstances, he added.
Firsta more favorable fiscal policy could cover the risks of slowing growth, recommended the World Bank specialist, adding that tackling the under-execution of the public investment program would make fiscal policies more effective.
In the short term, the focus should be on making full use of the stimulus package adopted earlier this year, with a strong impetus on project implementation.
This would help support the recovery of domestic demand in the near term while boosting Viet Nam’s long-term potential growth.
In addition, expanding targeted social safety nets would not only help cushion the effects of higher inflation on poor and vulnerable households, but also cushion the effects on private consumption more effectively than subsidies and subsidies. untargeted tax cuts.
Secondinflation risks call for agile monetary policies, noted Andrea Coppola.
Given that underlying inflation remains subdued and the economy is still below potential, the current accommodative monetary policies seem appropriate for now.
However, if upside risks to inflation materialize – with core inflation accelerating and headline inflation exceeding the government’s 4% target – the State Bank of Viet Nam could consider monetary tightening to ease inflationary pressures.
Accompanying monetary measures with clear and forward-looking communication of monetary policy decisions would help guide market participants and ensure that inflation expectations remain well anchored.
Over the medium term, more fundamental reforms to strengthen the State Bank of Viet Nam’s monetary policy framework and move towards inflation targeting would improve the transmission and effectiveness of monetary policy.
This could include measures to expand the tools available to manage liquidity as well as strengthened macroprudential measures.
Thirdemerging financial risks also need to be managed proactively to build the resilience of the financial system, the World Bank specialist suggested.
The cancellation of the forbearance at the end of June 2022 was an important step to allow better accounting for impaired loans.
On this basis, it will be important to step up prudential supervision and ensure that banks fully comply with reporting and provisioning requirements for non-performing loans in order to improve their loss absorbency and resilience.
In the event of a capital shortfall, banks must draw up specific, 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 more efficient allocation of private capital in Viet Nam.
To finishdeeper structural reforms are essential to support medium-term potential growth and make the economy more resilient and inclusive.
Fiscal reforms could focus on stabilizing revenue generation through tax policy reforms and improving spending efficiency to expand fiscal space for spending on social, climate and social objectives. and other Viet Nam development goals.
Promoting more public and private investment in climate change adaptation would help make Vietnam’s economy more resilient.
This could be accompanied by policies aimed at achieving Viet Nam’s carbon neutral goal, including the expansion of renewable energy and carbon pricing, which could also improve Viet Nam’s competitiveness in growing energy markets. green products and technologies.
While efforts to improve the business environment are key to enabling job creation, policymakers could also consider taking steps to reduce the skills mismatch and improve the quality of Vietnam’s workforce. .