World Bank: Three big risks to Vietnam’s economic outlook

Production at a business in the city. Ho Chi Minh

Despite the positive economic outlook, the World Bank believes that Vietnam needs to handle high financial, financial, and social risks.

According to the latest forecast of the World Bank (WB), Vietnam’s economic growth in 2021 could reach about 4.8%, and gradually move towards the pre-pandemic growth rate of 6.5-7% from 2022 onwards.

This is a positive forecast, but still 2 percentage points lower than the forecast made in December 2020, due to the negative impact related to the recent Covid-19 outbreak, and depends on the forecast of some negative risks.

The World Bank noted that the above forecast needs to be viewed with caution because there are still serious uncertainties about the scale and duration of the pandemic, including the appearance of new variants, and the speed of vaccination in Vietnam and in other countries.

If those risks come true, Vietnam’s economic recovery will slow down, GDP growth rate in 2021 will be lower than the forecast of 4.8%. The time to return to pre-pandemic growth and mid-term fiscal consolidation will also take longer than expected.

The World Bank recommends that the authorities need to deal with three high risks: fiscal, financial, and social.

First, deal with the social consequences of the pandemic.

The impact of the Covid-19 pandemic on the labor market and on households has been exacerbated by the February and April outbreaks. The pandemic has not only reduced workers’ incomes, but also creates deeper inequalities by having different impacts on different income groups, occupations, genders and locations.

Authorities should consider strengthening social protection programs, in terms of coverage, target audiences and levels of support, to ensure current and future victims of economic shocks and the epidemic is fully supported,” recommended the World Bank.

Second, be wary of financial sector risks that are increasing due to the crisis.

While new, or restructured, bank credit provides welcome support for affected businesses, it also contributes to the transfer of risk from the real economy to the financial sector, WB notes.

Accordingly, the monetary policy implementation agency will need to be careful with the increasing risk of bad debt, especially in banks with unsecured capitalization before the pandemic.

This is the time to adopt a plan to deal with bad debts and build a clear mechanism to deal with weak and troubled banks, and continue to recapitalize banks to meet the requirements according to Basel II standards.

Third, beware of fiscal risks.

Although the Government still has sufficient fiscal space, with a public debt-to-GDP ratio of around 55.3% of GDP by the end of 2020, international experience suggests that the fiscal situation can deteriorate relatively quickly if the current outbreak is not brought under control soon, or new outbreaks erupt in the coming months.

Vietnam may have to expand its fiscal support package, which has been modest so far, while budget revenue may be negatively affected due to a weaker-than-expected economic recovery.

At this point, fiscal risks appear to be under control, but should continue to be closely watched, especially since this risk relates to the financial health of state-owned enterprises, which are easy to become contingent liabilities. (Translated)


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