By Tao Jun, Bui Long

HANOI, April 20 (Xinhua) -- Despite the generally favorable medium-term outlook, there are significant challenges facing Vietnam's economy this year, stated senior economists from the World Bank (WB) and the Asian Development Bank (ADB).

"The ADB expects that the Vietnamese economy will continue to perform strongly in 2018 and 2019. The ADB forecasts that growth will rise to 7.1 percent this year, before easing back to 6.8 percent in 2019. With that said, several structural risks exist for Vietnam's economic outlook," Aaron Batten, senior ADB economist in Vietnam, told Xinhua on Thursday.

The structural risks include the need for deeper state-owned enterprise (SOE) reform and the continued vulnerability in the financial sector, to unresolved non-performing loans and undercapitalized banks as domestic credit records rapidly grow, he said.

Another risk facing Vietnam is rising global trade protectionism, with U.S. President Donald Trump's "America First" policy tending to protect domestic sectors, which might lead to trade wars.

"In particular, close attention also needs to be paid to rising global trade protectionism," the ADB economist said, adding that trade wars can negatively affect Vietnam's economic growth.

According to Batten, Vietnam has actively sought out preferential market access with other economies through a range of trade and investment agreements.

For example, the European Union and Vietnam plan to finalize their free trade agreement this year building on past agreements with Japan, South Korea and others, negotiated through ASEAN, the ADB economist noted.

While free trade and investment agreements will generate major benefits for Vietnam's economy, they will also require the country to open its economy to greater foreign competition and enforce stringent labor and environmental standards.

Vietnam needs to work towards improving its global competitiveness and productivity so that its firms can compete in new markets.

"Achieving this will require a range of coordinated policy actions, including reforming the efficiency of public service delivery, reducing the distorting impact of SOEs on innovation, and upgrading crucial national infrastructure," said Batten.

By being more competitive in these fields, Vietnam can be more successful in attracting foreign capital and export markets, he added.

The WB has also stated that Vietnam's robust growth and macro stability are expected to be sustained over the medium term, with its gross domestic product (GDP) estimated to grow around 6.5 percent this year, but risks remain.

The risks include global financial volatility, rising protectionism, as well as domestic vulnerabilities associated with the pace and quality of fiscal consolidation, remaining banking sector constraints and subdued productivity growth.

"Domestically, a slowdown in structural reforms could weaken the ongoing recovery and weigh on Vietnam's medium-term potential growth. There is also a risk that fiscal consolidation may erode pro-poor fiscal expenditure and investment in human and physical capital," Sudhir Shetty, chief economist for the East Asia and Pacific Region of the WB, told Xinhua recently.

Externally, strong trade and investment links expose Vietnam's economy to risks associated with a potential rise in protectionism and a possible weakening of external demand.

"These risks call for further steps to enhance macroeconomic resilience, including more exchange rate flexibility, a further buildup of foreign reserves, and responsive monetary and macro-prudential policies that moderate credit expansion and bolster capital buffers in the banking sector," Shetty stated.

On the fiscal front, there continues to be a need for deeper revenue and expenditure reforms, including broadening tax bases, right-sizing of the public administration, and higher value for money invested publicly.

Steps to solidify macroeconomic stability need to be accompanied by progress on structural reforms to lift productivity and potential growth, including steps to reform the SOE sector, improve the regulatory environment, and enhance factor markets, including for land and capital, the WB economist proposed.

Recently, the WB has predicted Vietnam's GDP will grow around 6.5 percent in 2018, while the ADB put the figure at 7.1 percent, and the International Monetary Fund at 6.6 percent.

Vietnam's GDP grew 7.38 percent in the first quarter of this year, according to the country's General Statistics Office.

Vietnam's top legislature targeted GDP growth of 6.5-6.7 percent in 2018. The growth rate was 6.81 percent in 2017.