Vietnam’s GDP growth is forecast at 5.2 percent in 2013, picking up to 5.6 percent in 2014 if progress is made in strengthening the banking sector and recovery in major industrial economies gathers momentum in 2014, the Asian Development Bank says in a report released Tuesday.

The prediction is made based on grounds that GDP grew by 4.9 percent in the first quarter of 2013, marginally higher than the year-earlier period, and  the purchasing managers’ index trended up slightly as orders increased, ADB stated in its Asian Development Outlook (ADO) 2013.

Inflation is seen easing to 7.5 percent on average this year before quickening to 8.2 percent in 2014. This view assumes reasonable weather for food production, a broadly stable dong exchange rate, and restrained policy stimulation. The trade surplus is expected to climb to a record $12.5 billion in 2013 and the current account surplus to increase further this year before easing in 2014 as imports accelerate in tandem with GDP growth, the report says.

Exports are projected to maintain solid expansion, given higher economic growth in China and some other markets this year, and the anticipated pickup in major industrial economies in 2014. Manufactured exports will continue to trend up as FDI-funded factories come into production. Imports also will increase, though, as domestic demand gradually recovers, as well as to supply inputs for the export-oriented manufacturers.

ADB Chief Economist, Changyong Rhee discusses the highlights of ADB's flagship annual financial publication, Asian Development Outlook 2013 and the forecast for developing Asia. ADB/Youtube

Risks to the outlook are the soundness of the banking system, the scale of the non-performing loans, the frozen property market, and the ongoing restructuring at state-owned enterprises.

Despite these concerns, Vietnam has remained an attractive investment destination in light of its growing working-age population and low labor costs. This is illustrated by an increase in FDI from Japan, the report added.

Nevertheless, the country faces increased competition for FDI in Southeast Asia particularly from Indonesia.

“Vietnam’s ability to remain competitive and drive economic growth back up to 7 percent – 8 percent will depend in large part on the timely and decisive implementation of structural reforms to the banking and SOE sectors and the improvement of other aspects of the business environment,” it stated.

Indicating the extent of this challenge, Vietnam’s ranking in the World Economic Forum’s Global Competitiveness Index fell by 16 places in the past 2 years to 75th of 144 countries. That puts it below other larger Southeast Asian economies. Vietnam scored poorly on several index components, including infrastructure (95), business sophistication (100), respect for property rights (113), irregular payments and bribes (118), and soundness of banks (125).

The ADO 2013 also estimates that regional economic growth in the Asia Pacific region will pick up to 6.6 percent in 2013 and reach 6.7 percent in 2014. This is a distinct improvement on 2012, when growth stood at just over 6 percent. Consumer prices are expected to rise by 4.0 percent in 2013 and 4.2 percent in 2014, up from 3.7 percent last year, it says.

The annual ADO provides a comprehensive analysis of economic performance for the past year and offers forecasts for the next two years for the 45 economies in Asia and the Pacific that make up developing Asia.