Information about Asia and the Pacific Asia y el Pacífico
Journal Issue


International Monetary Fund
Published Date:
July 2012
  • ShareShare
Information about Asia and the Pacific Asia y el Pacífico
Show Summary Details


1. The economy and financial sector have begun to stabilize, and monetary policy credibility has improved. Undergirded by tight macroeconomic policies, inflation is receding rapidly, activity is slowing, and the current account deficit has declined sharply. The informal interbank exchange rate has moved within the band around the official rate and investors, both domestic and foreign, are shifting into dong assets, allowing the State Bank of Vietnam (SBV) to increase foreign exchange reserves.

2. However, significant vulnerabilities remain. Even as problems in a number of small weak banks are being contained, the process of resolving them, as well as addressing broader weaknesses in the financial sector, is slow. Reform of SOEs is also proceeding slowly.

3. Stabilization should remain the highest priority. While much progress has been made, confidence is still nascent and policymakers should err on the side of caution, building policy credibility for the longer run.

Recent Developments And Outlook

A. Stabilization—Restoring Confidence

4. The economy is slowing as tighter macroeconomic policies are having an effect.

Output and inflation: In Q1 2012, GDP fell by almost 8 percent (q/q annualized, seasonally adjusted), led by construction and mining, and industrial production remained flat (q/q annualized, s.a.). Growth in retail sales slowed to 3¼ percent (q/q annualized s.a.), compared to 13¾ percent in the previous quarter. The number of enterprises that went bankrupt or stopped operation reportedly increased by 6 percent (y/y) in Q1, and there is anecdotal evidence of subdued consumer spending during the Lunar New Year celebrations. Credit growth for 2011, at 14.3 percent (y/y), undershot the SBV’s target (of 15–17 percent) and turned negative in Q1 2012 (q/q). Inflation slowed to 10.5 percent y/y) in April, despite increases in administered energy prices (Box 1).1

Box 1.Inflation Momentum and the Real Interest Rate1

Headline inflation. Vietnam experienced a bout of high inflation in 2011 comparable to 2008. Headline inflation peaked at 23 percent y/y in August 2011, and then declined to 10½ percent in April 2012. In the previous episode, inflation had similarly risen to 28½ percent in August 2008 and then declined rapidly to single digits in a space of about eight months. Both episodes appear to have originated with external shocks, but were exacerbated by loose macroeconomic policies. While the 2008 episode was related to large unsterilized capital inflows in the aftermath of WTO accession, the 2011 episode came in the wake of a large macroeconomic policy stimulus in response to the global financial crisis.

Inflation momentum. Although 12-month inflation is a widely used indicator of inflation, several other measures are useful to gauge inflationary pressures on a rolling basis. For Vietnam, one such measure, seasonally adjusted inflation (three-month moving average, annualized) suggests that the inflation momentum has fallen sharply in recent months. During Q1 2012, seasonally adjusted inflation fell to under 5 percent from a peak of over 37 percent in mid-2011 (earlier than the peak in headline inflation).2

Real interest rate. With high inflation, the real interest rate fell into negative territory in Q3 2010. With the sharp decline in inflation (measured by the above-mentioned inflation momentum indicator), the real interest rate reverted back to positive territory around Q4 2011 and reached around 10 percent in early 2012, a high level by any measure. The SBV’s recent rate announcement of cumulative 400 bps rate cuts by end-2012 may be understood in this context. However, further reining in inflation would require, among other factors:(i) supportive steps to limit credit growth by banks; (ii) quickly and decisively addressing problems of weak banks; and (iii) strengthening market confidence in the dong to stabilize inflation expectations.

Headline CPI and Inflation Momentum

(In percent)

Source: IMF staff estimates.

Real Interest Rate

(In percent per annum)

Source: IMF staff estimates.

1 Prepared by Sanjay Kalra and Van Anh Nguyen (Research Officer, Resident Representative office).2 See Nguyen, Nguyen, and Nguyen (2012), Robust Core Inflation Measures for Vietnam, forthcoming. The seasonally adjusted inflation (3mma, annualized) is used as deflator to compute the real interest rate.

Balance of payments: In 2011, the current account deficit narrowed sharply, to 0.5 percent of GDP, notwithstanding an appreciation of the real effective exchange rate (Box 2). Exports rose rapidly, in part because of higher commodity prices, but also due to production from a large foreign-financed investment project coming on stream. Imports, in line with slower demand, remained subdued. In the capital and financial account, direct investment held up well, while portfolio and other flows declined somewhat. Hoarding of gold and foreign exchange by residents outside the financial system, while overall still high in 2011, has begun to decline in Q4.

Box 2.Exchange Rate Assessment

The dong remained stable in 2011 while the trade balance strengthened. The real effective exchange rate (REER) appreciated by about 11 percent in real effective terms since March, largely reflecting high inflation.

Staff estimates suggest that the dong is broadly in line with fundamentals. The macroeconomic balance approach indicates a current account norm of -1.8 percent of GDP, which implies a small undervaluation of 0.3 to 0.7 percent. The external stability and the equilibrium exchange rate approaches suggest modest overvaluation. Given that the net foreign assets (NFA) used corresponds to the level in 2010, a higher NFA target would imply a higher level of overvaluation.

CGER Assessment of the Dong(In percent)
Estimated Overvaluation
Macro balance-0.7 to -0.3
External stability1.6 to 3.7
Equilibrium exchange rate7.4
Source: IMF staff estimates.
Source: IMF staff estimates.

Effective Exchange Rates


Source: IMF staff estimates.

Foreign exchange market. Since the devaluation of the dong in February 2011 and subsequent tightening of monetary policy, the exchange rate has gradually stabilized. International reserves rose through July 2011 before declining again in the latter part of the year, in part due to seasonal reasons. More recently, reserves have again risen rapidly, underpinned by domestic and foreign investors’ acquisition of dong assets, which has been driven by attractive yields in combination with increased confidence in the dong. Nonetheless, the level of foreign exchange reserves remains low (Box 3).

Box 3:Reserve Adequacy

Standard measures of reserve adequacy indicate that Vietnam’s international reserves are low. At end-2011, coverage of prospective imports is only 1.3 months. Even taking into account Vietnam’s very open economy, its reserves are low compared to peers (see figure below). Coverage of external short-term debt, on the other hand, at well over 100 percent, is adequate.

International Reserves vs. Trade Openness, 2011

Source: IMF staff estimates.

1/ Exports + imports of goods and services in percent of GDP.

Fiscal developments. Net borrowing declined sharply in 2011, compared to 2010, and is estimated at 2.6 percent of GDP, much lower than the budgeted level of 5 percent of GDP.2 This estimate is largely attributable to higher-than-budgeted revenues, both on account of the authorities’ overly conservative revenue estimates, as well as higher-than-anticipated inflation and oil prices, but also to some rationalization of public investment.

5. Risks in the financial sector have materialized. After years of rapid credit growth, the tightening of monetary conditions and a decline in asset prices have put a number of small joint-stock banks under intense liquidity pressure. The SBV Governor announced that the aggregate nonperforming loans (NPL) ratio had risen to 3.6 percent in late March. This would likely be higher under loan classification and provisioning rules in line with international best practices.

6. The direction of the authorities’ macroeconomic policies during 2011 has been broadly in line with staff advice. However, policies were tightened more slowly and by less than envisaged by staff. Furthermore, the SBV has recently reduced interest rates rather aggressively. Reliance on administrative measures increased rather than declined, though staff recognize that they have been useful in stabilizing the financial sector. On the fiscal side, the better-than-projected outcome in 2011 has been due largely to higher revenue, though investment reduction, both by the budget and by SOEs, was also significant. Some progress was also made in addressing financial sector weaknesses.

B. Outlook and Risks—A Balancing Act

Staff’s Views

7. Despite a sharp slowdown in Q1, the economy is projected to stabilize further in 2012. The recent cumulative reduction of policy interest rates by 200 bps and a modest fiscal impulse are expected to cushion adverse effects from slowing domestic demand and the projected slowdown in Europe and Asia. As a result, GDP would continue to grow at 6 percent, while inflation would decline to about 8¼ percent y/y (10¾ percent on average) by year-end, in line with the authorities’ target of year-on-year inflation below 10 percent. Further rate cuts in the course of the year have been announced (see below), which could rekindle pressures on prices and the exchange rate, if implemented prematurely. International reserves would increase further from the level reached in March, to around $19 billion by year-end (1.6 months of prospective imports), even as the current account deficit would rise modestly.3

8. Exogenous risks to this outlook are relatively modest, but the risk of losing market confidence in the government’s policy orientation is substantial. A possible sharper-than-anticipated slowdown in Asian economies in response to a weakening European economy, or severe financial sector turmoil in Europe with global spillovers, would adversely affect Vietnam’s performance. On the domestic side, a spillover of liquidity problems in weak banks to the wider system could lead to a credit crunch, loss of confidence in the dong, and renewed inflation (Box 4). However, the probability of these risks materializing is small. A larger risk arises from a potential perception of waning government commitment to stabilizing the economy and safeguarding the financial sector. Maintaining public confidence is critical for the baseline scenario outlined above to materialize, and to this end, government policies need to credibly prioritize stability and address weaknesses in the financial sector.

Box 4.Risk Matrix 1/

LikelihoodShockTransmission ChannelAffected Sectors (1st round)VulnerabilitiesPotential Impact
LowNew global financial crisisExports, remittances, external financingExport industries (incl. commodities), SOEs, banks, householdsBanks: Weak capital base, rising NPLs, but low exposure to int’l capital markets, NFA recovered and financing from non-European sources appears available.

Export industries/SOEs:Rising share of exports to Emerging Asia (21 percent in 2011). However, much of foreign financing is long-term and relates to project loans.
High: Growth and credit slowdown, pressure on exchange rate.
LowFurther slowdown in Europe/AsiaExports, remittancesExport industries (incl. commodities)Medium: Growth slowdown.
MediumDeleveraging by European banksExternal financingFinancial sectorLow: Some credit slowdown.
LowDomestic systemic banking crisisCredit crunchFinancial sectorFragile confidence in financial system and currencyHigh: Credit crunch, pressure on exchange rate, loss of international reserves, fiscal risks.
HighPremature policy looseningRenewed credit expansion, higher spendingFinancial sector, SOEs, real estate and constructionFragile confidence in financial system and currencyHigh: Loss of confidence: pressure on exchange rate, loss of international reserves.
1/ Assumes no policy response to external shocks.

9. A debt sustainability analysis indicates that the risk of external debt distress remains low. While the external debt-to-GDP ratio is projected to decline consistently only from 2016 onward, due to large projected disbursements from the Asian Development Bank, the net present value of external debt remains well below the thresholds set in the debt sustainability framework. Public and publicly guaranteed debt is set to continue to decline gradually from its peak of 54.2 percent of GDP in 2010.

10. In the medium term, growth needs to derive more from efficiency gains and less from higher factor inputs. Growth has hitherto been driven to a large extent by investment and domestic consumption, and has been broadly equitable, with poverty rates declining rapidly. However, with Vietnam reaching middle-income status and expecting a slowdown in labor force growth, reforms to enhance productivity—which would reinforce the inclusiveness of growth—will need to complement lasting macroeconomic stability. Reforming SOEs will be an important element in this process.

Authorities’ Views

11. The authorities broadly agreed with the staff’s assessment of economic conditions and outlook. During the mission, they reaffirmed that reducing inflation remained their foremost policy goal, even as they expressed concern about possible social implications from a further growth slowdown. In his statement on a second interest rate cut in April (see below), the SBV Governor expressed concern about the slowing economy. The SBV is enhancing its effort toward banking sector reforms including through personnel and organizational changes. The authorities also explained that SOE reform was a high priority, but would take time.

Policy Theme 1: Rebuilding Stability

The government’s stabilization policies are beginning to bear fruit, but gains made thus far need to be preserved and built on. Priority should be accorded to preserving and adding to hard-won but still nascent credibility, which would lead to a further decline in inflation expectations and reinforce stability in the foreign exchange market. In this context, the SBV’s decision to cut policy rates twice in quick succession has surprised market participants, though their response has been calm to date. While they expect further rate cuts over the course of 2012, as announced by the SBV Governor, the timing of the next move would be crucial, because if it is perceived premature, they could interpret the action as evidence for a shift of the policy objective toward growth from low inflation, risking the fruits of the tight policy stance over the past year.


12. Monetary policy was tightened during 2011 and sustained in early 2012, followed by a quick succession of rate cuts. In H1 2011, policy rates were raised in several steps, and after a premature cut of the repo rate in July, the SBV raised the refinancing rate in October. In February 2012, it publicly stated that interest rates would not be lowered through Q1. At the same time, it requested banks to lower lending rates and allocate credit to specific sectors, and imposed differentiated credit growth limits based on banks’ strength. Enforcement of regulations was generally strengthened, though ceilings on the credit-to-deposit ratio were suspended. The SBV also announced that depreciation of the dong would be limited to a maximum of 2–3 percent during 2012 in the absence of adverse external shocks, and has tightened restrictions in the gold market.

13. In March 2012, the SBV announced that it would cut policy rates by a cumulative 400 bps in the course of 2012. The rates were subsequently cut on March 13 and then again on April 10, by 100 bps each time. Also, the deposit rate ceiling was lowered by 100 bps each time, adding pressure on weak banks to seek fundamental solutions. While the two rate cuts came earlier than expected for most market participants, the pace of decline in inflation has also been faster than anticipated. Hence, the market seems to think that these cuts were justified, and expects further cuts down the road.

14. The SBV has added substantially to its international reserves. After several months of decline, in the first three months of 2012 gross international reserves rose by $4.3 billion and net international reserves by $4.5 billion, and officials expect further increases in the coming months. The SBV has also issued about 45 trillion dong of central bank bills since mid-March to mop up liquidity.

15. On the fiscal side, staff projections indicate an increase in net borrowing by ¾ percent of GDP in 2012. This implies a slight loosening of the fiscal stance in 2012 from the -1 percent of GDP in 2011, resulting in a fiscal impulse of ½ percent of GDP, which is projected to help avert a slowdown in output growth. This is mainly the result of a significant increase in current expenditure, which is projected to increase total spending by about 1 percentage point of GDP.

A. Monetary and Exchange Policy—Reinforcing Credibility

Staff’s Views

16. Maintaining and enhancing policy credibility is critical. The cumulative 200 bps interest rate cuts to date may be justified in view of rapidly falling inflation and slowing activity. However, the rapid decline in inflation in recent months owes much to the sharp decline in food prices, and core inflation has been flat, suggesting a risk of resurgence in inflationary pressure, if monetary policy is loosened prematurely and by too much, which would jeopardize the SBV’s hard-won credibility as in 2010. Indeed, the authorities should build on the rapid decline in inflation to achieve lower inflation for 2012, well below their original target of “below 10 percent,” by aiming at greater deceleration in inflation for the remaining months. To this end, they need to ensure before deciding on further cuts in policy rates that macroeconomic conditions are consistent with such a move, as staff project a stable growth for 2012 with no additional monetary action. Even in the event of exogenous risks materializing (see Box 4), monetary policy should continue to prioritize inflation reduction and confidence rebuilding.

17. Monetary policy should increasingly rely on market-based instruments. The use of credit growth ceilings is still warranted to complement interest rate policy, but should be phased out once inflationary pressures are firmly under control and weak banks have been decisively dealt with. Other administrative measures, such as limiting increases in energy prices to contain inflationary pressures, at the cost of losses in key SOEs and/or foregone tax revenues, should be eschewed. In this context, the SBV’s operational independence should be further strengthened.

18. Quickly rebuilding foreign exchange reserves while maintaining stability in the foreign exchange market should be a priority. This is more urgent in the face of potentially destabilizing capital inflows attracted by high yields. Should there be an erosion of confidence in the dong and depreciation pressures re-emerge, policy rates need to be re-tightened quickly. Should appreciation pressures mount, instead of loosening monetary policy, reserve accumulation should be accelerated. Sales of foreign currency by the SBV should only occur to limit volatility in the foreign exchange market.

19. In the medium term, the anchor for monetary policy should be simplified. The simultaneous pursuit of multiple announced objectives limits policy options and necessitates administrative controls. Therefore, the SBV would need to target inflation and international reserves, while letting the exchange rate be determined by market forces. For this shift not to trigger excessive volatility in the foreign exchange market, a high degree of credibility is required. Therefore, a lengthy period of exchange rate stability would have to precede such a move.

Authorities’ Views

20. The SBV stated that fortifying macroeconomic stability was of paramount importance. Officials placed priority on reducing inflation to single digits by year-end, and reaffirmed that this goal enjoyed support at the highest political level. They explained that the interest rate cuts in March and April were prompted by slowdown in activity, declining inflation expectations, and weak credit demand. In addition, because credit growth is tightly controlled by the differentiated limits, the SBV argues that the rate cuts would not likely lead to a resurgence of credit-induced inflationary pressures. They also indicated that they planned substantial reserve accumulation over the course of the year. Overall, they felt that increased confidence—which was also reflected in capital inflows—had allowed their recent policy moves.

21. With regard to exchange rate policy, the authorities reiterated their commitment to limiting depreciation of the dong. They repeated that a stable exchange rate and an increase in international reserves were a high priority.

B. Fiscal Policy—Supporting Stabilization

Staff’s Views

22. Fiscal policy should be more supportive of macroeconomic stabilization. The sharp reduction of investment and net borrowing in 2011 is welcome. In 2012, some fiscal expansion is projected given the sharp weakening of the economy in Q1. However, the main factor driving up spending, even as public investment is further reduced, is a planned increase in wages and salaries amounting to about 2 percent of GDP. Staff recognize that high inflation has eroded real remunerations, but consider that, to keep a prudent fiscal stance, other current spending should be contained to the extent possible. This could reduce the increase in net borrowing in 2012 to around ¼ percent of GDP (and all but eliminate the fiscal impulse). Such fiscal discipline could also help mitigate a rise in short-term capital inflows. Only if downward risks to the economy materialize should fiscal policy be loosened beyond staff’s recommendation, which would then be broadly in line with current budget plans.

23. In the medium term, the authorities should ensure that public debt remains on a downward trajectory. This would serve to enhance fiscal cushions against possible future shocks as well as potential liabilities arising from the financial and state-owned sectors (see below). After peaking in 2010, public and publicly guaranteed debt has begun to decline and is projected to reach 48¼ percent of GDP in 2012, and 42½ percent by 2017. This, however, requires limiting net borrowing to an average of around 2 percent of GDP. In addition, declining oil and trade revenues would need to be compensated for by other sources of taxation (Box 5). In this regard, the authorities’ plans for a comprehensive tax reform are welcome.

Box 5.Tax Reform

Vietnam’s 10-year budget plan envisions an overall decline in revenues from 26.2 percent of GDP in 2011 to 22½ percent of GDP in 2020, led by a drop in oil and trade revenues, as large offshore oil fields mature and tariffs are reduced under WTO commitments. To partially compensate for this revenue loss, the plan envisages a significant rise in revenues from business taxes (corporate income tax (CIT), royalties, and value-added tax (VAT)) as well as, to a lesser extent, personal income taxes (PIT).

To support this shift, the government has launched a five-year tax reform plan. This envisions broadening the VAT base and narrowing the scope of the lower 5 percent rate, and reducing CIT incentives. It also aims at improving the tax administration to manage the structural shift in revenue composition away from taxes collected at the border and from SOEs, toward those collected directly from private companies and individuals. However, some changes in the five-year plan threaten to undermine domestic revenue: for example, the government currently plans to cut the CIT rate from 25 percent to 22 percent and to eliminate the top rate of the PIT and raise its threshold, which is already high by international standards. Staff recommend that any CIT rate cut be offset by base broadening and that the current PIT threshold be preserved. Also, there is scope to significantly raise nonagricultural land tax (property tax) rates and extend its base to include buildings; increase petroleum excises to raise revenue, and protect the environment; and overhaul natural resource taxation including through the possible introduction of a resource tax.

Authorities’ Views

24. The authorities agreed with staff’s assessment of the challenges faced by fiscal policy. Ministry of Finance (MoF) officials said that they would seek to build on the fiscal consolidation achieved last year, but explained that the planned wage and salary increases had already been enacted into law. They indicated, however, that they would make efforts to constrain non-wage recurrent spending, as well as increase taxpayer compliance to boost revenues. In this regard, they pointed out that higher wages would support efforts to combat corruption, including in the revenue administration.

25. The authorities are seeking to minimize fiscal costs arising from bank or SOE restructuring. They indicated that the 2012 budget did not contain provisions for assuming nonperforming loans, and that budgetary resources would not be used to restructure SOE debt. This policy, in their view, also limited the need to create fiscal cushions in anticipation of such contingencies, though they broadly agreed with the need to reduce public debt over the medium term.

Policy Theme 2: Restructuring The Economy

Both in the short and medium term, key sectors of the economy will need to be reformed to improve factor allocation and raise productivity growth. In the financial sector, the SBV has contained the threat of small weak banks to the financial system, but a more forceful approach is needed. Beyond that, gaps in the supervisory and bank resolution frameworks, and governance issues in banks, will need to be addressed. Far-reaching SOE restructuring to improve performance on a sustained basis is required to lower contingent fiscal risks, level the playing field in more sectors, boost the economy’s productivity, and enable the sector to play the leading role envisaged for it by the government.


26. Financial market confidence increased but remains tentative. The authorities have taken action to address vulnerabilities emanating from a number of small weak banks, which account for approximately 7 percent of banking sector deposits. In a first step, the SBV reinforced deposit rate caps to prevent these banks from undermining competitors. Then, in order to stem a bank run late last year, the SBV announced unlimited deposit guarantees, merged three of the small weak banks (with more mergers expected), and provided direct and indirect liquidity support through state- owned commercial banks (SOCBs). Subsequently, it sent special inspection teams to the nine banks classified as weak (which are not allowed to expand credit). The combined assets of these nine banks amount to some six percent of the total banking sector assets. Based on the reports of the inspectors, as well as external audits, the banks will be required to present restructuring and recapitalization plans for the SBV’s approval. If the recapitalization plan is deemed inadequate, the SBV may even nationalize the bank. Despite their improvised character, these measures have strengthened the SBV’s credibility.

27. As part of the stabilization strategy announced last year, the authorities have made SOE reform a priority. Investments have been scaled back, and some SOEs have already sold part of their noncore operations. A broader plan, which includes a substantial reduction in the number of SOEs through listing on the stock market, and the creation of a centralized body to control state holdings in SOEs, is being considered for legislation. An improvement in corporate governance principles is under discussion. The authorities also intend to publish aggregated financial indicators for SOEs.

A. Financial Sector Reform—Cleaning Up

Staff’s Views

28. The government’s bank restructuring plan is ambitious; it is now imperative that its provisions are fully utilized (Box 6). The plan includes important features for dealing with weak banks, such as the possibility of restrictions on dividend payments and dismissing management.4 It also allows for the resolution of NPLs through sale to the Debt and Asset Trading Corporation (DATC) under the MoF. More broadly, the plan introduces a framework for comprehensive reform of the financial sector, including through strengthening internal controls and management, and limiting control of dominant shareholders. However, the lack of implementation details implies that its application will still be to some extent ad hoc, and the reluctance to close insolvent banks (indeed, the plan makes no real distinction between illiquidity and insolvency) deprives the supervisory authorities of an important coercive tool.

Box 6.The Bank Restructuring Plan

On March 1, 2012, the Prime Minister approved the “Scheme for Restructuring the System of Credit Institutions in the Period of 2011–2015.” Its objectives include developing the “modern, safe, sound, and efficient” operation of the financial sector compliant with “international banking standards and practices”. The plan prescribes specific measures for different types of credit institutions.

State-Owned Commercial Banks

  • Develop one to two SOCBs to compete regionally.

  • Continue to promote equitization, with the state remaining a dominant share holder.

  • Raising capital (including from the government) to meet Basel II requirements by 2015.

  • Reduce the NPL ratio to less than 3 percent according to domestic standards.

  • Improve risk management systems.

  • Restructure and gradually divest from non-financial sector subsidiaries.

  • Reduce the credit-to-deposit ratio below 90 percent by 2015.

Commercial Banks

  • Classification into three groups based on financial strength (healthy, temporary liquidity shortage, and weak).

  • For healthy banks: Voluntary consolidation to increase scale and competitiveness. These banks are expected to support weak banks with liquidity or through mergers.

  • For banks with temporary liquidity shortage: Refinancing by the SBV, while they are strengthening their financial condition, operations, and management under close SBV supervision. The SBV may limit their operations and require higher prudential ratios.

  • For weak banks: Refinancing by the SBV up to their charter capital under close and comprehensive supervision by the SBV. Purchase of good quality assets by SOCBs and healthy banks. The SBV may also put these banks under special control, limit dividend and other payments, suspend managers, force mergers, and allow foreign institutions to acquire them, or directly inject capital.

The Plan also lists ways to strengthen credit institutions, financially and operationally, which include:

  • Sale to the DATC or private firms, conversion to equity, or write-off of bad debts.

  • Write-off of bad debts stemming from directed loans through the budget.

  • Raise charter capital.

  • Reduction of the credit-to-deposit ratio to at most 85 percent by 2015.

  • Increase of information disclosure.

  • Gradual withdrawal of SOEs’ shareholding in the financial sector.

  • Limitation of control of dominant shareholders.

  • Improvement of qualification of managers and board members.

29. The SBV’s steps to contain the problems at weak banks are welcome, but can only be a beginning, and need to be sped up. Minimizing costs not only to the budget, but to the economy as a whole should be the overarching goal in dealing with small weak banks. Merging them is no solution in itself. Liquidity support by the SBV or SOCBs should be extended only to solvent banks, and any solvency support needs to be accompanied by conditions, including that owners bear first losses. Executive compensation should be restricted where appropriate. Nonperforming assets need to be recognized and disposed of rapidly.

30. Beyond the current efforts to deal with weak banks, the regulatory and supervisory framework needs to be strengthened at every stage including bank resolution. This would entail introducing specific and progressive enforcement measures to prevent problems leading to insolvency, as well as a special bank resolution and insolvency regime. At a minimum, this should prevent the possibility of a reversal of the supervisory authorities’ decisions by the court system, protect their staff from personal liability, and strengthen fit and proper criteria for board members and senior managers.

31. To improve supervision, the regulatory framework needs to be strengthened and better enforced. Prudential rules, such as for loan classification and provisioning, should be aligned with international best practices. Better enforcement also requires raising the capacity of the supervisory authorities. For this, staff need to be adequately trained, including to collect, compile, and analyze data provided by banks but also to conduct effective onsite supervision. Moreover, to reduce turnover and retain talent, staff should be adequately compensated and receive political backing.

Authorities’ Views

32. The SBV agreed with the need for forceful action on weak banks. Officials pointed out that their timetable was tight, and underscored their willingness to take over banks that did not submit adequate restructuring and recapitalization plans, or where owners were unwilling or unable to provide new capital and/or attract other investors. With regard to NPLs, the authorities acknowledged that they had as yet no reliable estimate of their magnitude, but indicated that the DATC’s capacity would be increased. In any event, they considered that additional resources would not be needed in 2012, and expected that much of the nonperforming real estate assets (which constitute the bulk of NPLs) could be sold in the market over the course of the next two years.

B. SOE Reform—Raising Performance

Staff’s Views

33. SOE reform is essential to reduce risks to the economy. In the short term, reducing inefficient investments would help control inflation and improve asset quality at some banks. Also, divestments to focus SOEs on their core businesses are welcome. However, the lack of information on SOEs’ financial position is posing a threat to the financial system, as well as, ultimately, the public fiscal position.

34. Reforming SOEs is also critical for longer-term growth prospects. There is evidence that SOEs have been using capital and labor inputs much less efficiently than the private sector. For SOEs to play a productive role in the economy, their performance needs to be strengthened on a sustained basis. This requires decisive measures beyond planned equitization and/or privatization of minority stakes, such as those that raise standards of accountability, transparency (including through better accounting and stronger oversight by the state), and financial discipline (including through the remittance of profits to the owner). In the recently conducted World Bank survey, overwhelming majority responded that improving transparency and accelerating equitization were the most effective reform measures. Against this backdrop, the World Bank and other donors are urging the government to advance reorganization and restructuring of SOEs by dividing them into three groups: those that should be equitized immediately, those that need to be restructured first before equitization, and those that should remain fully owned by the state. They are also advocating improvement in corporate governance.

Authorities’ Views

35. The authorities broadly agreed with staff’s assessment of the SOE sector and the required remedies. Officials at the Ministry of Finance and the Ministry of Planning and Investment recognized the urgency of reforms and agreed that improved accountability and supervision would have to be part of the reform strategy. However, they pointed out that such reforms would take time, as they had to compile more comprehensive information on financial performance and debts of SOEs. They also acknowledged that a restructuring of SOE debt was being discussed, but ruled out using budgetary resources.

Other Issues

36. Data analysis in the financial sector should be improved. In particular, the authorities should compute high-frequency financial soundness indicators, for all banks as well as on an aggregate basis, on a regular (at least quarterly) basis. This is especially important for the upcoming assessment under the FSAP.

37. Vietnam’s AML/CFT framework should be enhanced. In October 2010, Vietnam was identified—alongside other countries—by the Financial Action Task Force (FATF) as having “strategic AML/CFT deficiencies.” The authorities initiated an action plan to address these deficiencies. While significant progress has been made, it was not deemed sufficient by the FATF, and there are outstanding issues, mainly regarding the criminalization of money laundering, the freezing of terrorist assets, customer due diligence measures, and international cooperation. The next FATF review of the progress made is scheduled for June.

Staff Appraisal

38. The authorities made significant strides in stabilizing the economy, but hard-won confidence is still fragile. They tightened monetary and fiscal policy, and restrained investment by both the state and SOEs. At the same time, a start has been made to address banking sector vulnerabilities, and SOE reform is being prepared. As a consequence, inflation and inflation expectations have declined, confidence in the dong has increased, the exchange rate has stabilized, and international reserves have begun to recover.

39. The SBV needs to maintain and build on gains in monetary policy credibility. While the recent rate cuts in quick succession were justified in light of rapidly falling inflation and a weak economy, there is a risk of eroding market confidence and triggering renewed pressure on prices and the exchange rate if further rate cuts are implemented too rapidly and the authorities are perceived as again prioritizing growth. Instead, the authorities should seize the opportunity to bolster their credibility by aiming for inflation well below their original target of below 10 percent, rebuild international reserves further, and accept somewhat slower economic growth. Thus, the SBV should err on the side of caution, and be prepared to delay rate cuts depending on developments in the course of the year.

40. Going forward, monetary and exchange policies should rely less on administrative measures. While credit growth and deposit rate ceilings can be useful in the current situation, it is strong supervision of the financial sector that should ensure that banks’ lending decisions remain prudent. In the gold and foreign exchange markets, administrative measures cannot replace fundamental trust in the domestic currency.

41. Fiscal policy should support macroeconomic stabilization and build cushions against contingent liabilities. While further rationalization of public investment is welcome, the planned increase in the wage bill raises current spending significantly. Staff appreciate the need to compensate for the erosion of real wages due to high inflation, but to keep a prudent fiscal stance and to help contain inflationary pressures, this increase should be partially offset by cuts in other current spending to the extent possible.

42. Should risks to the outlook materialize, care will need to be taken that stability gains are not jeopardized. To this end, monetary policy would need to continue to focus on reducing inflation, while fiscal policy could be loosened moderately.

43. Financial sector restructuring needs to move forward rapidly. Market participants expect further steps, and maintenance of confidence depends on quick action by the authorities. In a first step, small weak banks need to be dealt with forcefully, including by forcing them to recognize NPLs, imposing strict conditions for liquidity support, and closing insolvent banks. In addition, the bank restructuring framework should be strengthened to prevent a recurrence of similar problems. More broadly, the legal framework for supervision, as well as its enforcement, need to be strengthened.

44. SOE reform is critical. The planned equitization and privatization of a large number of SOEs is welcome. However, oversight, accountability, and financial discipline of the remaining SOEs need to be raised, both to reduce risks to the financial sector and public finances, as well as to lay the foundations for continued strong economic performance in the medium term.

45. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

Figure 1.Slowdown

Sources: Authorities; Bloomberg LP; and IMF staff estimates.

Figure 2.Stabilization and Confidence Building

Sources: Authorities; Bloomberg LP; and IMF staff estimates

Table 1.Selected Economic Indicators, 2008–13
Real GDP (percent change)
Saving and investment (in percent of GDP)
Gross national saving27.831.634.929.333.533.1
Gross investment39.738.139.029.934.333.8
Prices (percent change)
CPI (period average)
CPI (end of period)19.96.511.718.18.26.0
Core inflation (end of period)
General government finances (in percent of GDP)1/
Revenue and grants28.927.327.827.827.927.7
Of which: Oil revenue6.
Net acquisition of non-financial assets9.113.411.
Net lending (+)/borrowing(-) 2/–0.5–7.2–5.2–2.6–3.4–2.6
Public and publicly guaranteed debt (end of period)42.951.254.248.348.246.6
Money and credit (percent change, end of period)
Broad money (M2)20.329.033.312.121.618.1
Credit to the economy25.439.632.414.316.814.4
Interest rates (in percent, end of period)
Nominal three-month deposit rate (households)8.110.711.614.9
Nominal short-term lending rate (less than one year)11.512.714.016.4
Balance of payments (in percent of GDP, unless otherwise indicated)
Current account balance (including official transfers)–11.9–6.6–4.1–0.5–0.8–0.7
Exports f.o.b.69.461.369.779.081.784.2
Imports f.o.b.83.670.274.779.383.586.2
Capital and financial account14.
Gross international reserves (in billions of U.S. dollars, end of period) 3/
In months of prospective GNFS imports3.
Total external debt (end of period) 4/32.441.643.840.941.040.4
Nominal exchange rate (dong/U.S. dollar, end of period)17,48318,47919,49821,034
Nominal effective exchange rate (end of period)92.080.881.067.5
Real effective exchange rate (end of period)125.7115.8117.0121.3
Memorandum items:
GDP (in trillions of dong at current market prices)1,4851,6581,9812,5352,9273,336
GDP (in billions of U.S. dollars)90.393.2103.6122.7135.8148.8
Per capita GDP (in U.S. dollars)1,0481,0681,1741,3741,5021,627
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Follows the format of the Government Finance Statistics Manual for 2001.

Excludes net lending of the Vietnam Development Bank.

Excludes government deposits.

Uses interbank exchange rate.

Sources: Vietnamese authorities; and IMF staff estimates and projections.

Follows the format of the Government Finance Statistics Manual for 2001.

Excludes net lending of the Vietnam Development Bank.

Excludes government deposits.

Uses interbank exchange rate.

Table 2.Balance of Payments, 2008–13 1/(In billions of U.S. dollars, unless otherwise indicated)
Current account balance–10.8–6.1–4.3–0.7–1.1–1.1
Trade balance–12.8–8.3–5.1–0.4–2.4–3.0
Exports, f.o.b.62.757.172.296.9111.0125.2
Imports, f.o.b.75.565.477.397.4113.4128.3
Nonfactor services–0.9–1.2–2.5–3.0–0.8–0.6
Investment income–4.4–3.0–4.6–5.1–6.3–6.5
Private (net)
Official (net)
Capital and financial account balance12.311.
Direct investment (net)
Of which: Foreign direct investment in Vietnam9.
Portfolio investment–0.6–
Of which: Sovereign bond issuance0.00.01.0
Medium- and long-term loans1.
Short-term capital2.60.0–6.0–5.2–3.5–3.5
Net foreign assets of commercial banks0.7–0.3–7.1–6.8–4.1–4.1
Trade credit (net)
Errors and omissions–1.1–13.3–3.7–3.6–1.40.0
Overall balance0.5–8.2–
Memorandum items:
Gross international reserves 2/
In months of prospective GNFS imports3.
Current account balance (in percent of GDP)–11.9–6.6–4.1–0.5–0.8–0.7
Capital and financial account balance (in percent of GD13.712.
Direct investment (in percent of GDP)
Non-oil current account balance (in percent of GDP)–10.9–5.9–
Trade balance (in percent of GDP)–14.2–8.9–5.0–0.4–1.8–2.1
Export value (percent change)29.1–8.926.434.214.512.9
Import value (percent change)28.1–13.318.325.916.513.2
External debt27.537.344.549.354.359.2
In percent of GDP 3/32.441.643.840.941.340.6
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Data up to 2009 reflect an old presentation; from 2010, part of errors and omissions began to be reflected in net foreign assets.

Excludes government deposits; data for 2009 include the SDR allocation of SDR 267.1 million.

Uses interbank exchange rate.

Sources: Vietnamese authorities; and IMF staff estimates and projections.

Data up to 2009 reflect an old presentation; from 2010, part of errors and omissions began to be reflected in net foreign assets.

Excludes government deposits; data for 2009 include the SDR allocation of SDR 267.1 million.

Uses interbank exchange rate.

Table 3.General Government Budgetary Operations, 2008–13 1/
Est.Budg. 2/Proj.Proj.
In trillions of dong
Tax revenue363373477615681736834
Oil revenues90616911187115122
Non-oil tax revenues274312408504594621713
Other revenue57726982557585
Other expense285329409520641652729
Net acquisition of non-financial assets136223221212229218239
Net lending(+)/borrowing(-)–8–119–103–65–176–101–86
Net incurrence of financial liabilities6113814270197121110
Net acquisition of financial assets–2818–39–5–20–20–24
Of which:Deposits–1142010
In percent of GDP, unless otherwise indicated
Tax revenue24.522.524.124.223.325.225.0
Oil revenues6.
Non-oil tax revenues18.418.820.619.920.321.221.4
Other revenue3.
Other expense19.219.820.620.521.922.321.8
Net acquisition of non-financial assets9.113.411.
Net lending(+)/borrowing(-)–0.5–7.2–5.2–2.6–6.0–3.4–2.6
Net incurrence of financial liabilities4.
Net acquisition of financial assets–1.91.1–2.0–0.2–0.7–0.7–0.7
Of which:Deposits–
Memorandum items:
Public and publicly guaranteed debt42.951.254.248.348.246.6
Net ODA onlending0.
Non-oil primary balance–5.4–9.6–7.4–5.5–5.8–5.0
Cyclically-adjusted NOPB (in percent of potential GDP)–5.5–8.9–7.3–5.4–5.4–4.6
Fiscal stance0.0–1.83.0–1.1–0.6
Fiscal impulse2.8–1.7–1.0–4.20.5
Nominal GDP (in trillions of dong)1,4851,6581,9812,5352,9272,9273,336
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Government Finance Statistics 2001 presentation.

Budget data include amounts allocated for contingency.

Sources: Vietnamese authorities; and IMF staff estimates and projections.

Government Finance Statistics 2001 presentation.

Budget data include amounts allocated for contingency.

Table 4.Government Balance Sheet, 2008–13
Opening BalanceTransactionsOther 1/Closing BalanceTransactionsOther 1/Closing BalanceTransactionsOther 1/Closing BalanceClosing BalanceClosing BalanceClosing Balance
In trillions of dong
Net financial worth–250–33–22–305–156–21–482–102–31–616–735–870–980
Financial assets160280188–180170390209214235259
Currency and deposits9715–4108–42–165–2265565656
Debt securities114260140140154221178223270294
In percent of GDP
Net financial worth–21.9–2.2–1.5–20.5–9.4–1.3–29.1–5.2–1.6–31.1–29.0–29.7–29.4
Financial assets14.–
Currency and deposits8.41.0–0.27.3––
Debt securities10.
Memorandum item:
Nominal GDP (VND trillions)1,1441,4851,4851,4851,6581,6581,6581,9811,9811,9812,5352,9273,336
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Foreign loan residuals are due to exchange rate effects.

Sources: Vietnamese authorities; and IMF staff estimates and projections.

Foreign loan residuals are due to exchange rate effects.

Table 5.Monetary Survey, 2008–13 1/(In trillions of dong at end-period, unless otherwise indicated)
Net foreign assets429312267300530792
State Bank of Vietnam (SBV)405281224271408574
Commercial banks24314329122218
Net domestic assets1,1931,7802,5232,8263,2723,698
Domestic credit1,4012,0402,6903,0633,5504,031
Net claims on government61170214232245251
Credit institutions8594132177
Credit to the economy1,3391,8692,4762,8303,3053,781
Claims on state-owned enterprises (SO Es) 2/414550464490
Claims on other sectors9251,3192,0122,341
In dong1,0711,5421,9902,264
In foreign currency269327485567
By state-owned banks7639821,2211,398
By joint stock banks5768871,2541,432
Other items net–207–260–167–237–278–334
Total liquidity (M2)1,6222,0922,7893,1263,8024,490
Dong liquidity1,2921,6652,2732,588
Currency outside banks237293338371
Foreign currency deposits330427517538
Memorandum items:
Money multiplier 3/
Reserve money (year on year percent change)
Liquidity (M2; year on year percent change)20.329.033.312.121.618.1
Currency/deposits (in percent)17.116.313.813.5
Credit/deposits (total, in percent)96.7103.9101.0102.7
Credit/deposits (dong, in percent)101.5112.4102.9102.1
Credit/deposits (foreign currency, in percent)81.376.593.9105.3
Credit to the economy
Total (in percent of GDP)90.2112.7125.0114.7112.9113.3
Total (year on year percent change)25.439.632.414.316.814.4
In dong (year on year percent change)27.644.129.013.7
In FC (year on year percent change)17.621.748.416.8
In FC at constant exchange rate (year on year percent change)11.615.140.76.1
To SOEs (year on year percent change) 2/23.832.9–15.75.5
To other sectors (year on year percent change) 2/26.242.552.516.4
To SOEs (percent of total) 2/30.929.418.717.3
Foreign currency deposits/total deposits (in percent)23.823.721.119.5
Foreign currency loans/total loans (in percent)20.117.519.620.0
Banks’ net foreign exchange position (in millions of U.S.$) 4/–2,279–3,8865832,816
Government deposits (in percent of GDP)
Nominal GDP (in trillions of dong)1,4851,6581,9812,5352,9273,336
Sources: SBV; and IMF staff estimates and projections.

Includes the SBV and deposit-taking credit institutions.

Break in series in 2010.

M2 over reserve money.

At interbank exchange rate; excludes SBV credit to credit institutions.

Sources: SBV; and IMF staff estimates and projections.

Includes the SBV and deposit-taking credit institutions.

Break in series in 2010.

M2 over reserve money.

At interbank exchange rate; excludes SBV credit to credit institutions.

Table 6.Medium-Term Projections, 2011–17
Real GDP (percent change)
Saving and investment(In percent of GDP)
Gross national saving29.333.533.133.333.734.535.3
Private saving24.430.029.329.629.730.631.4
Public saving5.
Gross investment29.934.333.834.235.035.936.9
Private investment21.426.826.627.
Public investment8.
Prices(Percent change)
CPI (period average)18.710.
CPI (end of period)
GDP deflator20.
General government finances1/(In percent of GDP, unless otherwise indicated)
Revenue and grants27.827.927.727.327.327.427.3
Net acquisition of non-financial assets8.
Net lending (+)/borrowing(-) 2/–2.6–3.4–2.6–2.3–1.6–1.6–1.5
Public and publicly guaranteed debt (end of period)48.348.246.645.744.643.542.4
Balance of payments
Current account balance–0.5–0.8–0.7–0.9–1.3–1.4–1.6
Exports f.o.b.79.081.784.287.592.096.796.5
Imports f.o.b.79.383.586.289.694.599.299.4
Capital and financial account (net)
Gross international official reserves (in billions of U.S. dollars)13.519.025.734.543.153.963.7
In months of prospective GNFS imports1.
Total external debt (in billions U.S. dollars)49.354.359.265.170.877.984.1
In percent of GDP 3/40.941.040.440.840.941.641.6
Memorandum items:
Nominal GDP (in trillions of dong)2,5352,9273,3363,7434,1784,6545,176
Nominal GDP (in billions of U.S. dollars)123136149162176190205
Per capita GDP (in U.S. dollars)1,3741,5021,6271,7511,8752,0042,138
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Follows the format of the Government Finance Statistics Manual for 2001.

Excludes net lending of the Vietnam Development Bank.

Uses interbank exchange rate.

Sources: Vietnamese authorities; and IMF staff estimates and projections.

Follows the format of the Government Finance Statistics Manual for 2001.

Excludes net lending of the Vietnam Development Bank.

Uses interbank exchange rate.

Table 7.Progress Toward the Millennium Development Goals1/
Goal 1: Eradicate extreme poverty and hunger
Target 1Halve between 1990 and 2015, the proportion of people living in povertyPoverty reduced by more three-quarters between 1990 and 2008Already achieved
Target 2Halve between 2009 and 2015, the proportion who suffer from hungerProportion reduced by more than two-thirds between 1993 and 2006Already achieved
Goal 2: Achieve universal primary education
Target 3By 2015, boys and girls to complete a full course of primary schoolingGrade 5 completion rate (gross) is 104 percent for boys and 100 percent for girlsLikely to be achieved
Goal 3: Promote gender equality
Target 4Eliminate gender gaps in primary and secondary education no later than 2015Gender equality at all school levels, except for ethnic minoritiesAlready achieved
Goal 4: Reduce child mortality
Target 5Reduce by two-thirds between 1900 and 2015, the under-five mortality rateReduced by 64 percent between 1990 and 2009 (down from 53 to 19 per 1000)Likely to be achieved
Goal 5: Improve maternal health
Target 6Reduce maternal mortality by three-quarters, between 1990 and 2015Fell by 78 percent, from 250 per 100,000 births in 1990 to 56 in 2008Already achieved
Goal 6: Combat HIV/AIDS and other diseases
Target 7By 2015, have halted and begun to reverse the spread of HIV/AIDSInfection rate went up from 0.34 percent in 2001 to 0.44 in 2005, then slowed to 0.4 in 2009Likely to be achieved
Target 8By 2015, have halted and reversed the incidence of malaria and other diseasesMalaria cases severely reduced; with only 27 malaria-related deaths in 2009Already achieved
Goal 7: Ensure environmental sustainability
Target 9Embrace sustainability and reverse the loss of environmental resourcesForest cover up but loss in closed-canopy forest and biodiversityUncertain to be achieved
Target 10Halve by 2015, the share of people without safe drinking water and basic sanitationRapid progress on drinking water, much slower on hygienic sanitationUncertain to be achieved
Sources: United Nations Development Program, General Statistics Office of Vietnam, and the World Bank.

As of March 2012.

Sources: United Nations Development Program, General Statistics Office of Vietnam, and the World Bank.

As of March 2012.

However, to limit losses for SOEs, increases in fuel prices were accompanied by the reduction to zero of fuel import tariffs. Electricity price rises were insufficient to recover past losses by the state-owned distributor.

From this report onward, fiscal indicators are presented in accordance with GFSM 2001 definitions.

See Tables 16. This scenario reflects the authorities’ policies.

Using the management expertise of SOCBs to improve management of small weak banks can be effective, but it appears that in the most recent merger case this expertise is not being used.

Other Resources Citing This Publication