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Vietnam: 2018 Article IV Consultation—Press Release and Staff Report

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
July 2018
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Context

1. A long track record of strong inclusive growth. Vietnam’s economy is one of the most dynamic in East Asia, with growth averaging 6½ percent a year during 2000–16. This reflects the cumulative benefits of outward and market-oriented reforms launched since 1986, resulting in a boom in the scale and sophistication of exports, and generally stable and accommodative macroeconomic conditions. Vietnam’s twin transition—from plan to market and from farms to modern manufacturing and services—is a multi-decade transformation that has been boosting productivity and living standards across all income levels (text Figure).

Vietnam: Gini coefficient

(Latest available)

Sources: WDI; and IMF staff calculations.

2. A commitment to macroeconomic stability and private sector-led growth. The government views macroeconomic stability as a foundation for sustained private sector-led growth (Appendix I). Its economic agenda focuses on public debt sustainability and building buffers while addressing widespread investment needs and strengthening the banking sector. It is cognizant of the need to make macroeconomic frameworks more flexible to manage near-term risks and longer-term challenges from climate change, demographics and automation. And it is stepping up market-oriented reforms to reduce the economic role of the state, boost business conditions and improve the quality of growth and innovation.

3. A large and multi-faceted reform agenda remains. While these achievements are substantial, sustaining and accelerating the pace of real convergence requires tackling a range of remaining distortions and capacity constraints. An important priority is to tackle barriers that constrain domestic investment and productivity in non-FDI firms and raise the external surplus. This requires, among other things, addressing remaining legacy issues in the banking system and state-owned enterprises (SOEs) and leveling the playing field for access to land and credit. Faster convergence will also require quickening the pace of reforms, but without sacrificing the consensus-building approach to policy reforms garnering broad national ownership.

2017: A Bumper Year

4. 2017 was an exceptionally good year. Growth was broad-based and accelerated to 6.8 percent while inflation remained below the 4 percent target (Figure 1 and text Figures). Private consumption continued to be driven by rural-to-urban migration, rising incomes, and a growing middle class. It was also facilitated by accommodative financial conditions, stronger bank balance sheets, and the improving business climate. The current account surplus increased as the global recovery and a REER depreciation due to a weaker dollar aided strong inflows from exports, tourism, and remittances. Vietnam also received record FDI and other capital inflows, aided by solid growth, the improving business environment, accelerating domestic business formation, and the low global interest rates (Figure 2). The State Bank of Vietnam (SBV) maintained the Dong within a tight range to the dollar and accumulated US$12½ billion of international reserves in 2017 (equivalent to 5.7 percent of GDP), bolstering low reserve buffers. Despite administered price increases, inflation was subdued, reflecting low food prices and a stable exchange rate.

Figure 1.Vietnam: Robust Growth, Low Inflation

Figure 2.Vietnam: Strong Trade and FDI, but Still Low Reserve Coverage

Vietnam: Contribution to GDP Growth by Expenditure (2010 prices)

(Year-on-Year Percent Change)

Sources: National authorities; and IMF staff calculations.

Note: 2018 only includes Q1 data. 2018 is based on q-o-q growth.

Vietnam: Contribution to Headline Inflation

(Year-on-Year Percent Change)

Sources: National authorities; and IMF staff calculations.

1/Includes education and health care services.

2/ Includes beverage, housing, garment, medicine, transport, post and telecom, education, culture and other goods.

5. The external position was substantially stronger than warranted by fundamentals. The current account (CA) surplus reached 2½ percent of GDP in 2017 (Figure 2, Tables 12), resulting in a CA gap of 5.2 percent of GDP (Appendix II). The external position is thus substantially stronger than warranted by fundamentals and appropriate policy settings. The CA gap translates into an REER undervaluation of 7 percent (text Figure). The external surplus reflects the economy’s dualism: the surpluses were mainly generated in the booming FDI sector whereas the non-FDI sector continued to run a large deficit (text Figure). Investment and capital upgrades in the non-FDI sector are slowed by lack of a level playing field between the state and the private sector, significant regulatory barriers including private sector and foreign ownership limits, and weaknesses in financial intermediation of the external surpluses to the domestic economy.

Table 1.Vietnam: Selected Economic Indicators, 2013–2019 1/
Est.Projections
2013201420152016201720182019
Output
Real GDP (percent change)5.46.06.76.26.86.66.5
Prices (percent change)
CPI (period average)6.64.10.62.73.53.84.0
CPI (end of period)6.01.80.64.72.64.04.0
Core inflation (end of period)4.22.71.71.91.32.03.1
Saving and investment (in percent of GDP)
Gross national saving31.231.727.529.529.029.830.2
Private29.829.625.427.326.226.927.4
Public1.52.12.12.22.82.92.8
Gross investment26.726.827.626.626.627.728.4
Private17.718.720.019.019.220.321.1
Public9.08.17.67.67.47.47.4
General government finances (in percent of GDP) 2/
Revenue and grants23.122.223.823.723.623.323.0
Of which: Oil revenue3.42.51.60.90.90.70.6
Expenditure30.528.529.228.528.127.927.8
Expense21.620.421.721.020.720.620.4
Net acquisition of nonfinancial assets9.08.17.57.57.47.37.3
Net lending (+)/borrowing(-) 3/−7.4−6.3−5.5−4.8−4.5−4.6−4.7
Public and publicly guaranteed debt (end of period)52.055.057.459.958.557.957.5
Money and credit (percent change, end of period) Broad money (M2)18.817.716.218.415.016.818.9
Credit to the economy12.713.818.818.817.416.915.3
Interest rates (in percent, end of period)
Nominal three-month deposit rate (households)6.95.04.84.9
Nominal short-term lending rate (less than one year)9.78.57.27.2
Balance of payments (in percent of GDP, unless otherwise indicated)
Current account balance (including official transfers)4.54.9−0.12.92.52.11.8
Exports f.o.b.77.480.884.687.797.1103.7109.4
Imports f.o.b.72.374.380.882.291.999.0105.2
Capital and financial account0.22.90.55.39.02.22.9
Gross international reserves (in billions of U.S. dollars) 4/26.134.528.536.849.459.672.0
In months of prospective GNFS imports2.12.41.92.02.32.42.5
Total external debt (end of period)37.338.342.045.249.150.651.4
Nominal exchange rate (dong/U.S. dollar, end of period)21,10521,38522,48522,76122,698
Nominal effective exchange rate (end of period)88.393.997.697.791.2
Real effective exchange rate (end of period)116.2123.7128.8133.1124.6
Memorandum items:
GDP (in trillions of dong at current market prices)3,5843,9384,1934,5035,0085,5096,142
GDP (in billions of U.S. dollars)170.6185.9191.5201.3220.4241.0264.5
Per capita GDP (in U.S. dollars)1,9002,0492,0882,1722,3542,5482,769
Sources: Vietnamese authorities; and IMF staff estimates and projections.

The national accounts has been re-based to 2010 from 1994 by the authorities.

Follows the format of the Government Finance Statistics Manual 2001 .

Excludes net lending of Vietnam Development Bank and revenue and expenditure of Vietnam Social Security.

Excludes government deposits.

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

The national accounts has been re-based to 2010 from 1994 by the authorities.

Follows the format of the Government Finance Statistics Manual 2001 .

Excludes net lending of Vietnam Development Bank and revenue and expenditure of Vietnam Social Security.

Excludes government deposits.

Table 2.Vietnam: Balance of Payments, 2013–2019(In billions of U.S. dollars, unless otherwise indicated)
Est.Projections
2013201420152016201720182019
Current account balance7.79.1−0.15.95.45.04.8
Trade balance8.712.17.411.011.611.311.1
Exports, f.o.b.132.0150.2162.0176.6214.0249.9289.3
Imports, f.o.b.123.3138.1154.6165.5202.4238.5278.2
Nonfactor services−3.1−3.5−5.3−4.5−3.9−3.3−3.0
Receipts10.711.011.312.313.114.816.3
Payments13.814.516.516.817.018.119.4
Investment income−7.3−8.8−10.0−8.6−10.8−12.3−13.1
Receipts0.30.30.40.70.70.20.3
Payments7.69.210.49.211.512.613.4
Transfers9.59.37.78.08.59.29.8
Private (net)8.98.87.47.78.39.19.6
Official (net)0.60.50.30.30.20.20.2
Capital and financial account balance0.35.51.010.619.95.27.7
Direct investment (net)6.98.110.711.613.614.314.6
Of which: Foreign direct investment in Vietnam8.99.211.812.614.114.815.1
Portfolio investment1.50.1−0.10.21.92.32.6
Medium- and long-term loans3.55.44.63.24.44.13.8
Disbursements8.29.89.88.713.714.415.1
Amortization4.74.45.25.59.310.311.3
Short-term capital 1/−11.6−8.0−14.2−4.40.0−15.5−13.3
Change in net foreign assets−11.7−9.1−15.0−3.8−6.4−6.4−6.4
Of which: Commercial banks−2.3−1.5−5.33.5−1.0−1.0−1.0
Trade credit (net)0.11.00.8−0.66.41.01.1
Other short-term capital 1/−10.0−8.0
Errors and omissions−7.5−6.2−6.9−8.2−12.80.00.0
Overall balance0.68.4−6.08.412.510.212.4
Memorandum items:
Gross international reserves 2/26.134.528.536.849.459.672.0
In months of prospective GNFS imports2.12.41.92.02.32.42.5
Current account balance (in percent of GDP)4.54.9−0.12.92.52.11.8
Trade balance, FDI sector (in percent of GDP)10.311.512.214.614.3
Trade balance, domestic sector (in percent of GDP)−5.2−4.9−8.3−9.1−9.1
Export value (percent change)15.313.87.99.021.216.815.8
Import value (percent change)16.512.012.07.022.317.816.6
External debt63.370.678.289.4108.4121.0134.9
In percent of GDP 3/37.338.342.045.249.150.651.4
GDP170.6185.9191.5201.3220.4241.0264.5
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Incorporates a projection for negative errors and omissions going forward (i.e. unrecorded imports and increase in US dollar currency holdings by residents outside the formal financial sector).

Excludes government deposits.

Uses interbank exchange rate.

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

Incorporates a projection for negative errors and omissions going forward (i.e. unrecorded imports and increase in US dollar currency holdings by residents outside the formal financial sector).

Excludes government deposits.

Uses interbank exchange rate.

Vietnam: Real Effective Exchange Rate, 2000Q1—2017Q4

(2010=100)

Sources: INS; and IMF staff calculations.

Vietnam: Trade Balance

(In Billions of USD)

Sources: CEIC; and IMF staff calculations.

Positive Outlook, Though with Significant Risks

6. Rising potential growth and a positive outlook. Vietnam’s economic momentum is expected to continue in 2018 despite a mild tightening in credit growth targets and a neutral fiscal stance (Table 13). Growth is projected at 6.6 percent in 2018, in line with official and consensus forecasts, reflecting the synchronized global recovery and rising growth potential growth at home. Inflation is forecast to rise to just under the 4 percent target, led by higher oil prices and gradual increases in administered prices. Developments Q1 2018—broad-based GDP growth of 7½ percent, headline inflation of 2.7 percent, and robust high frequency indicators-are consistent with these projections.

  • Rising growth potential, to 6½ percent per annum, is attributable to: (a) improvements in the quality of the capital stock associated with strong FDI inflows; (b) higher aggregate productivity associated with the ongoing shift of labor out of agriculture (text Figures; (Selected Issues Paper: Potential Output Estimates); and (c) a better business climate. Higher incomes, urbanization and financial deepening will help drive private consumption and investment, including in housing. On current trends and assuming reforms continue at their current pace, 6½ percent annual growth remains feasible beyond 2018. Implementation of the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) and the free trade agreement (FTA) with the European Union (EU) would further boost medium-term growth.

  • The CA surplus is expected to decline over the medium term as structural reforms boost investment and REER appreciation resumes its trend (Tables 23). This would leave the reserve cover constant at 2½–3 months of imports and 77 percent of the ARA metric. The policies discussed below—greater exchange rate flexibility to reduce the need for large buffers, more ambitious structural and financial sector reforms to remove distortions that inhibit investment, and raising high-quality public investment while pursuing fiscal consolidation—should help close the CA gap at a faster pace.

Table 3.Vietnam: Medium-Term Projections, 2013–2023
Est.Projections
20132014201520162017201820192020202120222023
Output(Percent change)
Real GDP5.46.06.76.26.86.66.56.56.56.56.5
Prices
CPI (period average)6.64.10.62.73.53.84.04.04.04.04.0
CPI (end of period)6.01.80.64.72.64.04.04.04.04.04.0
GDP deflator4.83.7−0.21.14.13.24.74.74.24.03.8
Saving and investment(In percent of GDP, unless otherwise indicated)
Gross national saving31.231.727.529.529.029.830.231.032.033.134.4
Private saving29.829.625.427.326.226.927.428.129.130.031.4
Public saving1.52.12.12.22.82.92.82.93.03.13.0
Gross investment26.726.827.626.626.627.728.429.530.832.233.6
Private investment17.718.720.019.019.220.321.122.123.524.826.3
Public investment9.08.17.67.67.47.47.47.37.37.47.3
General government finances 1/
Revenue and grants23.122.223.823.723.623.323.022.922.922.922.8
Expenditure30.528.529.228.528.127.927.827.727.627.627.6
Expense21.620.421.721.020.720.620.420.320.320.220.3
Net acquisition of nonfinancial assets9.08.17.57.57.47.37.37.37.37.37.3
Net lending (+)/borrowing(-)−7.4−6.3−5.5−4.8−4.5−4.6−4.7−4.7−4.7−4.7−4.7
Non-oil primary balance−9.3−7.1−5.1−3.8−3.4−3.3−3.3−3.2−3.1−3.0−3.0
Public and publicly guaranteed debt (end of period)52.055.057.459.958.557.957.557.357.557.858.3
Balance of payments
Current account balance4.54.9−0.12.92.52.11.81.51.20.90.8
Exports f.o.b.77.480.884.687.797.1103.7109.4115.1121.6128.5136.1
Imports f.o.b.72.374.380.882.291.999.0105.2111.4118.3125.4133.3
Capital and financial account (net)0.22.90.55.39.02.22.92.82.73.43.4
Gross international official reserves (in billions of U.S. dollars)26.134.528.536.849.459.672.084.596.7111.4127.1
In months of prospective GNFS imports2.12.41.92.02.32.42.52.62.62.62.6
Total external debt (in billions U.S. dollars)63.370.678.289.4108.4121.0134.9149.6165.4182.5200.7
In percent of GDP37.338.342.045.249.150.651.452.253.053.854.7
Memorandum items:
Nominal GDP (in trillions of dong)3,5843,9384,1934,5035,0085,5096,1426,8467,6008,4189,303
Nominal GDP (in billions of U.S. dollars)170.6185.9191.5201.3220.4241.0264.5289.5315.2342.5371.0
Per capita GDP (in U.S. dollars)1,9002,0492,0882,1722,3542,5482,7693,0023,2393,4873,745
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Follows the format of the Government Finance Statistics Manual 2001.

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

Follows the format of the Government Finance Statistics Manual 2001.

Vietnam: Total Factor Productivity Growth, 1986–2017

(In percent)

Sources: Penn world table 9.0, World Bank; and IMF Staff estimates.

Vietnam: TFP growth and Employment in Agriculture, 2008–2017

(In percent)

Sources: Penn world table 9.0, World Bank; and IMF Staff estimates.

7. Significant risks and capacity constraints. Vietnam’s highly open economy remains vulnerable to external and domestic shocks. These risks are compounded by low buffers in the private and public sectors, thin foreign exchange markets, and inflexible macroeconomic policy frameworks. Vietnam’s institutions and information systems are not fully ready to proactively detect and manage risks (Appendix III).

  • Domestically, the relatively high elevated public debt limits the scope for raising infrastructure investments and counter-cyclical fiscal policies. Moreover, sustained high credit growth, high leverage, low bank capital buffers and the inflexible exchange rate could lead to balance sheet vulnerabilities. Vietnam must also prepare for cyber security risks, and longer-term challenges of climate change, aging and technological disruption.

  • External shocks could arise from rising trade protectionism, tighter global financial conditions, slower partner country growth, and geopolitical tensions. These shocks could affect Vietnam through trade and financial channels given large capital inflows recently. External shocks could compound domestic fiscal and financial sector vulnerabilities which, in turn, could be aggravated by uncertainty stemming from institutional and informational weaknesses.

8. Authorities’ views. The authorities broadly shared staff’s assessment about the outlook and the need to boost non-FDI investment to lower the external surplus. They credited the turnaround from relatively modest growth and strong inflationary expectations in early 2017 to the government’s efforts to slash administrative procedures starting mid-2017, the depreciation of the US dollar since the second quarter of 2017, and the robust recovery in electronic and semiconductors manufacturing. The 2018 growth target of 6¾ percent is likely to be achieved, but inflation could be higher due to rising international commodity prices and administered price increases. The authorities are conscious of Vietnam’s exposure to external shocks and domestic vulnerabilities. They reaffirmed their commitment to macroeconomic and financial stability and the need to upgrade the growth model.

Making Good use of the Strong Economy

The strong growth momentum provides an opportunity to put policies in place to increase resilience, upgrade the growth model, and reduce the external surplus. High-quality fiscal consolidation is needed to build room for countercyclical policies and longer-term fiscal costs, while protecting and improving infrastructure investment. Monetary policy should be tightened by aligning credit growth with fundamentals, the exchange rate should become more flexible and the monetary framework should gradually transition to inflation targeting. Banks must be strengthened further to improve financial intermediation to support the domestic sector; supervision, risk management, and regulation should be beefed up with macroprudential measures. Reforms to improve the business climate and foster a sustainable growth model must continue in order to boost private investment.

A. Improving the Quality of Fiscal Consolidation

9. A much-needed fiscal consolidation started in 2017. This was largely revenue-based, resulting mainly from higher non-tax revenues, including land-related items which benefitted from rising prices and volumes of land transactions (Table 4, Figure 3). While revenue exceeded budget targets, VAT collections fell short as anticipated reforms were delayed. Lower administrative expenditures and higher fees in health and education kept current spending in check. Nevertheless, the wage bill—approximately 9½ percent of GDP—remains high (text Figures). Public investment exceeded budget targets due to spending carried over from previous years (about ½ percent of GDP) and accelerated disbursement of project funding. Fiscal consolidation and equitization proceeds (1.2 percent of GDP) helped contain public and publicly guaranteed debt (PPG) to 58½ percent of GDP at end-2017, below the statutory limit of 65 percent.

Figure 3.A Small Fiscal Consolidation, High Public Debt

Table 4a.Vietnam: General Government Budgetary Operations, 2013–2018 1/(In trillions of dong)
PlanEst.PlanStaff Baseline
2013201420152016 2/2017201720182018
(In trillions of dong)
Total revenue and grants82787699610691152117912541282
Tax revenue68571775680895793810271037
Oil revenues120100684038443636
CIT9173503826302525
Natural resource tax3027181612141111
Non-oil tax revenues5656176897689188959921001
PIT4748576581829797
CIT141135150162195191218218
VAT209241252270337316355356
Trade78969996102959191
Others9198131175204210231240
Grants11111294555
Other revenue131147228253192236222240
Expenditure10941123122612851390140615201538
Expense7738049109481038103711301133
Interest546783879999113110
Other expense71973782786193993810181022
Of which: Wages 3/469509511
Net acquisition of non-financial assets321319316338352369390405
Net lending (+)/borrowing (-)−267−248−230−216−238−227−266−256
Net incurrence of liabilities267248230216238227266256
Net incurrence of financial liabilities264322218258245234221211
Domestic186225152206196184129119
Securities132137105
Loans559247
Foreign7897675250509292
Disbursement10513689867979108108
Amortization2739223329293131
Net acquisition of financial assets3−7412−42−7−74545
Memorandum items:
Public and publicly guaranteed debt52.055.057.459.958.758.557.957.9
Primary balance−5.9−4.6−3.5−2.9−2.8−2.5−2.8−2.6
Non-oil primary balance−9.3−7.0−5.1−3.8−3.5−3.4−3.4−3.3
Cyclically Adjusted Primary Balance−5.9−4.6−4.6−2.8−2.6−2.7
Nominal GDP (in trillions of dong)3584.33937.94192.94502.75007.95007.95499.45509.0
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Government Finance Statistics 2001 presentation. The baseline projections include assumptions of lower trade-related tax revenue due to

international trade agreements, gradual improvements in tax collection, and current plans for SOE equitization/divestment. Figures consolidate central and provincial government accounts, but exclude net lending of Vietnam Development Bank and revenue and exenditure of Vietnam Social Security and other extra-budgetary funds.

Expenditure includes 66 trn of 2015 revenue overperformance by local governments equally split between capital and current expenditure.

Wages are staff estimates.

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

Government Finance Statistics 2001 presentation. The baseline projections include assumptions of lower trade-related tax revenue due to

international trade agreements, gradual improvements in tax collection, and current plans for SOE equitization/divestment. Figures consolidate central and provincial government accounts, but exclude net lending of Vietnam Development Bank and revenue and exenditure of Vietnam Social Security and other extra-budgetary funds.

Expenditure includes 66 trn of 2015 revenue overperformance by local governments equally split between capital and current expenditure.

Wages are staff estimates.

Table 4b.Vietnam: General Government Budgetary Operations, 2013–2018 1/ (In percent of GDP, unless otherwise indicated)
PlanEst.PlanStaff Baseline
2013201420152016 2/2017201720182018
(In percent of GDP, unless otherwise indicated)
Total revenue and grants23.122.223.823.723.023.622.823.3
Tax revenue19.118.218.017.919.118.718.718.8
Oil revenues3.42.51.60.90.80.90.70.7
CIT2.51.81.20.90.50.60.40.4
Natural resource tax0.80.70.40.40.20.30.20.2
Non-oil tax revenues15.815.716.417.118.317.918.018.2
PIT1.31.21.41.41.61.61.81.8
CIT3.93.43.63.63.93.84.04.0
VAT5.86.16.06.06.76.36.56.5
Trade2.22.42.42.12.01.91.71.7
Others2.52.53.13.94.14.24.24.3
Grants0.30.30.30.20.10.10.10.1
Other revenue3.73.75.45.63.84.74.04.4
Expenditure30.528.529.228.527.828.127.627.9
Expense21.620.421.721.020.720.720.620.6
Interest1.51.72.01.92.02.02.02.0
Other expense20.118.719.719.118.818.718.518.6
Of which: Wages 3/9.49.39.3
Net acquisition of non-financial assets9.08.17.57.57.07.47.17.3
Net lending (+)/borrowing (-)−7.4−6.3−5.5−4.8−4.8−4.5−4.8−4.6
Net incurrence of liabilities7.46.35.54.84.84.54.84.6
Net incurrence of financial liabilities7.48.25.25.74.94.74.03.8
Domestic5.25.73.64.63.93.72.32.2
Securities3.73.52.5
Loans1.52.31.1
Foreign2.22.51.61.21.01.01.71.7
Disbursement2.93.52.11.91.61.62.02.0
Amortization0.81.00.50.70.60.60.60.6
Net acquisition of financial assets0.1−1.90.3−0.9−0.1−0.10.80.8
Memorandum items:
Public and publicly guaranteed debt52.055.057.459.958.758.557.957.9
Primary balance−5.9−4.6−3.5−2.9−2.8−2.5−2.8−2.6
Non-oil primary balance−9.3−7.0−5.1−3.8−3.5−3.4−3.4−3.3
Cyclically Adjusted Primary Balance−5.9−4.6−4.6−2.8−2.6−2.7
Nominal GDP (in trillions of dong)3,5843,9384,1934,5035,0085,0085,4995,509
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Government Finance Statistics 2001 presentation. The baseline projections include assumptions of lower trade-related tax revenue due to international trade agreements, gradual improvements in tax collection, and current plans for SOE equitization/divestment. Figures consolidate central and provincial government accounts, but exclude net lending of Vietnam Development Bank and revenue and exenditure of Vietnam Social Security and other extra-budgetary funds.

Expenditure includes 66 trn of 2015 revenue overperformance by local governments equally split between capital and current expenditure.

Wages are staff estimates.

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

Government Finance Statistics 2001 presentation. The baseline projections include assumptions of lower trade-related tax revenue due to international trade agreements, gradual improvements in tax collection, and current plans for SOE equitization/divestment. Figures consolidate central and provincial government accounts, but exclude net lending of Vietnam Development Bank and revenue and exenditure of Vietnam Social Security and other extra-budgetary funds.

Expenditure includes 66 trn of 2015 revenue overperformance by local governments equally split between capital and current expenditure.

Wages are staff estimates.

Vietnam: Wage Bill

(In Percent of GDP)

Sources: National authorities; and IMF staff calculations.

Vietnam: Wage Bill

(In Percent of Public Expenditure)

Sources: National authorities; and IMF staff calculations.

10. Public debt remains sustainable over the medium-term; nevertheless, fiscal policy must create space for longer-term challenges. The 2018 budget envisages a neutral fiscal stance (Table 4). Under current tax and expenditure plans,1 staff projects a consolidated state budget deficit of around 4.7 percent of GDP during 2018–23 (GFS classification, but excluding the cash surplus of extra budgetary funds). Significant available equitization proceeds will facilitate budget financing via non-debt-generating flows, containing PPG debt below statutory limits in the medium-term. Financing from equitization proceeds will, however, last for only another 3–5 years, with interest rates potentially rising thereafter. Debt dynamics will also worsen once aging sets in around 2035 (Appendix IV). Additional buffers maybe needed to accommodate fiscal risks from a cyclical downturn or contingent liabilities from potentially sizable SOE non-guaranteed debt. Fiscal consolidation is needed to put debt on a sustainable path over the long term and create space to deal with contingencies.

11. More ambitious, high-quality consolidation is warranted. The authorities are committed to adhering to the statutory debt limit and to lowering the deficit to 3½ percent of GDP by 2020 (3.9 percent by GFS classification). The statutory debt limit is in line with cross-country thresholds for emerging market economies. It has been effective in triggering fiscal adjustment and should be maintained as an upper bound. However, the government should consider bringing PPG debt to around 55 percent of GDP by 2022 to ensure debt sustainability over the longer term.

  • A lower debt level will require more fiscal consolidation than currently planned—lowering the deficit by ⅓ percent of GDP per year on average over 2018–23 (text Table). Stronger consolidation could succeed in boosting medium-term growth and reducing the external surplus if it were achieved through high-quality structural fiscal measures (see below) and other measures to boost private investment (Section D).

  • These more ambitious targets could be achieved by capping annual growth in nominal government spending to 10 percent (Selected Issues Paper: Fiscal Rules in Vietnam).

  • Producing comprehensive fiscal accounts based on GFSM 2014 (planned for mid-2018) and improved budgetary and reporting processes would help improve budget planning and execution and support consolidation.

12. Policies should be geared toward meeting development and investment needs, improving resilience, and preparing for aging. The budget must meet large infrastructure needs, protect social spending, support recapitalizing SOCBs and adequately fund the deposit insurance system. The strong economy provides an opportunity to improve the quality of fiscal consolidation by implementing more ambitious reforms in tax policy, administration, and expenditure management which will yield results over time.

Vietnam: Corporate Income Tax Rates

Source: FADTP.

Note: 2017 or latest available.

  • Tax policy: Vietnam’s tax rates are in line with regional competitors (text Figure). While some increases in rates (for example gradually raising the VAT rate to 12 percent) would be welcome, efforts should focus on reviewing and narrowing tax exemptions, broadening the base of the land tax to create a full property tax, increasing environmental excises further, and unifying the VAT rate of final and intermediate goods. The stalled 2017 tax reforms envisaging a higher VAT rate, fewer tax rate brackets and lower PIT rates should be reworked and reconsidered.

  • Tax administration: The large taxpayer unit should be made fully operational and the many subnational collection offices should continue to be consolidated to streamline operations. In addition, administrative procedures should be simplified, and the use of information technology (IT) and risk-based auditing intensified. Simplification of the omnibus tax reform law would improve collection.

  • Infrastructure: Public investment should be anchored in a medium-term framework. To avoid delays, cost overruns and spreading capital too thinly, the allocation, coordination, and efficiency of capital spending should be improved along with project appraisal, prioritization and selection. Priority projects should be protected and implemented. The public investment management assessment (PIMA) planned for 2018 should be an important boost to reforms in this area.

  • Current spending: Priority social spending should be protected and non-priority spending further tightened.2 The large wage bill should be rationalized by trimming headcount at a faster rate and by linking wages to performance. SOE reform and divestment should continue and tariffs should gradually cover full costs (including capital costs). Ongoing reforms to raise cost recovery and introduce private education and healthcare must be carefully designed to ensure access to all and protect the poor while raising service quality. Social security reforms to raise retirement ages, increase contributions and rationalize benefits are needed for pension sustainability.

Text Table. Fiscal Consolidation Scenario 1/(In percent of GDP)
20162017 Staff Estimate2018 Staff Baseline20192020202120222023
Baseline
Total revenue and grants23.723.623.323.022.922.922.922.8
Capital expenditure7.57.47.37.37.37.37.37.3
Current expenditure21.020.720.720.720.620.520.420.3
Net lending (+)/borrowing (-)−4.8−4.5−4.6−4.7−4.7−4.7−4.7−4.7
Primary surplus (+)/deficit (-)−2.9−2.5−2.6−2.8−2.7−2.7−2.6−2.7
Equitization fund transfers to bugdet0.71.21.20.60.40.30.10.1
Public and public-guaranteed debt59.958.557.957.557.357.557.858.3
Real growth6.26.86.66.56.56.56.56.5
Consolidation Scenario 2/
Total revenue and grants23.723.623.323.423.723.823.923.9
Capital expenditure7.57.47.37.37.67.77.87.9
Current expenditure21.020.720.620.420.119.819.519.2
Net lending (+)/borrowing (-)−4.8−4.5−4.6−4.3−4.0−3.7−3.4−3.1
Primary surplus (+)/deficit (-)−2.9−2.5−2.6−2.5−2.1−1.9−1.7−1.3
Equitization fund transfers to bugdet0.71.21.20.70.50.40.20.2
Public and public-guaranteed debt59.958.557.957.156.055.154.252.8
Real growth6.26.86.66.46.56.66.76.8
Source: IMF staff estimates.

The baseline projections include assumptions of lower trade-related tax revenue due to international trade agreements, gradual improvements in tax collection, and current plans for SOE equitization/divestment. Figures exclude net lending of Vietnam Development Bank and revenue and exenditure of Vietnam Social Security and other extrabudgetary funds.

Public guaranteed debt, interest rates, ODA onlending and valuation changes are assumed to be the same as in the baseline. The consolidation scenario incorporates the negative GDP growth impact of fiscal consolidation with a multiplier of 0.3. The scenario also assumes the implementation of a tax policy reform in 2019, and a positive impact of public investment efficiency gains following PIM improvements to begin in 2020. The scenario further assumes structural reforms aimed at improving public spending efficiency and addressing bank recapitalization needs, which together with higher public investment is expected to increase real GDP growth by 0.4 percent over the baseline by 2023.

Source: IMF staff estimates.

The baseline projections include assumptions of lower trade-related tax revenue due to international trade agreements, gradual improvements in tax collection, and current plans for SOE equitization/divestment. Figures exclude net lending of Vietnam Development Bank and revenue and exenditure of Vietnam Social Security and other extrabudgetary funds.

Public guaranteed debt, interest rates, ODA onlending and valuation changes are assumed to be the same as in the baseline. The consolidation scenario incorporates the negative GDP growth impact of fiscal consolidation with a multiplier of 0.3. The scenario also assumes the implementation of a tax policy reform in 2019, and a positive impact of public investment efficiency gains following PIM improvements to begin in 2020. The scenario further assumes structural reforms aimed at improving public spending efficiency and addressing bank recapitalization needs, which together with higher public investment is expected to increase real GDP growth by 0.4 percent over the baseline by 2023.

13. Authorities’ views. Fiscal policy recommendations are broadly consistent with the National Assembly’s commitment to the statutory debt limit and a 3½ percent of GDP deficit by 2020.

  • The goal is raise total revenue by broadening tax bases, further reforming tax administration, and better utilizing natural resource and property tax revenues. The proposals remain under discussion. A draft property tax bill, raising non-agricultural land tax rates and introducing property taxes, will be considered by the National Assembly in late 2018.

  • Current spending will be checked by stronger expenditure controls, new limits on carry-forward spending, eliminating recurrent spending on autonomous public-sector delivery units (PSDUs), and continuing the two-out one-in policy for civil servants. Comprehensive civil service and social insurance reforms will continue, following recent increases in early retirement penalties and years of service for calculating benefits. The civil service is being reorganized to improve capacity and lower headcount but wage increases are needed to attract and retain talent.

  • PIMA is a strategic priority, but Vietnam’s large investment needs cannot be met solely with public funding. Private funding will be considered in the form of public private partnership (PPP) agreements.

  • Improving the quality (especially comprehensiveness and timeliness) of fiscal accounts and centralized management of the seventy extra budgetary funds are important goals and require collaboration across government agencies.

B. Improving Monetary and Exchange Rate Policies

14. Monetary conditions have been accommodative in an environment of rising real money demand. The SBV set lower credit growth ceilings in 2017 but cut its policy rate by 25 bps in mid-2017 to support growth. While credit growth has been declining over time, it is outstripping the rise in financial deepening. Credit outstanding reached 130 percent of GDP in 2017, resulting in a sizeable credit gap (text Figure) which maybe contributing to asset market valuations which are higher than fundamentals (Selected Issues Paper: Credit Growth and Asset Market Valuations). External inflows were strong during the year, including from equitization, with the SBV building reserves without full sterilization. This led to overnight interbank rates sliding well below the policy (repo) rate. Nevertheless, inflation remained low due to rising monetary-cum-financial deepening associated with a growing urban middle-class and de-dollarization, lower food prices and a stable exchange rate. Inflation is set to gradually increase to the 4 percent target over the medium-term as import prices strengthen.

Vietnam: Interest Rates

(In Percent per Annum)

Sources: National authorities; Bloomberg; CEIC; and IMF staff calculations.

Vietnam: Credit-to-GDP

(In Percent)

Sources: National authorities; and IMF staff calculations.

15. A tighter monetary policy is warranted. The policy stance should be tightened to drain excess liquidity, reduce credit gaps, and continue to keep inflation contained. Credit growth targets should be lowered further and the interbank and overnight rates should be brought closer to the policy rate. The lower credit target of 17 percent set for 2018 should help tighten monetary conditions but a more ambitious reduction to no more than 14 percent (Selected Issues Paper: Credit Growth and Asset Market Valuations) is needed compared to the baseline (Table 5). Greater two-way exchange rate flexibility within the current ± 3 percent band should be allowed. Reserve accumulation should continue but at a more gradual pace and interventions should be accompanied by active liquidity management.

Table 5.Vietnam: Monetary Survey, 2013–2019 1/(In trillions of dong, unless otherwise indicated)
Projections
2013201420152016201720182019
Net foreign assets6138268369491,2641,5501,902
State Bank of Vietnam (SBV)5407226148061,0971,3581,685
Commercial banks73104222143167191217
Net domestic assets3,7884,3535,1846,1776,9288,0199,476
Domestic credit3,8764,4805,3816,3077,1008,2989,601
Net claims on government407530689732556649782
SBV2778331−10
Credit institutions379523606701566
Credit to the economy3,4703,9504,6935,5756,5447,6508,818
Claims on state-owned enterprises (SOEs)573644723741
Claims on other sectors2,8973,3063,9704,834
In dong3,0103,4584,2675,1276,051
In foreign currency460491425448492
By state-owned banks (SOCBs)1,6251,8502,3042,7233,174
By non-SOCBs1,6941,9392,2472,6953,198
Other items net−88−127−198−129−172−280−125
Total liquidity (M2)4,4015,1796,0207,1268,1939,56811,378
Dong liquidity3,8524,6135,3706,5057,536
Deposits3,3453,9884,6435,6546,558
Currency outside banks507625727851978
Foreign currency deposits549566650621656
Memorandum items:
Money multiplier 2/6.36.36.16.46.16.16.3
Velocity0.80.80.70.60.60.60.5
Reserve money (year-on-year percent change)6.118.719.312.820.417.216.1
Liquidity (M2; year-on-year percent change)18.817.716.218.415.016.818.9
Currency/deposits (in percent)13.013.713.713.613.6
Credit/deposits (total, in percent)89.186.788.788.990.790.888.0
Credit/deposits (dong, in percent)90.086.791.990.792.3
Credit/deposits (foreign currency, in percent)83.786.865.572.275.1
Credit to the economy
Total (in percent of GDP)96.8100.3111.9123.8130.7136.8141.4
Total (year-on-year percent change)12.713.818.818.817.416.915.3
In dong (year-on-year percent change)18.514.923.420.218.0
In FC (year-on-year percent change)−14.56.9−13.45.210.0
In FC at constant exchange rate (year on year percent change)−15.46.0−16.43.28.4
To SOEs (year-on-year percent change)9.212.512.32.6
To other sectors (year-on-year percent change)13.514.120.121.7
To SOEs (percent of total)16.516.315.413.3
Dollarization
Foreign currency deposits/total deposits (in percent)14.112.412.39.99.1
Foreign currency loans/total loans (in percent)13.312.49.18.07.5
Banks’ net foreign exchange position (millions of U.S. dollars) 3/−7951,372−106−1,346151
Government deposits (in percent of GDP)3.02.31.62.56.1
Nominal GDP (in trillions of dong)3,5843,9384,1934,5035,0085,5936,235
Sources: SBV; and IMF staff estimates and projections.

Includes the SBV and deposit-taking credit institutions.

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.

M2 over reserve money.

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

16. The monetary policy framework needs to be modernized. Vietnam would benefit from adopting a modern monetary framework using inflation as the nominal anchor, accompanied by greater exchange rate flexibility and improved monetary transmission. Credit targets should begin to be phased out to achieve more market-based capital allocation and improve banks’ risk management. Macroprudential tools should be developed to deal with financial stability risks (see next Section). Cross-country evidence suggests that a gradual, opportunistic but planned transition initiated in times of economic strength can be orderly and effective. The tools, institutions, and expertise can be developed over time, with greater exchange rate and interest rate flexibility catalyzing institutional and financial market development by sharpening incentives to manage risk. For such a framework to succeed, the central bank must be operationally independent, technically capable, and effective in communicating its monetary policy. Financial literacy of policymakers, the public and investors is crucial. Such transitions are best initiated in times of economic strength and financial stability to maximize buy-in and minimize reversals.

17. Authorities’ views. Monetary policy maintained macroeconomic stability in the face of large capital inflows, including equitization receipts, which posed challenges for liquidity management. The SBV succeeded in maintaining credit growth below target although growth was strong. Rising money demand, financial deepening and de-dollarization helped control inflation. The SBV intends to adhere to the 2018 credit growth target, while reassessing the target over the course of the year. They shared staff’s views about the need to transition gradually to a modernized framework using inflation as the nominal anchor and greater exchange rate flexibility. The SBV will continue to strengthen its capacity, and will sequence measures depending on economic conditions and capacity development across a range of institutions. Market determination of interbank rates will need to await the improvement of financial sector risk management and transition to Basel II standards.

C. Strengthening Financial Sector Policies

18. Reforms have strengthened bank balance sheets. Bank profits and asset quality are improving in most large banks (Figure 4, Table 6), helped by the strong economy and faster disposal of non-performing loans (NPLs). Legal changes in 2017 (Resolution 42) and higher real estate prices are facilitating the disposal of collateral and the restructuring of bad assets. Amendments to the Law on Credit Institutions are enhancing bank corporate governance by clarifying bankruptcy and other restructuring options. Several banks have used this opportunity to address legacy bad assets, raise profits and boost capital, and large private banks are already close to the 8 percent capital adequacy ratio (CAR) Basel II requirement. Overall, the banking system has become more competitive.

Figure 4.Vietnam: Strengthening Financial Sector, with Underlying Weaknesses

Table 6.Vietnam: Financial Soundness Indicators 1/(In Percent)
201220132014201520162017
Regulatory Capital to Risk-Weighted Assets11.813.411.812.812.612.2
Regulatory Tier 1 Capital to Risk-Weighted Assets 2/12.912.110.610.19.49.2
Non-performing Loans Net of Provisions to Capital 2/14.812.814.211.011.411.5
Non-performing Loans to Total Gross Loans 3/3.43.12.92.32.32.0
Return on Assets 4/0.80.50.30.40.50.8
Return on Equity 4/8.25.83.25.46.610.2
Interest Margin to Gross Income 2/79.673.469.474.472.372.2
Non-interest Expenses to Gross Income 2/55.655.156.755.855.351.7
Liquid Assets to Total Assets (Liquid Asset Ratio) 2/13.413.015.513.213.212.7
Source: Financial Soundness Indicators (FSI)

Depository corporations only

The values for 2017 are based on those in 2017Q2

The staff estimated more broadly defined NPL ratios, which include NPLs sold to VAMC and loans previously restructured under Decision 780, as about 7.5 percent of total loans as of December 2017.

The values for 2017 are based on those in 2017Q3.

Source: Financial Soundness Indicators (FSI)

Depository corporations only

The values for 2017 are based on those in 2017Q2

The staff estimated more broadly defined NPL ratios, which include NPLs sold to VAMC and loans previously restructured under Decision 780, as about 7.5 percent of total loans as of December 2017.

The values for 2017 are based on those in 2017Q3.

19. However, important weaknesses remain in the form of low profits, thin capital buffers and high NPLs in some banks, and emerging financial risks (Figure 4).

  • Profitability remains low relative to other ASEAN countries, particularly for some large private banks, including three weak banks taken over by the SBV in 2015. While SOCBs are profitable, their ability to use profits to boost capital is hampered by required dividend payments.

  • Capital buffers remain thin in some SOCBs and a few private banks. This may imply potential risks to financial stability given the sizable credit gap, still thin capital buffers, and regulatory limits to private sector ownership.

  • Reported NPL ratios are still high for some banks and could be higher still if ever-greening and connected lending were fully accounted for. Moreover, the recent shift to consumer lending, including mortgages and durable goods, and margin lending, could sour in a cyclical downturn.

  • Strong growth in asset prices, driven by improved fundamentals, capital inflows, and accommodative credit conditions maybe leading to a buildup in financial sector risks (Box 1 and Selected Issues Paper: Credit Growth and Asset Market Valuations). Elevated equity prices are complicating the ability of banks to raise Tier 1 capital (Tier 2 capital limits have been reached by most banks). A market correction could affect household, corporate and financial sector balance sheets.

20. The banking system and supervision need to be further strengthened. Vietnam’s financial system must become more resilient and efficient in intermediating savings, both to ensure sustainable growth and stability, and to support a modern monetary framework with greater exchange rate flexibility.

  • SOCBs should be recapitalized quickly and managed at arms-length. Required dividend payments to the budget should be reduced and fresh capital injected using government funds: recapitalization costs are an estimated 1–1½ percent of GDP to raise CAR up to current regulatory requirements and to meet Basel II requirements by 2020. To help SOCBs recapitalize with new equity issues, state ownership should be reduced below 65 percent and foreign ownership limits raised. The banks taken over by the SBV should be restructured and sold to strategic investors or liquidated.

  • Asset recovery should be accelerated by speeding up NPL resolution to less than the current 5–10-year timeframe, finalizing the implementing regulations for Resolution 42 to clarify enforcement, increasing the Vietnam Asset Management Corporation’s (VAMC) capital, and expanding fast-track court procedures to cover a broader category of NPLs. The VAMC should stop warehousing bad assets; evolve into an asset management company by buying more NPLs at market prices in the near-term; and be gradually phased out over the medium-term.

  • To better monitor vulnerabilities, data quality on loan classification, disaggregated credit and banking sector and corporate exposures, and real estate markets should improve. Data gaps constrain supervision and risk assessment Closing these gaps requires a comprehensive strategy spanning multiple agencies with fragmented responsibilities for data collection and supervision. Broadening the required application of international accounting standards would improve transparency and help attract foreign capital for recapitalization needs.

21. The capacity to proactively manage financial sector risks should be improved. The SBV should strengthen the macroprudential framework by introducing leverage ratios, and countercyclical buffers (CCBs), complemented by policy tools to temper potential risks from consumer and mortgage loans (including loan-to-value (LTV) and debt service-to-income (DSTI) requirements. It should ensure that sufficiently robust liquidity and crisis management frameworks—including legal and operational clarity on early intervention, information sharing, and communication—are in place to weather shocks. A strong and adequately funded deposit insurance scheme and an effective lender of last resort would be helpful in this regard. The AML/CFT framework (including customer due diligence requirements for political exposed persons) should be strengthened in line with the FATF standards to address key country risks.

22. Authorities’ views. Banking sector reforms have contributed to macro-financial stability and growth but vigilance is needed about emerging risks.

  • The capitalization and consolidation of SOCBs is a priority. Strong bank profits in 2017 makes it a good time for bank restructuring to improve governance, transparency and efficiency. Since the budget now has some room, SOCBs should be allowed to retain profits until legacy NPLs are fully resolved; this proposal is awaiting a high-level decision. Agribank, the last fully state-owned bank, is targeted for equitization by 2019, after accounting for land holdings and land use plans.

  • Resolving legacy NPLs and preventing NPLs from rising are also major priorities. Banks have improved risk management. Information technology improvements (such as the Credit Information Bureau) have boosted financial deepening and credit demand, while also improving credit risk assessment.

  • New concerns are associated with rising stock prices, margin lending for equity investment (which has prompted tighter regulatory limits), and growing consumer lending. Speculative real estate investments have, however, declined. The SBV is encouraging banks to reduce high-risk credit concentration, and to improve internal risk management by strengthening prudential regulations. It will conduct offsite supervision in institutions with concentration of these types of lending, and keep strengthening prudential regulations.

  • There is widespread recognition of the need to improve the quality of data. The SBV plans to harmonize definitions across regulations to improve data timeliness and accuracy. Macroprudential policies such as LTV ratios and CCBs are under consideration but implementation would need to await the availability of better data and the transition to Basel II in 2020.

Box 1.Asset Market Developments

Ample liquidity has elevated asset valuations. Strong credit growth and external inflows have helped push up asset prices. While the strong growth in asset prices is partly driven by improving fundamentals, they could be storing up risks to the financial system.

Vietnam: Stock Price Index

(Year-on-Year Percent Change)

Sources: Bloomberg; and IMF staff calculations.

Vietnamese stock markets have boomed, outperforming US and ASEAN markets. Market capitalization in the Ho Chi Minh City and Hanoi stock indices tripled in 2016–17, reflecting growing numbers of listed firms and higher valuations (text Figures). The sharp increase in stock prices is largely driven by the expectation for economic growth and SOE reforms and by global financial conditions. Slower growth, delays in reforms or a loss of investor confidence due to other factors could result in a market correction.

Vietnam: Valuation Measures in Vietnam Stock Exchange Markets

(Year-on-Year Percent Change)

Sources: Bloomberg; and IMF staff calculations.

Real estate prices have rebounded from the lows seen in the GFC but remain well below the highs of 2008. Price-to-rent ratios suggest that the increase in property prices is in line with growing demand for housing from a rapidly growing urban middle class with rising incomes (text Figure). The availability of affordable housing is also increasing, supported in part by low-interest mortgage lending by SOCBs.

Vietnam: Real Estate Prices

(2014=1.0)

Sources: Savills; National authorities; and IMF staff calculations.

Source: Selected Issues Paper: Credit Growth and Asset Market Valuations.

D. Enabling Private-Sector-Led Growth and Innovation

23. Economic reforms, modernization, a shrinking state footprint, and better access to credit are improving productivity and the business environment. Numerous administrative measures were scrapped in 2017 to level the playing field; and, business formation has risen to record levels. The CPTPP, EU-FTA, and commitments under other FTAs, should further boost modernization and reforms. The legal framework for equitization, divestment and reform of SOEs is being revamped with the creation of an independent State Capital Management Committee (SCMC) overseeing all large SOEs to improve accountability and efficiency, while leaving management and regulation with line ministries and regulatory bodies. Several large and profitable SOEs in non-strategic sectors are slated for divestment in 2016–20, with substantial momentum evident in 2017 and 2018. Bolstered by the authorities’ public commitments, efforts to address high-level corruption have been stepped up and have started to reduce perceptions of corruption. Finally, in addition to possessing a high-quality labor force in which female labor force participation is high (Figure 5; Box 2 and Figure 6), Vietnam is ahead of its ASEAN peers in mobile penetration and digital-economy readiness (text Figure). Reflecting these strengths and ongoing reforms, Vietnam’s rankings in international competitiveness ratings are rising (Figure 5).

Figure 5.Vietnam: Competitiveness and Business Climate

Figure 6.Vietnam: Gender Gaps

Vietnam: Internet Users, 2017

Sources: Internet Live Stats; and IMF staff calculations. Note: Internet Users per Capita; Growth since 2014.

Vietnam: Connection Speed

(Average Mbps)

Source: Akamai’s state of the internet report.

Note: Dots show the change in speed from 2015Q1 (RHS).

1 Mbps = 1000 Kbps.

24. Despite important progress, the reform agenda to achieve higher middle-income status remains large. As an enabler of private sector-led growth and as part of its Industry 4.0 initiative, the government can take advantage of the strong economy to implement far-reaching and complementary reforms to raise labor productivity, tackle remaining barriers to domestic investment, and reduce informality and dualism. It should formulate a strategy for the digital age which is already reshaping jobs and business models globally. According to the ILO (2016), 56 percent of jobs in the ASEAN-5 are at risk of automation by 2025, in retail and wholesale trade, construction and manufacturing, with women being at a disproportionate risk. Policies should focus on:

  • Investment with an eye toward the digital future. Continued investments in human capital and high-quality infrastructure are needed to further improve productivity, the business climate and innovation. Further boosting connectivity, and enhancing incubators for startups would aid financial deepening and inclusion, and facilitate participation of Vietnamese entrepreneurs in global and regional digital platforms and production. Action is also needed to fundamentally reform tertiary education, especially in science, technology, engineering and mathematics (STEM), to reduce skills mismatches and ensure that graduates have the necessary skills suitable for the digital age. Modernizing and improving the quality of vocational training, boosting private-sector led in-house training, and providing lifelong learning opportunities can facilitate continued rural-urban migration and raise labor productivity.

  • Developing non-bank, long-term financing to support investment and businesses. The limited availability of long-term financing deters strategic and long-term investors. Developing capital markets, including secondary government and corporate bond markets, would help shift Vietnam away from bank-based financing, and enable private sector financing for infrastructure and business needs. It is important to increase the transparency and governance of equity markets and bring them toward international standards, by requiring public companies above a certain size to be listed and modernizing the legal framework to support Vietnam’s move to emerging market status.

  • Further transforming the role of the state. Regulatory barriers to foreign and domestic private sector ownership should be reduced to strengthen links between the domestic economy and FDI sectors, improve competition, and raise productivity through the transfer of technology and expertise. While the regulatory burden has lightened, implementation challenges, especially at the local and provincial levels, need to be alleviated. Land ownership and leasing should be reformed to reduce concentration in state hands; competitive and transparent land auctions should become the norm. The separation of state ownership of SOEs from regulation is welcome, but regulatory entities must operate at arms-length from the government, enterprises and interest groups and be independent but accountable. To facilitate divestment, the State Capital Investment Corporation (SCIC) should have adequate capital and greater legal clarity regarding the transfer of SOEs to the SCIC is needed.

  • Raising the bar on soft infrastructure. Vietnam must accelerate its march toward international standards for regulatory excellence, transparency and disclosure, including by improving data quality. A collaborative and comprehensive approach is needed across all agencies to address data and analytical gaps, with greater public access to information to better communicate, educate and improve accountability. The effectiveness of anti-corruption measures should be enhanced (e.g., the use of AML tools, recovery of stolen assets and asset declaration systems). Judiciary reform is needed to improve the enforcement of contracts, strengthen legal interpretation, and facilitate resolution, restructuring and bankruptcy proceedings.

Box 2.Gender Gaps

Vietnam is a success story in women’s contributions to the economy and politics (Figure 6). Female labor force participation is over 73 percent, close to that for men, surpassing levels in comparator ASEAN countries, and the 2016 OECD average. Overall, female educational attainment is high, though still lagging that for men. Current net enrollment rates for women are now equal to, or higher, than those for men from primary through tertiary education. The gender wage gap is, on average, just under 20 percent, and is the smallest in the FDI sector, where women comprise some 65 percent of the workforce and where average wages are the highest in the economy. Women are well-represented in Vietnam’s parliament compared to other Asian countries, with women chairing the National Assembly and comprising nearly 27 percent of MPs.

Significant challenges remain to the further empowerment of women. The share of women in the employed labor force with strong technical training is low (as it is for men) and over 63 percent of working women are self-employed and family laborers. In the formal sector, women dominate certain types of industrial work, such as garments and automobile parts, which is remunerated at piece rates and where the risk of automation is high. Women face various legal barriers for work, including an earlier mandatory retirement age and disqualification for certain jobs. Surveys indicate that Vietnamese women, regardless of education or income level, face a much larger burden of unpaid family and societal care than men. Women’s access to the formal financial sector is low (as for men) relative to other lower middle-income countries, which likely restricts their ability to form businesses.

Sources: ActionAid, Make a House Become a Home, 2016; GSO, Gender Statistics 2016 (released 2018); UN Women, Viet Nam Gender Briefing Kit 2016; UN Women, Towards Gender Equality in Viet Nam: Making Inclusive Growth Work for Women, 2016

25. Sustainable development and economic welfare. Vietnam is highly vulnerable to climate change. Under the Paris Climate Agreement, the government committed to meeting the SDGs and drew up a National Action Plan. To address the threat of climate change and degradation and ensure sustainable development, Vietnam should lower the intensity of dirty fossil fuels by raising the contribution of renewables and gas; provide stronger incentives for green growth, including full carbon pricing of fossil fuels; invest in infrastructure more resilient to natural disasters; and introduce an arms-length regulatory framework to prevent and manage environmental risk.

26. Authorities’ views. Staff recommendations are consistent with the government’s broad policies and commitment to private-sector-led growth. Improving the business climate, leveling the playing field for domestic small and medium-sized enterprises (SMEs), tackling corruption and improving transparency are important priorities.

  • Several legislative initiatives are under way to address these objectives. They include a new legal framework for SMEs; special administrative and economic zones; improved legal and institutional framework for capital and securities markets; and a revised public investment law to introduce a medium-term five-year investment strategy, simplify procedures, improve prioritization, and reduce arrears. The Central Institute for Economic Management has been tasked to recommend land use measures to improve business conditions.

  • SOE governance will be improved to boost profitability. SOE equitization and divestment will continue in 2018–20, along with PSDU restructuring. To enhance accountability of state agencies, an improved anti-corruption law seeks to address conflicts of interest and illicit wealth by recording and making publicly available the income and wealth of all public servants.

  • The government is cognizant of pervasive data weaknesses which needs to be addressed with technical assistance programs as part of the Industry 4.0 initiative. The government is also setting up databases to improve transparency.

  • The government has ambitious plans to increase green energy production by 2020 from the current levels of 2 percent of energy supply. It will increase environmental taxes in July 2018.

Staff Appraisal

27. Vietnam’s dynamic, highly open economy continues to perform well. The solid performance is aided by macroeconomic and financial stability, stepped up economic reforms, and inflows of foreign direct investment which are enabling structural transformation and are raising potential growth. The strong economic momentum is expected to continue. But financial buffers are still thin, macroeconomic policy frameworks remain inflexible, complicating the management of shocks, and the external position is substantially stronger than warranted by fundamentals. The strong economy provides an opportunity for more ambitious reforms to level the playing field by tackling remaining distortions and capacity constraints, increasing investment and reducing the external surplus.

28. Fiscal policy should emphasize high-quality consolidation to meet large development needs and ensure that Vietnam has fiscal space to meet longer-term challenges. A slightly more ambitious consolidation than currently planned, and a lower debt ceiling than the current statutory limit, will be needed to create additional fiscal room before aging sets in the mid-2030s and provision for contingencies. Stronger consolidation could boost medium-term growth if it relied on high-quality structural fiscal measures and measures to boost private investment. Reforms should focus on broadening tax bases; reducing administrative and wage-related spending; protecting social spending through well designed social security and civil service reforms; and, protecting and improving the quality of public investment. Comprehensive and timely fiscal accounts based on GFSM 2014 and improved budget planning and execution should help facilitate consolidation.

29. To sustain macroeconomic stability, monetary policy should be tightened by further lowering credit growth to bring it in line with ongoing improvements in financial deepening. Greater two-way exchange rate flexibility within the current band should be allowed to reduce speculative inflows, absorb shocks and help bring down the external surplus. Reserve accumulation should continue but more gradually, with fully sterilized interventions. The modernization of the monetary framework should start, gradually easing away from credit targets to begin a phased shift to inflation targeting and greater exchange rate flexibility.

30. Financial sector balance sheets, supervision and risk management need to be further strengthened. A stronger financial sector can help improve the efficiency of financial intermediation to service the domestic economy and investment. Strong credit and asset price growth may be contributing to the build-up of risks in the financial system. SOCBs should be capitalized swiftly with government funds, and by raising private sector and foreign ownership limits. It is critical to develop a macroprudential framework and improve data quality on credit aggregates and balance sheet exposures to monitor and proactively manage risks, and ensure that sufficiently robust liquidity and crisis management frameworks are in place to provide legal and operational clarity regarding early intervention and communication to mitigate emerging financial sector risks.

31. The reform drive needs to be broadened and accelerated to tackle the remaining barriers to investment and to raise labor productivity. Priority areas include: high-quality infrastructure investments; further reductions in regulatory barriers and transitioning to international standards for regulatory excellence, transparency and data quality to aid investment; reforms to tertiary education; efforts to reduce the concentration of land ownership in state hands; and continued reforms in state-owned enterprises. Vietnam must continue to enhance anti-corruption measures and address the threat of climate change.

32. It is recommended that the next Article IV Consultation take place on the standard 12-month cycle.

Proposed Decision

The Executive Board endorses the thrust of the staff appraisal in the report for the 2018 Article IV consultation with Vietnam (SM/18/125, 5/29/2018).

It is expected that the next Article IV consultation with Vietnam will take place on the standard 12-month cycle.

Appendix I. Progress Against IMF Recommendations
Policies2017 Article IV Consultations RecommendationsActions since 2017 Article IV Consultations
Fiscal PoliciesImplement tax reform to broaden and diversify revenue base and undertake civil service reform.Draft tax reforms tabled for discussions in late 2017. Revisions are underway.

The tax administration improvements continued through the updating of electronic infrastructure, increasing rates of electronic e-filing and electronic tax refunds (particularly for VAT), and improved coordination between the large taxpayer office and the local authorities. Reductions in the frequency of tax filing requirement and streamlining of procedures from 535 to 289 is supporting the business climate.
Capital expenditure should be protected and its efficiency should be raised.

Undertake a Public Investment Management Assessment (PIMA).
High-level efforts to accelerate disbursement of project funding through streamlined administrative measures, technical support, and economic incentives in 2017.

A PIMA is planned for 2018.
Monetary PolicyModernize the monetary framework by anchoring monetary policy on price stability, allowing greater exchange rate flexibility and phasing out credit growth targets.

Set interbank interest rates at the repo rate level and reduce credit growth targets to below 15 percent.
The main objective of monetary policy remains price and exchange rate stability. The SBV will continue to strengthen its capacity for inflation targeting, but the sequencing of measures will depend on economic conditions and capacity development across a range of institutions. Credit grew by 17½ percent in 2017, but credit growth targets were set at a lower level (17 percent) in 2018.

Interbank rate remained below the repo rate level in 2017 due to the rise in equitization related capital inflows into the banking system.
Financial Sector PoliciesAccelerate NPL resolution and banks recapitalization.Legal changes in 2017 (Resolution 42) and higher real estate prices are facilitating the disposal of collateral, the restructuring of bad assets, and the disposal of NPLs. Amendments to the Law on Credit Institutions are enhancing bank corporate governance by clarifying bankruptcy and other restructuring options.

Several banks have addressed legacy bad assets, raise profits and boost capital, and large private banks are already close to the 8 percent capital adequacy ratio (CAR) Basel II requirement. But capital buffers remain thin in some SOCBs and a few private banks. Reported NPL ratios are still high for some banks and could be higher still if evergreening and connected lending were properly accounted for.
Structural PoliciesAccelerate SOE reform, upgrade governance and management and increase transparency.The legal framework for equitization, divestment and reform of SOEs is being revamped with the creation of an independent State Capital Management Committee (SCMC) overseeing all large SOEs to improve accountability and efficiency, while leaving management and regulation with line ministries and regulatory bodies. Several large and profitable SOEs in non-strategic sectors are slated for divestment in 2016–20, with substantial momentum evident in 2017 and 2018.
Undertake product market reforms aimed at reducing regulatory barriers to entry to enhance competition and raise sectoral productivitySignificant reduction in red tape and administrative procedures starting in mid-2017 and ongoing. Further reforms are likely in the context of the implementation of free trade agreements.
Increase the environmental tax and gradually raise energy prices to fully price externalities associated with fossil fuels.Environmental tax increases are likely to come into effect in July 2018.
Appendix II. External Assessment

The external position is substantially stronger than warranted by fundamentals and desirable policies. The current account (CA) gap is 5.2 percent of GDP and the exchange rate is undervalued by 7 percent, reflecting distortions still prevalent in Vietnam’s dual economy which discourage investment in the domestic private sector. The CA gap should be addressed through more ambitious structural and financial sector reforms that strengthen private investment; protecting and improving the efficiency of public investment while pursuing fiscal consolidation, and allowing greater two-way exchange rate flexibility to reduce the need to build buffers.

The current account position reflects a dual and segmented economy. A competitive FDI manufacturing sector generates a large trade surplus (15.5 percent of GDP). It is dominated by electronics multinationals and apparel producers, integrated into the broader Asian supply chains, and engaged in final assembly and processing, although higher value-added activities are also increasingly located in Vietnam.1 Meanwhile, the domestic non-FDI sector (many SMEs, agriculture, tradable goods producers, including SOEs and domestic private firms) runs a trade deficit of 8.7 percent of GDP. Productivity in this sector is low (20 percent of that of the FDI sector), and exports are dominated by agricultural commodities and oil. Slow SOE reform progress, barriers faced by SMEs to reach economies of scale and credit misallocation and weaknesses in financial intermediation impede the development of a productive and vibrant economy outside the FDI sector despite rapid growth.

Investment has declined during the last decade while saving has remained high. Gross capital formation has been below most countries in the region. Excluding the FDI sector, investment has fallen by 10 percentage points, to 20 percent of GDP, in the last decade. This partly reflects cutbacks in SOE capital formation in heavy industries and barriers to the development of private manufacturing firms and SMEs, as well as declining public investment despite high fiscal deficits. Saving has remained at about 30 percent of GDP, which is high relative to peers, reflecting ineffective financial intermediation of high profits in the FDI sector into productive investment opportunities in the domestic economy because of foreign ownership limits and weaknesses in the banking system.

Vietnam: Exports-Domestic and FIE Sector, Jan.01-Dec.17

(Rolling 12-months, in billions of U.S. dollars)

Sources: Vietnamese authorities; and IMF staff calculations.

Vietnam: Current Account Balance

(In percent of GDP)

Sources: Vietnamese authorities; and IMF staff estimates.

Vietnam: Savings, Investment and Current Account

(In percent of GDP)

Sources: Vietnamese authorities; and IMF staff estimates.

The real effective exchange rate (REER) depreciated in 2017. The real effective exchange rate has appreciated from the low levels of 2005 until 2016 by 4 percent on average every year. In 2017 however, the REER depreciated by 4.4 percent, as the Dong remained pegged to a weakening U.S. dollar.

Vietnam: Real Effective Exchange Rate, 2000Q1— 2017Q4

(2010=100)

Source: IMF staff estimates.

Vietnam experienced large foreign exchange inflows in 2017. FDI inflows amounted US$14.1 billion, up 12 percent from 2016, mainly in the manufacturing sector. FII inflows surged from 0.2 to US$1.9 billion, supported by the booming stock market and SOE equitization. Private external disbursements were also on the rise, mainly due to FDI enterprises borrowing from parent companies and national banks. Estimated errors and omission remain high, due to unreported imports and increase in US dollar currency holdings by residents outside the formal financial sector.

Reserve coverage now stands at 77 percent of the adequacy metric, owing to an increase in GIR by US$12.5 billion in 2017.2 At around 2.3 months of imports of goods and services at end-2017, reserves remain under the regional emerging market countries’ average of nine months.

Vietnam: Reserve Adequacy Metric, 2000Q1–2017Q4

(In percent of reserve metric)

Sources: Vietnamese authorities; and IMF staff estimates

Vietnam’s external position is assessed to be substantially stronger than warranted by fundamentals and desirable policies. The current account approach of the external balance assessment (EBA)3 suggests a CA norm of -3.8 percent, indicating an undervaluation of 8.4 percent. However, the EBA-lite model does not account for the fact that the FDI sector has relatively few, though growing, links to the domestic economy. Cross-country panel regressions that link investment and savings were used to estimate an average CA norm, and factor in the activities of the FDI sector and aging.4 This approach suggests a CA norm of -2.8 percent of GDP. The EBA-lite semi-elasticity of the CA of -0.7 was then used to arrive at an REER undervaluation of 7 percent. The equilibrium real exchange rate approach points to a substantial overvaluation, but the fit is poor and staff’s judgment relies on the adjusted REER results of the CA regression.

Vietnam: EBA Lite Results
ApproachCurrent Account1Staff estimateREER1
2017 Current Account2.5%2.5%
Current Account Norm−3.8%−2.8%
Current Account Gap6.3%5.2%
o/w Policy Gap−1.6%−1.6%
In(REER) Actual4.85
In(REER) Norm4.53
o/w Policy Gap0.04
REER gap−8.4%−7.0%31.5%
Source: IMF staff estimates.

EBA-Lite standard models

Source: IMF staff estimates.

EBA-Lite standard models

In conclusion, there is evidence of substantial CA strength of some 5.2 percent of GDP. This reflects the dual structure of the economy. CA strength should be addressed through structural and financial sector reforms to raise private investment and protect public investment while raising its efficiency and lowering the budget deficit. The modernization of the monetary framework with greater two-way exchange rate flexibility would also help external adjustment by facilitating nominal appreciation and reducing the need to accumulate reserves.

Appendix III. Risk Assessment Matrix
RiskLikelihood of RiskImpactPolicies to Minimize Impact
External Risks
Tighter global financial conditions

Intensification of the risk of fragmentation/security dislocation
H



H
M: Decline in financial market confidence, capital outflows with pressure on the exchange rate and reserves, stock market correction and tightening of liquidity conditions, increase in sovereign yields, pressure on banks with weak balance sheetsTighten monetary policy and allow exchange rate flexibility, with judicious currency intervention to avoid excessive volatility. Strengthen bank balance sheets to improve resilience. Initiate the modernization of the monetary framework using inflation as a nominal anchor. Accelerate growth friendly fiscal rebalancing and consolidation, and structural reforms to support confidence and FDI and build adequate buffers.
Significant China slowdown and its spillovers

Structurally weak growth in key advanced

Significant U.S. slowdown and its spillovers
L/M



H



M
M: Decline in growth due to weaker export growth, FDI, and remittances. Pressures on the exchange rate and international reserves. Deterioration in public sector and bank balance sheets.Allow greater exchange rate flexibility, move toward using inflation as a nominal anchor. Accelerate financial sector, SOE, and structural reforms to improve productivity, preserve investor confidence, and increase competitiveness in the domestic economy. Undertake fiscal rebalancing to support growth and public investment while ensuring debt sustainability.
Retreat from cross border integrationMH: Weaker export growth, FDI, and remittances; supply chains could be interrupted.Rapid implementation of CPTPP and FTAs with the EU, Eurasian Economic Union, and Korea. Deepen regional trade integration. Strengthen competitiveness through accelerated SOE, structural, and banking sector reforms.
Domestic Risks
Poor quality and insufficient fiscal consolidationHH: Weaker medium-term productivity and output growth, higher sovereign yields, crowding out generate unsustainable debt dynamics and impact bank balance sheets. Lower investor confidence and capital flight create exchange rate pressures.Strengthen revenues by reducing tax exemptions, improving tax administration, introducing a property tax. Curtail non-essential spending, reduce wage bill by implementing civil service reform, improve quality of investment spending. Use SOE equitization receipts to help finance the budget and buyback debt, but this should not substitute for structural consolidation.
Continued high credit targetsHH: Excessive risk taking exacerbates weaknesses in bank balance sheets. Credit misallocation gives rise to economic inefficiencies, reduces productivity and growth and creates an adverse sovereign-macroeconomic-financial feedback loop.Reduce credit growth targets and phase out over the medium-term. Accelerate NPL resolution and recapitalization of systemically important banks, resolve small unviable banks, strengthen safety nets. Monitor vulnerabilities and proactively manage risks to prevent excessive risk taking by banks. Make progress on developing a macroprudential framework.
Climate changeHH: Vietnam is among the top ten countries affected by air pollution. Greenhouse gas emissions are expected to double between 2010 and 2020 and triple by 2030. By 2100, climate change could impact more than 12 percent of the population and reduce growth by 10 percent.Lower the intensity of fossil fuels by raising the contribution of renewable energy. Provide stronger incentives for green growth through taxation of fossil fuels that fully price environmental externalities. Invest in climate resilient infrastructure. Shift to autonomous, electric, shared vehicles to reduce congestion and pollution in cities. Improve government capacity to coordinate technological change and promote and green growth.
“L” =Low; “M” =Medium; “H” =High. The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.
“L” =Low; “M” =Medium; “H” =High. The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.
Appendix IV. Public and External Debt Sustainability Analysis

Vietnam’s public and publicly guaranteed (PPG) debt has risen by 10 percentage points of GDP in the last five years, to 58.5 percent of GDP in 2017. The authorities are planning fiscal consolidation, but concrete measures are not yet fully identified. Under staff’s baseline projections, which incorporate less consolidation than the authorities’ plan, PPG debt would remain about constant until 2023. Compared to the 2017 analysis, the projected debt trajectory is more benign, primarily due to the greater planned use of non-debt creating equitization revenues for budget financing, a lower 2017 deficit, lower interest payments due to lower financing needs in 2016 and 2017, and lower interest rates. Notwithstanding, staff continues to assess the debt sustainability risk as low to moderate, reflecting uncertainty about fiscal consolidation measures and equitization revenues and risks from potential contingent liabilities related to banks and SOEs.

Background. The debt sustainability analysis (DSA) framework for market access countries is used to assess Vietnam’s debt sustainability and other risks related to its funding and debt structure. The framework uses a risk-based approach and expands upon the basic DSA to include (i) an assessment of the realism of baseline assumptions and the projected fiscal adjustment; (ii) an analysis of risks associated with the debt profile; (iii) macro-fiscal risks; (iv) a stochastic debt projection taking into account past macro-fiscal volatility; and (v) a standardized summary of risks in a heat map. This DSA also examines the implications of implementation risks by considering a no-adjustment scenario.

Coverage. The DSA is performed on the public and publicly guaranteed debt and external debt. In addition to the central government, the analysis covers state owned enterprises (SOEs) and specialized financial institutions (SFIs), limited to the debt guaranteed by the government. Local government debt is included in the public debt.

Macro-fiscal assumptions. Using the baseline scenario, growth slightly declines from 6.8 percent in 2017 to a projected 6.6 percent in 2018, and stabilizes at potential—6.5 percent—in the medium term. In the baseline, staff projects a primary fiscal deficit of 2.6 percent in 2018, which is assumed to remain constant over the medium-term.

Choice of framework. Vietnam’s recent surge of public debt and its relatively high debt level call for using the more detailed version (higher scrutiny) of the new DSA framework. This analysis gives a more in-depth assessment of specific risks to debt sustainability.

Realism of baseline assumptions. The median forecast errors for real GDP growth, primary balance and inflation during 2008–16 are small, around -0.4 percent, showing no evidence of systematic projection bias that could undermine the assessment.

Cross-country experience suggests that the baseline fiscal adjustment is feasible. The maximum three-year adjustment in the cyclically adjusted primary balance (CAPB) over the projected period is 1 percent, with fiscal consolidation assumed to be achieved mainly through expenditure reduction, absent of structural revenue enhancing measures.

Public debt sustainability. Under the baseline scenario, PPG debt-to-GDP ratio is projected to decline by 0.6 percentage points in 2018, with privatization receipts partially compensating for the primary deficit. PPG debt should remain below 60 percent of GDP by 2023. However, as of the mid-20s, the debt ratio is expected to increase fast, given rising age and climate change related spending, a sharp drop in privatization receipts, and increases in domestic interest rates. Most of Vietnam’s debt has medium to long-term maturity and the share of foreign currency-denominated debt is projected to decrease from 43 percent of total debt in 2016 to 39 percent in 2023.

The constant primary balance scenario tracks the baseline scenario closely, given little change in the projected deficits. The historical scenario—in which real GDP growth, the primary balance and real interest rates are set at their historical average—leads to a level of PPG debt similar to the constant primary balance scenario, but foresees temporarily higher financing needs. Macro-fiscal stress tests suggest that Vietnam is more vulnerable to real interest rate and primary balance shocks but these shocks would not carry the debt-to GDP ratio over the 70 percent threshold. A real interest rate shock, in which the effective interest rate is increased by 55 basis points in 2020 to 185 basis points in 2023, would raise PPG debt to 60 percent of GDP. A combined macro-fiscal shock in 2018 would increase PPG debt to 66 percent of GDP by 2023.

Probability distributions from a dynamic simulation of debt sustainability under an array of macroeconomic shocks show that in a negative-case scenario, PPG debt could reach about 73 percent of GDP with 10 percent likelihood by 2023, while a combination of positive shocks would help reduce the debt-to-GDP ratio to 50 percent with a 25 percent probability. While the medium-term outlook is relatively positive, the current DSA does not include potentially large contingent liabilities from potentially high levels of non-guaranteed SOE debt and the costs of recapitalizing SOCBs and the SCIC. It only takes into account the already-determined remaining amounts for recapitalizing Agribank (0.2 percent of GDP), assumed to be finalized by end-2019. Lack of more specific information makes the assessment of the underlying risks difficult at this time.

Heat map. The heat map shows a low risk of debt distress, and the gross-financing-needs-to-GDP ratio remains below the 15 percent threshold under all shocks. Finally, the assessment highlights possible risks in the Vietnam debt profile, notably in terms of external financing requirements and foreign currency debt.

External debt sustainability. Vietnam’s external debt-to-GDP ratio rose to 49.2 percent in 2017. While PPG external debt remained constant compared to 2016—at 26 percent of GDP—private external debt increased strongly, mainly from FDI companies and banks. In particular, short-term external private debt grew by 70 percent to reach US$22 billion. About half of the increase went towards the purchase of SABECO’s shares, a SOE equitized in December 2017.

Under the baseline, external debt would increase to 50.2 percent of GDP in 2018 and would reach 54 percent of GDP by 2023 as gross external financing needs rises, in line with the projected erosion of the current account surplus. Vietnam’s external debt is vulnerable to real depreciation and current-account shocks while growth and interest rate shocks have only limited impact on the external debt dynamics.

Figure 1.Vietnam: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(In percent of GDP unless otherwise indicated)

Source: IMF staff.

1/ Public sector is defined as general government and includes public guarantees, defined as SOEs.

2/ Based on available data.

3/ EMBIG.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r – π(1+g) – g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π (1+g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

8/ Includes 0.2 percent of GDP remaining cost of recapitalizing Agribank (8.8 trillion dong), assumed to be finalized by end-2019.

9/ Includes changes in the stock of guarantees, asset changes, and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

10/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Figure 2.Vietnam: Public DSA—Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Figure 3.Vietnam: Public DSA—Stress Tests

Source: IMF staff.

Figure 4.Vietnam: Public DSA—Risk Assessment

Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ EMBIG, an average over the last 3 months, 23-Jan-18 through 23-Apr-18.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

Figure 5.Vietnam: Public DSA—Realism of Baseline Assumptions

Source: IMF Staff.

1/ Plotted distribution includes surveillance countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Vietnam has had a cumulative increase in private sector credit of 30 percent of GDP, 2014–2017. For Vietnam, t corresponds to 2018; for the distribution, t corresponds to the first year of the crisis.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

Figure 6.Vietnam: External Debt Sustainability—Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2015.

Table 1.Vietnam: External Debt Sustainability Framework, 2013–2023(In percent of GDP, unless otherwise indicated)
ActualProjections
20132014201520162017201820192020202120222023Debt-stabilizing non-interest current account 6/
Baseline: External debt37.138.040.944.449.250.251.051.752.553.354.1−7.2
Change in external debt−0.30.82.93.64.71.00.80.70.80.80.80.0
Identified external debt-creating flows (4+8+9)−11.9−12.3−6.6−10.7−12.5−11.0−10.3−9.7−9.1−8.5−8.20.0
Current account deficit, excluding interest payments−5.3−5.6−0.8−3.7−3.4−3.2−2.9−2.7−2.4−2.1−1.97.2
Deficit in balance of goods and services−3.3−4.6−1.1−3.2−3.5−3.3−3.1−2.9−2.7−2.5−2.4
Exports83.786.790.593.8103.0109.8115.6121.3127.9134.8142.5
Imports80.482.189.490.699.6106.5112.5118.5125.2132.3140.1
Net non-debt creating capital inflows (negative)−4.1−4.3−5.6−5.8−6.2−5.9−5.5−5.1−4.8−4.5−4.2−4.2
Automatic debt dynamics 1/−2.5−2.3−0.2−1.2−2.9−1.9−1.8−1.9−1.9−1.9−2.0−3.0
Contribution from nominal interest rate0.70.70.90.80.91.11.11.21.21.21.21.2
Contribution from real GDP growth−1.9−2.0−2.5−2.4−2.8−3.0−3.0−3.0−3.1−3.1−3.2−3.2
Contribution from price and exchange rate changes 2/−1.4−1.01.40.4−1.1−0.9
Residual, incl. change in gross foreign assets (2–3) 3/11.613.19.514.317.212.011.110.39.99.49.00.0
External debt-to-exports ratio (in percent)44.443.845.247.447.745.744.142.641.039.538.0
Gross external financing need (in billions of US dollars) 4/5.35.015.110.318.625.328.331.635.239.242.9
in percent of GDP3.12.77.95.18.410-Year10-Year10.510.710.911.211.511.6
Scenario with key variables at their historical averages 5/50.252.152.852.651.649.9−9.7
Key Macroeconomic Assumptions Underlying BaselineHistorical AverageStandard DeviationFor debt stabilization
Nominal GDP (US dollars)170.6185.9191.5201.3220.4241.0264.5289.5315.2342.5371.0401.9
Real GDP growth (in percent)5.46.06.76.26.86.00.66.66.56.56.56.56.56.5
Exchange rate appreciation (US dollar value of local currency,−0.7−0.8−3.3−2.1−1.6−3.42.8−0.6−1.6−1.8−1.9−1.9−2.0−2.0
GDP deflator (change in domestic currency)4.83.7−0.21.14.18.78.03.24.74.74.24.03.83.8
GDP deflator in US dollars (change in percent)4.02.8−3.5−1.02.54.97.22.63.02.82.22.01.71.7
Nominal external interest rate (in percent)2.22.12.42.02.32.60.52.52.52.52.52.62.42.4
Growth of exports G&S (US dollar terms, in percent)15.012.97.59.020.315.912.216.515.514.914.814.514.5
Growth of imports G&S (US dollar terms, in percent)17.311.312.26.520.413.411.516.915.915.215.114.914.7
Current account balance, excluding interest payments5.35.60.83.73.40.85.53.22.92.72.42.11.9
Net non-debt creating capital inflows4.14.35.65.86.25.81.65.95.55.14.84.54.2

Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (ba

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (ba

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Appendix V. Vietnam—Draft Press Release

Press Release No. 18/x

FOR IMMEDIATE RELEASE

[June 13, 2018]

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

IMF Executive Board Concludes the 2018 Article IV Consultation with Vietnam

On [June 13, 2018], the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Vietnam1, and considered and endorsed the staff appraisal without meeting.2

Vietnam’s dynamic, highly open economy had a bumper year in 2017. Growth was broad-based and accelerated to 6.8 percent while inflation remained below the 4 percent target reflecting low food prices and a stable exchange rate. Private consumption continued to be driven by rural-to-urban migration, rising incomes, and a growing middle class. It was also facilitated by accommodative financial conditions, stronger bank balance sheets, and an improving business climate as reforms continued in the banking sector, privatizations and cuts in red tape. The current account surplus increased as the global recovery and real effective depreciation due to a weaker dollar helped strong inflows from exports, tourism, and remittances. Vietnam also received record FDI and other capital inflows, aided by solid growth, accelerating domestic business formation, and the low global interest rates. The central bank maintained the Dong within a tight range to the dollar and accumulated US$12½ billion of international reserves in 2017, bolstering low reserve buffers.

The strong economic momentum is expected to continue in 2018, aided by the reform drive, higher potential output, the global recovery, and commitment to macroeconomic and financial stability. Growth is projected at 6.6 percent in 2018, despite a mild tightening in credit growth targets and a neutral fiscal stance. Inflation is forecast to rise to just under the 4 percent target, led by higher oil prices and gradual increases in administered prices. On current trends and if reforms continue at their current pace, 6½ percent annual growth remains feasible beyond 2018. The current account surplus is expected to decline over the medium term as structural reforms boost investment and real effective appreciation of the Dong resumes its trend, leaving reserves at 2½–3 months of imports.

Despite recent economic strength, economic distortions and capacity constraints remain, and external and domestic risks and longer-term challenges loom on the horizon. Financial buffers are still thin, macroeconomic policy frameworks remain inflexible to manage possible shocks, and the external position is substantially stronger than warranted by fundamentals. The strong economy provides an opportunity for more ambitious reforms to level the playing field by tackling remaining distortions and capacity constraints, increasing investment and reducing the external surplus.

Executive Board Assessment3

Vietnam’s dynamic, highly open economy continues to perform well. The solid performance is aided by macroeconomic and financial stability, stepped up economic reforms, and inflows of foreign direct investment which are enabling structural transformation and are raising potential growth. The strong economic momentum is expected to continue. But financial buffers are still thin, macroeconomic policy frameworks remain inflexible, complicating the management of shocks, and the external position is substantially stronger than warranted by fundamentals. The strong economy provides an opportunity for more ambitious reforms to level the playing field by tackling remaining distortions and capacity constraints, increasing investment and reducing the external surplus.

Fiscal policy should emphasize high-quality consolidation to meet large development needs and ensure that Vietnam has fiscal space to meet longer-term challenges. A slightly more ambitious consolidation than currently planned, and a lower debt ceiling than the current statutory limit, will be needed to create additional fiscal room before aging sets in the mid-2030s and provision for contingencies. Stronger consolidation could boost medium-term growth if it relied on high-quality structural fiscal measures and measures to boost private investment. Reforms should focus on broadening tax bases; reducing administrative and wage-related spending; protecting social spending through well designed social security and civil service reforms; and, protecting and improving the quality of public investment. Comprehensive and timely fiscal accounts based on GFSM 2014 and improved budget planning and execution should help facilitate consolidation.

To sustain macroeconomic stability, monetary policy should be tightened by further lowering credit growth to bring it in line with ongoing improvements in financial deepening. Greater two-way exchange rate flexibility within the current band should be allowed to reduce speculative inflows, absorb shocks and help bring down the external surplus. Reserve accumulation should continue but more gradually, with fully sterilized interventions. The modernization of the monetary framework should start, gradually easing away from credit targets to begin a phased shift to inflation targeting and greater exchange rate flexibility.

Financial sector balance sheets, supervision and risk management need to be further strengthened. A stronger financial sector can help improve the efficiency of financial intermediation to service the domestic economy and investment. Strong credit and asset price growth may be contributing to the build-up of risks in the financial system. SOCBs should be capitalized swiftly with government funds, and by raising private sector and foreign ownership limits. It is critical to develop a macroprudential framework and improve data quality on credit aggregates and balance sheet exposures to monitor and proactively manage risks, and ensure that sufficiently robust liquidity and crisis management frameworks are in place to provide legal and operational clarity regarding early intervention and communication to mitigate emerging financial sector risks.

The reform drive needs to be broadened and accelerated to tackle the remaining barriers to investment and to raise labor productivity. Priority areas include: high-quality infrastructure investments; further reductions in regulatory barriers and transitioning to international standards for regulatory excellence, transparency and data quality to aid investment; reforms to tertiary education; efforts to reduce the concentration of land ownership in state hands; and continued reforms in state-owned enterprises. Vietnam must continue to enhance anti-corruption measures and address the threat of climate change.

It is recommended that the next Article IV Consultation take place on the standard 12-month cycle.

Table 1.Vietnam: Selected Economic and Financial Indicators, 2013–19 1/
Est.Projections
2013201420152016201720182019
Output
Real GDP (percent change)5.46.06.76.26.86.66.5
Prices (percent change)
CPI (period average)6.64.10.62.73.53.84.0
CPI (end of period)6.01.80.64.72.64.04.0
Core inflation (end of period)4.22.71.71.91.32.03.1
Saving and investment (in percent of GDP)
Gross national saving31.231.727.529.529.029.830.2
Private29.829.625.427.326.226.927.4
Public1.52.12.12.22.82.92.8
Gross investment26.726.827.626.626.627.728.4
Private17.718.720.019.019.220.321.1
Public9.08.17.67.67.47.47.4
General government finances (in percent of GDP) 2/
Revenue and grants23.122.223.823.723.623.323.0
Of which: Oil revenue3.42.51.60.90.90.70.6
Expenditure30.528.529.228.528.127.927.8
Expense21.620.421.721.020.720.620.4
Net acquisition of nonfinancial assets9.08.17.57.57.47.37.3
Net lending (+)/borrowing(-) 3/−7.4−6.3−5.5−4.8−4.5−4.6−4.7
Public and publicly guaranteed debt (end of period)52.055.057.459.958.557.957.5
Money and credit (percent change, end of period)
Broad money (M2)18.817.716.218.415.016.818.9
Credit to the economy12.713.818.818.817.416.915.3
Interest rates (in percent, end of period)
Nominal three-month deposit rate (households)6.95.04.84.9
Nominal short-term lending rate (less than one year)9.78.57.27.2
Balance of payments (in percent of GDP, unless otherwise indicated)
Current account balance (including official transfers)4.54.9−0.12.92.52.11.8
Exports f.o.b.77.480.884.687.797.1103.7109.4
Imports f.o.b.72.374.380.882.291.999.0105.2
Capital and financial account0.22.90.55.39.02.22.9
Gross international reserves (in billions of U.S. dollars) 4/26.134.528.536.849.459.672.0
In months of prospective GNFS imports2.12.41.92.02.32.42.5
Total external debt (end of period)37.338.342.045.249.150.651.4
21,1021,3822,4822,7622,69
Nominal exchange rate (dong/U.S. dollar, end of period)55518
Nominal effective exchange rate (end of period)88.393.997.697.791.2
Real effective exchange rate (end of period)116.2123.7128.8133.1124.6
Memorandum items:
GDP (in trillions of dong at current market prices)3,5843,9384,1934,5035,0085,5096,142
GDP (in billions of U.S. dollars)170.6185.9191.5201.3220.4241.0264.5
Per capita GDP (in U.S. dollars)1,9002,0492,0882,1722,3542,5482,769
Sources: Vietnamese authorities; and IMF staff estimates and projections.

The national accounts has been re-based to 2010 from 1994 by the authorities.

Follows the format of the Government Finance Statistics Manual 2001.

Excludes net lending of Vietnam Development Bank and revenue and expenditure of Vietnam Social Security.

Excludes government deposits.

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

The national accounts has been re-based to 2010 from 1994 by the authorities.

Follows the format of the Government Finance Statistics Manual 2001.

Excludes net lending of Vietnam Development Bank and revenue and expenditure of Vietnam Social Security.

Excludes government deposits.

This includes: unchanged tax policy; lower trade-related taxes due to FTAs; higher environmental taxes starting mid-2018; higher-than-budgeted non-tax revenue similar to 2017 outcomes; gradually improving tax collection; public investment that includes spending from undisbursed funds in previous years; and, current plans for SOE equitization. The quantitative impact of reform plans in other areas (such as social security reform) has not been incorporated.

Staff will prepare a report on the cost of closing gaps in Sustainable Development Goals (SDGs) in health, education and infrastructure in Vietnam and other selected countries, in the coming months.

International Monetary Fund, 2016, China’s Changing Trade and the Implications for the CLMV.

While exchange rate flexibility has been increased de jure, the regime is de facto stabilized. The fixed exchange rate ARA metric is therefore appropriate.

Vietnam is not included in the EBA sample. The analysis is based on the EBA lite tool.

These 3 regressions link the 2012–17 average Investment and Saving in 164 countries, controlling respectively for level of development, FDI inflows and a dummy variable for the 26 Asian developing and emerging economies (WEO classification). It builds on the approach taken last year by adding new control variables.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

The Executive Board takes decisions under its lapse of time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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