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IMF Executive Board Concludes the 2018 Article IV Consultation with Vietnam

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
July 2018
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On June 8, 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.

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.

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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