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


International Monetary Fund
Published Date:
July 1999
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Information about Asia and the Pacific Asia y el Pacífico
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I. Introduction

1. The performance of the Vietnamese economy has deteriorated sharply since mid-1997, reflecting domestic structural weaknesses compounded by the impact of the regional crisis. As explained in Chapter II, growth in 1992-97 was impressive, driven by reforms initiated in the late 1980s, along with large inflows of foreign direct investment (FDI) from the Asian region. However, because an increasing share of FDI was directed at import-substituting and nontradeable industries, when FDI inflows plateaued in 1997, stresses in the banking and state-owned enterprise (SOE) sectors and shortages of foreign exchange emerged. Since the authorities have responded to these difficulties by maintaining a prudent budgetary stance, the main policy challenge will be to speed up structural reforms, especially in the banking, SOE, and trade areas, the subject of the other chapters in this paper.

2. Chapter III reviews recent monetary and banking developments, and provides an assessment of the main problems in the banking sector. In the late 1990s Vietnam’s banking sector has come under mounting pressure from the slowdown in growth and the weakening financial position of SOEs. In addition, problems have emerged from the banks’ large foreign exchange exposure, accumulation of nonperforming loans, weak capital base, and low profitability. In response, the authorities have taken a number of measures to facilitate the necessary restructuring of the banking sector, and have started to develop a comprehensive strategy for banking reform. The chapter concludes with an outline of an approach to banking reform that builds on these initiatives.

3. The acceleration of SOE reform is essential to ensure that the banking system reforms are sustained and that the losses of SOEs do not threaten macroeconomic stability. Chapter IV gives an overview of recent SOE financial performance, noting that under the favorable conditions of 1997 and relaxed profitability criteria, only 40 percent of SOEs were profitable and many were highly indebted. The chapter also summarizes recent reform efforts, especially the recent improvements to the equitization program. Although these initiatives have laid the foundation for further reforms in several areas, they need to be sharply accelerated and more closely linked to strong financial criteria to ensure an improvement in enterprise performance. Complementary policies to promote private sector development are also needed to provide alternative job creation for displaced workers and to create an environment where equitized enterprises can thrive.

4. A greater outward orientation of the Vietnamese economy is necessary for sustained improvements in enterprise efficiency and in the availability of foreign exchange. Chapter V shows that the high levels of protection in the 1990s and FDI inflows have contributed to the start up of very inefficient import substituting industries. Although there have been some initiatives to open up the trade system, the coverage of quotas and licensing to shelter certain sectors from the regional downturn has been increased. Just as other countries have responded to the current crisis by accelerating trade liberalization, Vietnam should also decisively embark on such an approach, with the highest priority given to the early removal on nontariff barriers.

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