The information provided below has become available since the issuance of the staff report. The thrust of the staff appraisal remains unchanged.
1. Most indicators suggest that economic activity has remained buoyant over the last few months. Real GDP growth picked up to 8.2 percent (year-on-year (yoy)) during the first nine months of 2007, supported by continued rapid growth of domestic demand and non-oil exports. Retail sales growth has remained brisk and the boom in foreign direct investment (FDI) has continued. If recent trends continue, the authorities’ revised target for GDP growth of 8.5 percent over the full year will likely be achieved. Like other emerging markets in the region, Vietnam has been relatively unscathed by the global market turmoil triggered by the subprime mortgage crisis in the United States.
2. Inflation has remained on an upward path, reaching a level of 9.3 percent (yoy) in October. Continuing cost-push pressures on food and commodity prices, largely due to local supply shocks and global market conditions, have been compounded by demand pressures. To address the growing concerns about these developments, the Prime Minister issued a directive in August (Directive 18/2007) instructing a number of ministries and the SBV to adopt urgent measures to curb inflation.
3. As a first step, the Ministry of Finance (MOF) has temporarily reduced import tariffs on a number of food and foodstuff products and construction materials, and has permanently reduced tariffs on some other consumption goods by advancing the implementation of commitments under the WTO. The government has also postponed previously-planned steps to ease controls on key administered prices. Accordingly, oil trading enterprises were asked in August to reduce their gasoline retail prices by VND 500 per liter (i.e., by about 4¼ percent), and an effective freeze was imposed on the prices of electricity, oil products, coal sold to electricity, cement, fertilizer, and paper producers, clean water, postal services, and bus tickets.
4. Despite a doubling of reserve requirements from June 2007, the growth of total liquidity (M2) and credit to the economy continued to accelerate through end-August 2007 (to 42 percent and 40 percent, respectively). In August, the SBV was instructed to adopt measures to control the growth of monetary and credit aggregates, and its monetary program targets for end-2007 were subsequently set at 25-28 percent for M2 growth and 26-28 percent for credit growth. To achieve these targets, the SBV is to continue to absorb excess bank liquidity through open market operations. Preliminary data suggest that there has been some tightening of money market conditions in recent weeks, although interbank deposit rates have remained negative in real terms.
5. Fiscal policy trends have remained broadly in line with the projections in the staff report. Based on preliminary data for the first nine months of 2007, revenues have been running slightly below the budget target, but disbursements of capital expenditure have also fallen short of budget targets, helping to contain the overall deficit so far in 2007. However, expenditures are likely to be boosted in the remainder of the year, as implementation of planned capital projects is expected to be stepped up.
6. On September 26, the Prime Minister approved the long-awaited equitisation plan for Vietcombank (VCB). Under this plan, private sector participation in VCB is to be raised gradually to a maximum of 49 percent, with up to 20 percent to be allocated initially to foreign strategic investors and another 15 percent to be subsequently issued and listed abroad. VCB is to select no more than two foreign strategic investors, and submit their names to the Prime Minister for approval before the bank launches its initial public offering (IPO). Following the IPO, VCB will be allowed to reserve a part of any accrued surplus capital for investment in key public infrastructure projects subject to the Prime Minister’s decision.
7. Continuing progress has been made in the issuance of implementing regulations for the Unified Enterprise Law, the Common Investment Law, and the new Commercial Law. Decree 139 dated September 5 provides detailed guidelines relating to the establishment, management structure, operation modalities, and restructuring and dissolution of enterprises. Among other things, application of these guidelines is expected to facilitate the issuance of business registration certificates.
8. On September 18, the MOF published its first semi-annual external debt bulletin on its website (http://www.mof.gov.vn/DefaultE.aspx?tabid=5591&ItemID=46332). The Bulletin contains statistics on government and government-guaranteed external debt, together with detailed information on the coverage, methodology, sources, and definition of data.