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Vietnam

Author(s):
International Monetary Fund
Published Date:
September 2010
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Introduction

1. Vietnam has exited the ambitious and largely successful stimulus policies adopted to counter the global crisis, but sustaining stable economic conditions remains achallenge. Vietnam has demonstrated commendable pragmatism in its handling of a series ofdomestic and external shocks in the past few years. However, adapting its style ofmacroeconomic management to an increasingly private sector-oriented economy is posing agrowing challenge, and the resulting economic and/or financial instability has had an adverseimpact on investor perceptions of the economic environment in Vietnam. Maintainingmacroeconomic stability, together with steady implementation of structural reforms, are critical for achieving its goal of becoming a modern emerging market economy by the end ofthis decade. These challenges are currently being debated in the context of the preparation forthe next five-year plan (Socio-Economic Development Plan (SEDP)).

I. Recent Economic and Policy Developments

2. Economic activity held up well during the global crisis, thanks to ambitious stimulus measures. The 2008 global crisis hit Vietnam when it had just stabilized the economy after a period of overheating in 2007, resulting from extraordinary capital inflows following its accession to the WTO. Facing a decline in foreign direct investment (FDI) commitments and expecting sluggish external demand for exports in the wake of the global crisis, the government decisively shifted policies toward supporting growth. Monetary policy was drastically loosened and a sizable fiscal package (5 percent of GDP) was executed (Appendix I). As a result, real GDP grew by 5.3 percent in 2009, down from 6.3 percent in 2008 and the slowest pace since 2000, but among the better performers in developing Asia. Robust growth in manufacturing, supported by resilient external demand for Vietnam’s exports, also helped underpin growth in 2009 (Table 1).

Table 1.Vietnam: Selected Economic Indicators, 2006-11 1/
Nominal GDP (2009): US$93.2 billionGDP per capita (2009): US$1,068
Population (2009, est.): 87.2 millionFund quota: SDR 329.1 million
200620072008200920102011
Est.Est.Proj.Proj.
Real GDP (annual percentage change)8.28.56.35.36.56.8
Saving and investment (in percent of GDP)
Gross national saving36.533.329.030.129.830.3
Private28.127.021.425.625.825.3
Public8.46.37.54.64.05.0
Gross investment36.843.140.938.138.838.4
Private26.732.631.023.929.129.4
Public10.110.69.914.29.79.0
Consumer price inflation (annual percentage change)
Period average7.58.323.16.710.48.3
End of period6.712.619.96.510.36.2
GDP deflator7.38.222.16.010.69.0
General government (in percent of GDP)
Revenue and grants28.728.729.026.726.927.2
Of which: Oil revenue8.66.96.03.63.63.7
Expenditure29.130.629.835.632.831.5
Plan 2/27.529.427.631.728.627.8
Off-budget, onlending and other 3/1.51.22.23.94.23.7
Overall fiscal balance 4/-0.4-1.9-0.9-8.9-5.9-4.3
Non-oil primary fiscal balance 4/-8.1-7.7-5.9-11.1-8.3-6.7
Money and credit (annual percentage change, end of period)
Broad money (M2)33.646.120.329.024.528.4
Credit to the economy25.453.925.439.625.030.9
Interest rates (in percent, end of period)
Nominal three-month deposit rate (households)7.97.88.110.7
Nominal short-term lending rate (less than one year)11.811.811.512.7
Current account balance (including official transfers)
(In billions of U.S. dollars) 5/-0.2-7.0-10.8-7.4-9.4-9.5
(In percent of GDP) 5/-0.3-9.8-11.9-8.0-9.0-8.1
Exports f.o.b. (annual percentage change, U.S. dollar terms) 5/22.721.929.1-8.914.516.9
Imports f.o.b. (annual percentage change, U.S. dollar terms) 5/22.138.328.1-13.316.214.3
Foreign exchange reserves (in billions of U.S. dollars, end of period)
Gross official reserves, including gold11.521.023.014.115.419.2
(In months of next years imports of GNFS)2.13.03.82.01.92.1
External debt (in percent of GDP, using interbank exchange rate) 6/31.532.333.540.740.841.3
External debt (in percent of GDP, using official exchange rate) 6/31.632.632.539.538.3
Total public and publicly-guaranteed debt (in percent of GDP)42.945.643.949.051.350.9
Dong per U.S. dollar exchange rate (end of period) 7/16,06816,00317,48618,47919,040
Nominal effective exchange rate (end of period) 8/77.473.373.862.5
Real effective exchange rate (end of period) 8/96.8100.2119.1106.8
Memorandum items:
GDP (in trillions of dong at current market prices)9741,1441,4851,6581,9532,273
Per capita GDP (in U.S. dollars)7248351,0481,0681,1781,312
Sources: Data provided by the Vietnamese authorities; and IMF staff estimates and projections.

Figures in 2008-10 are staff estimates and projections unless otherwise indicated.

2010 expenditure projection assumes some spending out of expected revenue overperformance.

Includes costs of interest subsidy schemes in 2009 and 2010.

Excludes VDB net lending.

Includes gold imports in 2008 and gold re-exports in 2009.

Includes private debt.

Interbank exchange rate. Data for 2010 is as of June 29.

2000 annual average=100.

Sources: Data provided by the Vietnamese authorities; and IMF staff estimates and projections.

Figures in 2008-10 are staff estimates and projections unless otherwise indicated.

2010 expenditure projection assumes some spending out of expected revenue overperformance.

Includes costs of interest subsidy schemes in 2009 and 2010.

Excludes VDB net lending.

Includes gold imports in 2008 and gold re-exports in 2009.

Includes private debt.

Interbank exchange rate. Data for 2010 is as of June 29.

2000 annual average=100.

3. The economic stimulus, however, resulted in elevated macroeconomic risks. Credit growth accelerated to 40 percent (y/y) toward end-2009 (up from 25 percent in 2008), resulting in a deterioration of the trade deficit.1 Expecting a severe loss in international reserves, and consequently dong devaluations, domestic residents dramatically shifted from dong assets into U.S. dollar assets and/or gold, which accounts for unusually large errors and omissions (about 13 percent of GDP). As a result, a substantial balance of payments deficit (8¾ percent of GDP) was recorded, despite the current account deficit (excluding gold exports and imports) remaining stable relative to 2008 with resilient inflows of remittances and FDI disbursements, and an increase in ODA disbursements. As depreciation expectations mounted, the parallel market exchange rate fell to about 10 percent below the weaker end of the official band in late 2009, and gross international reserves (GIR) declined by about US$8 billion to US$14.1 billion by end-2009, equivalent to only about two months of imports projected for 2010.2

Vietnam: 2009 GDP Growth

(In percent)

Sources: Authorities data; and IMF staff estimates.

Vietnam: Contribution to GDP Growth by Sector, 2007-10

(In percent)

Source: Vietnam, General Statistics Office.

4. The authorities have tightened the policy stance since late 2009. In November 2009, the authorities shifted the policy priority from growth to stability, and adopted a number of measures.3 Liquidity was squeezed in December, driving the interbank interest rates sharply to as high as 18 percent at one point. The termination of the interest subsidy scheme for short-term loans at end-2009 and the liberalization of lending rates in early 2010,4 led to a slowdown in credit growth (3.6 percent year-to-date at end-March), affecting especially activity in construction and financial services. A rebound in manufacturing, in line with the global recovery, picked up the slack only partially. As a result, real GDP growth slowed from 7 percent (y/y) in 2009 Q4 to 5.8 percent in 2010 Q1.

5. The government began to balance growth and stability since late March 2010, as it became confident in the improvement in economic and financial conditions. During 2010 Q1, investment in capacity expansion, especially in the export sector, was said to be held back by high borrowing costs, which invited many complaints from the industry directed to the government. Also to secure the growth target of 6½ percent, the government began to strongly encourage banks to lower commercial lending and deposit rates, and started to bring downward pressure to bear on short-term interest rates through its open market operations (OMOs), reducing them to around 7 percent (for one week) since mid-April. The effect on lending and deposit rates seems to have been more mixed,5 but credit did grow somewhat faster after March: year-to-date growth was 7½ percent at end-May.

6. The rebalancing of policy priority combined with more positive economic news calmed the market, and confidence in the dong has risen. Against the backdrop of subdued inflation and contained trade deficit, both the interbank and the parallel market rates appreciated back within the band since mid-April,6 allowing the SBV to gradually replenish GIR from the low level at end-March (US$11¾ billion) to US$12.9 billion by end-May 2010. Nondeliverable forward rates have also been on an appreciation trend.

Vietnam: Inflation Developments, 2006-10

(Year-on-year percent change)

Source: Vietnam, General Statistics Office.

Vietnam: Exchange Rate Developments, 2008-10 1/

(Dong per U.S. dollar)

Sources: State Bank of Vietnam; and Reuters.

1/An upward movement indicates an appreciation.

Vietnam: International Reserves, 2006-10

(In billions of U.S. dollars)

Sources: State Bank of Vietnam; and IMF staff estimates.

Vietnam: Current Account and Financing Sources, 2007-10

(In billions of U.S. dollars)

Sources: State Bank of Vietnam; and IMF staff estimates.

1/ Includes portfolio investment, other capital flows, and errors and omissions.

Vietnam: Trade (c.i.f.), 2006-10

(In billions of U.S. dollars)

Sources: Authorities’ data; and IMF staff estimates.

7. Vietnam’s relatively good performance has been marred by large swings in economic and financial conditions. In the past few years, policies were tightened and loosened in succession, giving an impression of “stop and go” policy style. Delays in rersponse to changing circumstances, a weak monetary transmission mechanism, use of moral suasion, and uncertainty about policy stance including fiscal management have made it necessary for the government to apply strong measures to ensure policy effectiveness. The consequent large swings seem to have made overseas investors more cautious about investing in Vietnam. Movement of sovereign bond spread since the beginning of the year is in line with the regional trend, but its level is higher than in other emerging Asian economies. Foreign investors left the stock market after its collapse in 2008, from which the index has recovered only partially. The successful issuance of an international bond worth US$1 billion on January 25 was both a sign of investor confidence (the bond was oversubscribed) and misgivings (the yield was higher than a similar bond issued by the Philippines, at a comparable credit rating, shortly before). Also, Vietnam has not benefitted from the resurgence of international capital inflows experienced elsewhere in the region.

Vietnam: Sovereign Bond Spreads, 2008-10

(In basis points)

Source: Bloomberg LP.

Vietnam: Stock Market Performance, 2008-10

(January 2, 2008=100)

Source: Bloomberg LP.

II. Outlook and Risks

8. Market stability has been restored, but appears fragile, compounded by confusion over the government’s policy intentions. Market participants appear unconvinced that the current calm in the foreign exchange and money markets will be sustained in the remainder of 2010, judging from elevated spreads between overnight and three-month dong interbank rates (at around 4 percentage points). Uncertainties about the outlook are compounded by confusion about the government’s policy intentions, in particular with regard to monetary policy. The SBV’s repeated comments on the need for lower lending rates may be taken as a precursor of its policy action through OMOs. In addition, the fact that some key data, including GIR, have not been published since late 2009 is raising concerns in the market about the level of reserves and ultimately the ability of the government to cope with shocks. The lack of clarity on the fiscal policy stance, and the resulting market financing needs, for 2010 is also adding to the uncertainty.

9. The near-term outlook hinges critically on whether the current stability can be maintained, with downside risks from both internal and external sources. If the existing macroeconomic stability can be maintained through end-2010, staff projects that the government’s objectives are largely attainable:

  • Real GDP growth is projected at 6½ percent—the same as the authorities’ target—supported by robust manufacturing and construction activity, underpinned by buoyant private investment, consumption, and non-oil exports.
  • Inflation is currently projected to reach 10.4 percent (y/y) for the year as a whole. Although core inflation is edging up, headline inflation eased slightly in the last few months. Going ahead, it depends importantly on the pace and magnitude of the expected deceleration of commodity and food prices later in the year.
  • The external position is projected to slightly improve. Exports should rebound, along with the global recovery, and the overall current account deficit is expected to narrow to 9 percent of GDP compared with 10.7 percent (excluding gold re-exports) in 2009. With market confidence sustained, short-term capital outflows (including errors and omissions), are also expected to moderate significantly, allowing a modest build up of reserves in 2010.

Vietnam: Contribution to GDP Growth by Expenditure, 2004-10

(In percent)

Sources: Vietnam, General Statistics Office; and IMF staff estimates.

1/ Includes contribution from statistical discrepancy.

Vietnam: Balance of Payments, 2004-10

(In billions of U.S. dollars)

Sources: Authorities’ data; and IMF staff estimates.

1/ Includes errors and omissions.

10. To this baseline scenario, while there is some upside potential, the greatest downside risk lies in uncertainty about domestic policies. At the moment, a successful exit from the stimulus is being consolidated, and it would take some time for the government to convince market participants that the government is serious about maintaining macroeconomic stability. Further policy loosening is not warranted, in staff’s view, to achieve the growth target. The authorities also seem confident that the growth target will be met. At the same time, however, they appear to believe that lending rates can be lowered without much disruption to the current stability, so that the industry base is protected, the credit growth target (25 percent for 2010) is met, and even higher growth may be achieved. Hence, the government has strongly encouraged banks to lower their lending rates. Staff argued that premature policy loosening, real or perceived, would be counter-productive, since it could raise market participants’ expectations for a deterioration in the trade deficit and/or inflation, which could quickly result in devaluation pressures on the dong, requiring a sharp tightening down the road with great cost to the economy inflicted by another “stop-and-go cycle.” Slower economic activity could then heighten vulnerabilities in the banking system down the line. While the authorities are aware of these risks, they are still publicly stating that lower lending rates are desirable.

11. Downside external risks also exist, including possible spillover effects from Europe (Appendix II), lower-than-expected recoveries in major trading partners (e.g., the United States, Japan, ASEAN-4, and newly industrialized economies), a slowdown in China, and higher-than-expected commodity and food prices. With prudent macroeconomic management, these risks are more or less manageable, given Vietnam’s robust domestic demand.

12. The medium-term outlook is favorable. Provided that the government is committed to implementing sound macroeconomic policies and sustaining the momentum of reforms in its next SEDP (2011-15), Vietnam remains an attractive destination for foreign investors. In this scenario, real GDP growth is expected to rise to 7½ percent by 2015 (Table 4), supported by buoyant exports and domestic private investment and consumption. Inflation should ease further in 2011 and gradually fall to 5 percent (y/y) by 2015, provided that commodity and food prices remain stable, the credit growth is contained, and the exchange rate stability is maintained. The current account deficit is projected to narrow to about 4½ percent of GDP by 2015, as export growth and private remittances are likely to rebound. Capital inflows are also expected to pick up as investor confidence recovers. With the improved balance of payment environment, GIR is projected to rebuild and the reserve coverage ratio improve. The debt sustainability analysis (DSA), under the baseline scenario of sustained macroeconomic stability, indicates that external debt levels would be manageable, provided that external borrowing remains prudent.

Table 2.Vietnam: Balance of Payments, 2006-15
2006200720082009201020112012201320142015
Est.Proj.Proj.Proj.Proj.Proj.Proj.
(In millions of U.S. dollars, unless otherwise indicated)
Current account balance-164-6,992-10,787-7,440-9,405-9,470-9,360-8,793-8,471-7,813
Trade balance-2,776-10,360-12,782-8,306-10,596-10,422-10,729-10,874-11,084-11,012
Exports, f.o.b.39,82648,56162,68557,09665,38976,43689,220104,312121,973142,907
Imports, f.o.b.42,60258,92175,46765,40275,98486,85799,949115,186133,057153,919
Nonfactor services (net)-8-894-915-1,129-1,649-1,633-1,645-1,704-1,818-1,969
Receipts5,1006,0307,0415,7666,5027,4138,4579,60510,87912,317
Payments5,1086,9247,9566,8958,1529,04710,10211,30812,69714,285
Investment income (net)-1,429-2,168-4,401-4,532-3,859-4,755-5,042-5,044-5,238-5,589
Receipts6681,0931,3577526194358311,5202,0422,427
Payments2,0973,2615,7585,2844,4785,1895,8736,5657,2808,016
Transfers (net)4,0496,4307,3116,5276,6987,3408,0568,8309,66910,756
Private3,8006,1806,8046,0186,1386,7247,3788,0848,8499,855
Official249250507509560616677745820902
Financial account balance3,08817,54012,34111,45212,11313,31214,52515,20315,75915,328
Net foreign direct investment (FDI)2,3156,5509,2796,9007,5657,9288,4909,1499,60710,062
Medium- and long-term loans (net)1,0252,0459924,4732,5413,1763,6863,5423,4533,093
Disbursements2,2603,3972,4416,1404,5005,5006,2006,5006,7007,000
Amortization1,2351,3521,4491,6671,9592,3242,5142,9583,2473,907
Portfolio investment 1/1,3136,243-5781281,5681,6271,6921,7631,8411,177
Short-term capital (net)-1,5652,7022,648-49439581658749858997
NFA of commercial banks-1,5352,623677-305200220242266293322
Net trade credit-30791,971256239361416482565675
Errors and omissions1,398-349-1,081-12,178-1,50000000
Overall balance4,32210,199473-8,1661,2083,8425,1656,4107,2887,515
Memorandum items:
Gross official reserves (excluding government deposits) 2/11,49120,96423,02214,14815,35619,19724,36230,77238,06045,575
(In months of next years imports)2.13.03.82.01.92.12.32.52.72.9
Current account balance (in percent of GDP) 3/-0.3-9.8-11.9-8.0-9.0-8.1-7.2-6.2-5.4-4.5
Trade balance (in percent of GDP) 3/-4.6-14.6-14.2-8.9-10.2-8.9-8.3-7.6-7.1-6.4
Non-oil current account balance (in percent of GDP) 3/-4.5-11.6-10.9-7.4-8.1-7.4-6.7-5.6-4.7-3.8
Export value (annual percentage change) 3/22.721.929.1-8.914.516.916.716.916.917.2
Export volume (annual percentage change) 3/14.413.76.58.35.015.715.715.715.915.8
Import value (annual percentage change)22.138.328.1-13.316.214.315.115.215.515.7
Import volume (annual percentage change)17.334.916.1-0.38.213.414.014.314.514.7
GDP (in millions of U.S. dollars)60,93371,11190,27493,164103,929117,208129,191142,417156,908173,042
Sources: Data provided by the Vietnamese authorities; and IMF staff estimates and projections.

Includes the sovereign bond issuance of US$750 million in 2005 and US$1 billion in 2010.

Data for 2009 includes the SDR allocation of SDR 267.1 million.

Data for 2009 includes gold re-exports.

Sources: Data provided by the Vietnamese authorities; and IMF staff estimates and projections.

Includes the sovereign bond issuance of US$750 million in 2005 and US$1 billion in 2010.

Data for 2009 includes the SDR allocation of SDR 267.1 million.

Data for 2009 includes gold re-exports.

Table 3.Vietnam: General Government Budgetary Operations, 2006-11 1/
200620072008200920102011
Est.Budget 2nd Est.BudgetProj.Proj.
(In trillions of dong)
Total revenue and grants 2/279328430390442462524619
Revenue (excluding grants)272322421385436457519614
Tax revenue236269368345370404444527
Oil revenues8379906461667185
Non-oil tax revenues153190278282310338373442
Non-tax and capital revenues3553534066527586
Grants86957556
Official expenditure268336410456526536559633
Current 3/180232290343346410423480
Of which: Interest813152324242430
Capital88104120113180126136153
Other expenditures1514337464728284
Off-budget expenditure1017273646564752
ODA onlending (less SF net lending)5-3621892832
Interest rate subsidy cost0001710770
Total expenditure283350443529591608640717
Overall fiscal balance-4-22-13-139-148-147-116-97
Discrepancy (+ is overfinancing)14-323-4
Financing18193713914514711697
Foreign (net)1418264160256481
Domestic (net)411198841215216
(In percent of GDP)
Total revenue and grants 2/28.728.729.023.526.723.626.927.2
Revenue (excluding grants)27.928.128.323.226.323.426.627.0
Tax revenue24.323.524.820.822.320.722.723.2
Oil revenues8.66.96.03.83.63.43.63.7
Non-oil tax revenues15.716.618.717.018.717.319.119.5
Non-tax and capital revenues3.64.73.52.44.02.73.93.8
Grants0.80.50.60.30.40.30.30.3
Official expenditure27.529.427.627.531.727.428.627.8
Current 3/18.520.319.620.720.921.021.721.1
Of which: Interest0.81.11.01.41.41.21.21.3
Capital9.19.18.16.810.96.47.06.7
Other expenditures1.51.22.24.43.93.74.23.7
Off-budget expenditure1.11.51.82.22.82.92.42.3
ODA onlending (less SF net lending)0.5-0.30.41.20.50.51.41.4
Interest rate subsidy cost0.00.00.01.00.60.40.40.0
Total expenditure29.130.629.831.935.631.132.831.5
Overall fiscal balance-0.4-1.9-0.9-8.4-8.9-7.5-5.9-4.3
Discrepancy (+ is overfinancing)1.4-0.31.6-0.2
Financing1.81.62.58.48.77.55.94.3
Foreign (net)1.41.61.72.53.61.33.33.6
Domestic (net)0.40.10.75.95.16.22.70.7
Memorandum items:
Non-oil primary balance-8.1-7.7-5.9-10.8-11.1-9.7-8.3-6.7
Domestic non-oil revenue19.321.322.319.422.620.023.023.3
Plan investment & off-budget spending10.110.69.99.013.69.39.39.0
Total investment spending (incl. net onlending)10.610.310.310.214.19.810.810.4
Nominal GDP (in trillions of dong)9741,1441,4851,6581,6581,9531,9532,273
Sources: Data provided by the Vietnamese authorities; and IMF staff estimates and projections.

Based on IMF definition.

Revenue estimates reflect fiscal stimulus measures in 2009-10.

Budget data include the amount allocated for contingency.

Sources: Data provided by the Vietnamese authorities; and IMF staff estimates and projections.

Based on IMF definition.

Revenue estimates reflect fiscal stimulus measures in 2009-10.

Budget data include the amount allocated for contingency.

Table 4.Vietnam: Monetary Survey, 2006-11 1/
200620072008200920102011
Dec.Dec.Dec.Mar.Jun.Sep.Dec.Jan.Feb.Dec.Dec.
Est.Est.Proj.Proj.
(In trillions of dong)
Net foreign assets287.9410.4428.9425.7383.6322.8312.3319.8315.7339.2419.1
State Bank of Vietnam211.9376.6404.8389.9343.3312.0281.2268.6273.5304.3379.9
Commercial banks76.033.924.235.840.310.831.051.242.334.839.2
Net domestic assets634.7937.81,193.21,322.51,523.91,663.31,780.21,772.71,807.72,265.02,923.7
Domestic credit730.31,096.81,400.71,498.51,702.81,887.42,039.72,028.42,049.42,524.53,183.2
Net claims on government36.529.161.478.783.5117.9170.4155.0155.2188.0124.7
Credit to government13.513.412.912.915.228.823.443.243.615.913.4
Government securities87.7105.5149.3159.4161.2183.7205.1193.3186.0235.9177.1
Government deposits-64.7-89.8-100.7-93.6-92.9-94.6-58.1-81.5-74.4-63.8-65.7
Credit to the economy693.81,067.71,339.31,419.81,619.21,769.51,869.31,873.41,894.12,336.63,058.6
In dong547.5839.21,070.51,171.41,359.61,478.11,559.91,557.51,557.0
In foreign currency146.4228.5268.7248.4259.6291.3309.4315.9337.2
By nonstate banks219.1444.2575.9606.3706.1805.5886.8
By state-owned commercial banks474.7623.5763.3813.5913.1964.0982.5
Claims on state-owned enterprises218.5334.2413.8440.1499.9529.4
Claims on other sectors475.3733.5925.5979.71119.31240.1
Other items, net-95.6-159.0-207.5-176.0-178.8-224.0-259.5-255.7-241.6-259.5-259.5
Total liquidity (M2)922.71,348.21,622.11,748.21,907.51,986.12,092.42,092.52,123.52,604.23,342.8
Of which: Total deposits763.91,127.71,385.31,467.61,629.41,710.11,799.21,777.51,797.6
Dong liquidity723.21,089.61,291.81,409.21,562.91,622.51,665.31,664.91,695.2
Foreign currency deposits199.5258.6330.4339.0344.6363.6427.1427.6428.2
(Annual percentage change)
Total liquidity (M2)33.646.120.325.035.836.129.025.325.424.528.4
Of which: Total deposits36.547.622.824.934.633.629.929.426.7
Dong liquidity36.150.718.623.441.443.428.924.424.8
Foreign currency deposits25.329.727.732.115.210.729.329.228.0
Domestic credit24.750.227.725.436.351.245.639.541.523.826.1
Credit to the economy25.453.925.417.828.339.739.638.938.925.030.9
Of which: In foreign currency9.056.117.6-8.2-6.06.115.119.432.3
Memorandum items:
Money multiplier 2/4.04.34.34.25.15.45.05.04.9
Currency to total deposits (in percent)20.819.617.119.117.116.116.317.718.1
Foreign currency deposits to total deposits (in percent)26.122.923.823.121.121.323.724.123.8
Foreign currency loans to total loans (in percent)21.121.420.117.516.016.516.516.917.8
Loans to deposits (in percent)90.894.796.796.799.4103.5103.9105.4105.4
Gross official reserves (in billions of U.S. dollars)11.521.023.022.017.616.213.713.512.915.419.2
NFA of the banking system (in billions of U.S. dollars)17.925.525.325.122.619.016.917.817.018.322.4
Nominal GDP (in trillions of dong)974.31,143.71,485.01,658.41,953.12,273.1
Sources: State Bank of Vietnam; and IMF staff estimates and projections.

Data include the State Bank of Vietnam and all deposit-taking credit institutions.

Money multiplier is measured as the ratio of total liquidity (M2) to reserve money.

Sources: State Bank of Vietnam; and IMF staff estimates and projections.

Data include the State Bank of Vietnam and all deposit-taking credit institutions.

Money multiplier is measured as the ratio of total liquidity (M2) to reserve money.

Table 5.Vietnam: Medium-Term Scenario, 2006-15
2006200720082009201020112012201320142015
Est.Est.Proj.
(Percentage change)
Real GDP (annual percentage change)8.28.56.35.36.56.87.07.27.47.5
Nominal GDP (in trillions of dong)9741,1441,4851,6581,9532,2732,5812,9303,3253,777
Consumer prices (annual average)7.58.323.16.710.48.35.65.05.05.0
Consumer price (end of period)6.712.619.96.510.36.25.05.05.05.0
GDP deflator7.38.222.16.010.69.06.15.95.65.7
(In percent of GDP)
Saving-investment balance-0.3-9.8-11.9-8.0-9.0-8.1-7.2-6.2-5.4-4.5
Gross national saving36.533.329.030.129.830.331.232.533.434.1
Private saving28.127.021.425.625.825.325.827.027.928.4
Public saving8.46.37.54.64.05.05.45.55.55.7
Gross investment36.843.140.938.138.838.438.538.638.838.6
Private investment26.732.631.023.929.129.429.529.729.929.8
Public investment10.110.69.914.29.79.08.98.98.98.8
General government revenue and grants28.728.729.026.726.927.227.427.327.327.4
Of which: Oil revenue8.66.96.03.63.63.73.73.63.53.4
General government expenditure29.130.629.835.632.831.531.130.930.830.7
Plan27.529.427.631.728.627.827.627.427.327.3
Off-budget, onlending and other1.51.22.23.94.23.73.53.53.53.4
General government fiscal balance-0.4-1.9-0.9-8.9-5.9-4.3-3.7-3.6-3.5-3.3
Non-oil primary balance-8.1-7.7-5.9-11.1-8.3-6.7-6.1-5.9-5.7-5.4
(In billions of U.S. dollars; unless otherwise indicated)
Current account balance-0.2-7.0-10.8-7.4-9.4-9.5-9.4-8.8-8.5-7.8
(In percent of GDP)-0.3-9.8-11.9-8.0-9.0-8.1-7.2-6.2-5.4-4.5
Trade balance-2.8-10.4-12.8-8.3-10.6-10.4-10.7-10.9-11.1-11.0
Exports (f.o.b.)39.848.662.757.165.476.489.2104.3122.0142.9
(Percentage change)22.721.929.1-8.914.516.916.716.916.917.2
Imports (f.o.b.)42.658.975.565.476.086.999.9115.2133.1153.9
(Percentage change)22.138.328.1-13.316.214.315.115.215.515.7
Net services and transfers (including investment income)2.63.42.00.91.21.01.42.12.63.2
Of which: Private transfers3.86.26.86.06.16.77.48.18.89.9
Capital and financial account (net)3.117.512.311.512.113.314.515.215.815.3
Direct investment2.36.69.36.97.67.98.59.19.610.1
Portfolio investment1.36.2-0.60.11.61.61.71.81.81.2
Medium- and long-term loans1.02.01.04.52.53.23.73.53.53.1
Short-term capital (net)-1.62.72.60.00.40.60.70.70.91.0
Memorandum items:
Gross official reserves (in billions of U.S. dollars)11.521.023.014.115.419.224.430.838.145.6
(In months of next year’s imports of GNFS)2.13.03.82.01.92.12.32.52.72.9
Total external debt (in billions U.S. dollars)19.123.128.436.541.747.754.461.168.073.8
(In percent of GDP, using interbank exchange rate)31.532.333.540.740.841.342.743.644.043.3
(In percent of GDP, using official exchange rate)31.632.632.539.538.3
Total public debt (in percent of GDP)42.945.643.949.051.350.951.050.850.449.8
Nominal GDP (in billions of U.S. dollars)60.971.190.393.2103.9117.2129.2142.4156.9173.0
Sources: Data provided by the Vietnamese authorities; and IMF staff estimates and projections.
Table 6.Vietnam: Millennium Development Goals
19901995200020052008
Goal 1: Eradicate extreme poverty and hunger
Employment to population ratio, 15+, total (percent)7574717069
Employment to population ratio, ages 15-24, total (percent)7569565451
GDP per person employed (constant 1990 PPP $)2,3463,0943,8034,8325,676
Income share held by lowest 20 percent8777
Malnutrition prevalence, weight for age (percent of children under 5)37272020
Poverty gap at $1.25 a day (PPP) (percent)241155
Poverty headcount ratio at $1.25 a day (PPP) (percent of population)64402121
Vulnerable employment, total (percent of total employment)828074
Goal 2: Achieve universal primary education
Literacy rate, youth female (percent of females ages 15-24)939496
Literacy rate, youth male (percent of males ages 15-24)949697
Persistence to last grade of primary, total (percent of cohort)8692
Primary completion rate, total (percent of relevant age group)96
Total enrollment, primary (percent net)95
Goal 3: Promote gender equality and empower women
Proportion of seats held by women in national parliaments (percent)1819262726
Ratio of female to male primary enrollment (percent)9495
Ratio of female to male secondary enrollment (percent)91
Ratio of female to male tertiary enrollment (percent)72
Share of women employed in the nonagricultural sector
(percent of total nonagricultural employment)41.040.740.4
Goal 4: Reduce child mortality
Immunization, measles (percent of children ages 12-23 months)8895979592
Mortality rate, infant (per 1,000 live births)3933241512
Mortality rate, under-5 (per 1,000)5644301814
Goal 5: Improve maternal health
Adolescent fertility rate (births per 1,000 women ages 15-19)221817
Births attended by skilled health staff (percent of total)77688888
Contraceptive prevalence (percent of women ages 15-49)5365747776
Maternal mortality ratio (modeled estimate, per 100,000 live births)150
Pregnant women receiving prenatal care (percent)71689191
Unmet need for contraception (percent of married women ages 15-49)75
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Children with fever receiving antimalarial drugs
(percent of children under age 5 with fever)733
Incidence of tuberculosis (per 100,000 people)204204204202200
Prevalence of HIV, female (percent ages 15-24)0.30.3
Prevalence of HIV, male (percent ages 15-24)0.60.6
Prevalence of HIV, total (percent of population ages 15-49)0.10.10.30.50.5
Tuberculosis case detection rate (all forms)51676662
Goal 7: Ensure environmental sustainability
CO2 emissions (kg per PPP $ of GDP)00011
CO2 emissions (metric tons per capita)00111
Forest area (percent of land area)28.832.437.741.743.3
Improved sanitation facilities (percent of population with access)2940516565
Improved water source (percent of population with access)5264779292
Marine protected areas (percent of total surface area)01
Terrestrial protected areas (percent of total surface area)6
Goal 8: Develop a global partnership for development
Net ODA received per capita (current US$)311222330
Debt service (PPG and IMF only,3222
percent of exports, excluding workers’ remittances)
Internet users (per 100 people)0.00.00.312.924.2
Mobile cellular subscriptions (per 100 people)0011281
Telephone lines (per 100 people)0131934
Other
Fertility rate, total (births per woman)43222
GNI per capita, Atlas method (current U.S. dollars)120250390620890
GNI, Atlas method (current U.S. dollars) (billions)8.218.530.251.376.8
Gross capital formation (percent of GDP)14.427.129.635.640.9
Life expectancy at birth, total (years)6569727474
Literacy rate, adult total (percent of people ages 15 and above)889093
Population, total (billions)0.10.10.10.10.1
Trade (percent of GDP)81.387.6110.6143.5169.6
Source: World Bank, World Development Indicators.

III. Policy Discussions

A. Macroeconomic Policies: Balancing Growth and Stability Objectives

Monetary and exchange rate policies

13. Commitment to macroeconomic stability should be unequivocally communicated to the market. Staff believes that the immediate priority for the government is to safeguardthe ongoing macroeconomic stability, reached after the exit from the stimulus measures during 2009, by sustaining market confidence, and take the opportunity to rebuild GIR. It is important, therefore, to convince the market that the government’s commitment to maintaining and reinforcing the stability is firm, by sending out the unequivocal message that monetary conditions will not be eased further until inflation is on a downward trajectory, sentiment toward the dong is firmly established, and external reserves are rebuilt to more comfortable level.

Vietnam: Interest Rates, 2006-10

(In percent)

Sources: State Bank of Vietnam; and Reuters.

14. The interest rate structure should be gradually normalized to resolve maturity mismatch problems. There exists a sizable difference between OMO rates and interbank rates (around 7 percent for up to one week) and deposit rates (around 11-12 percent), which distorts and destabilizes the interest rate structure. This situation has led some banks to increasingly rely on OMOs and money market for funding, deteriorating the maturity mismatch between banks’ assets and liabilities.7 To resolve this, staff encouraged the SBV to gradually move toward a normalized interest rate structure,8 where OMO interest rates would complement but not substitute deposits as sources of funds, having factored in liquidity and maturity structure.9Repurchase agreement (repo) at longer maturities (three months to one year) can also be an option to temporarily resolve maturity mismatch problems.

15. Despite recent stabilization, risks to the exchange rate remain. The dong has depreciated by 9 percent since December 2008 but due to relatively high inflation, it has depreciated by only 2.1 percent in real effective terms. It has appreciated in real terms since the beginning of 2010, and its size (4.2 percent year-to-date) is comparable to Chinese yuan, but less than most regional currencies. The CGER-type exchange rate assessment exercise suggests that the value of the dong is broadly in line with medium-term fundamentals. The recent stability of the dong cannot be taken for granted, however. Although the risk of depreciation induced by a “sudden stop” of capital inflows may be limited because much of capital inflows are in the form of FDI, the greater risk is a shift of residents’ assets, as witnessed in late 2009. Over the medium term, staff recommended that the exchange rate regime be made more flexible, with a move from the current focus on bilateral dong/U.S. dollar exchange rate to a system based on a basket including currencies of regional trading partners.

Emerging Asia: Real Effective Exchange Rates, 2006-10

(January 2006=100)

Source: IMF, Information Notice System; and IMF staff estimates.

Box 1:Exchange Rate Assessment

The dong is broadly in line with medium-term fundamentals based on three approaches of CGER exchange rate assessment exercise. Estimates of overvaluation of the dong range between -2.9 and 2.4 percent. Under the baseline scenario that the government is committed to implementing sound macroeconomic policies, current account deficit and external liabilities (as captured by negative NFA) are projected to decline. Improvement in external balances has led to estimates of slight undervaluation of 2.9 and 0.9 percent in the cases of external sustainability and equilibrium exchange rate approaches, respectively. Given that the projected current account deficit over the medium term of around 5 percent—slightly above the norm of around 4 percent—the macro-balance approach suggests a small overvaluation of 2.4 percent.

16. The SBV agrees in principle with staff’s recommendations. The SBV reiterated its commitment to macroeconomic stability, especially low inflation. The SBV also acknowledged that aiming for a higher credit growth could risk deterioration in the trade deficit. Yet, because it is tasked with balancing stability and growth, it wants to maintain a degree of flexibility in the conduct monetary policy. As for the structure of interest rates, the SBV agrees that it should be “normalized” at an appropriate time, though it wondered if such a move would be supported by the general public. While understanding the importance of increasing flexibility, the SBV focuses on the stability under the current exchange rate regime for the moment. Staff welcomes the new SBV Law, approved in late June, which removed growth promotion from the list of monetary policy objectives and strengthened operational authority of the SBV, though the details have yet to be clarified.

Fiscal policy

17. Overall fiscal balance in 2009 deteriorated by about 8 percentage points of GDP. According to the official estimates, the 2009 overall fiscal deficit10 widened to about 9 percent of GDP, from about 1 percent of GDP in 2008. The large deterioration reflected two major factors: a 2½ percentage points of GDP decline in oil revenues, linked to the moderation in world oil prices from 2008 peak levels; and a spending surge of more than 5 percentage points of GDP related largely to the stimulus package. Although official foreign financing (3½ percent of GDP) was more than double the level envisaged in the 2009 plan, much of the deficit was financed domestically, split evenly between deposit draw-downs and nonmarket loans from the social security fund, the SBV, and state-owned commercial banks (SOCBs), as domestic bond issuance was constrained due to a low interest rate ceiling. Public and publicly-guaranteed debt increased by 5 percentage points of GDP to 49 percent of GDP.

Vietnam: Revenues and Expenditures, 2001-09

(In percent of GDP)

Sources: Authorities, and IMF staff calculations.

Vietnam: Overall Deficit and Financing, 2001-09

(In percent of GDP)

Sources: Authorities data; and IMF staff estimates.

18. With most stimulus measures having expired at end-2009 and a favorable growth outlook ahead, staff projects a narrowing of the fiscal deficit by around 3 percentage points of GDP in 2010.11 Non-oil revenues are expected to rise by ¼ percentage point of GDP, compared to the 2009 level, to 23 percent of GDP,12 while oil revenues are expected to remain flat. On the expenditure side, staff projects a small increase in current outlays, while total investment spending would decline by 3 percentage points of GDP. It is expected that the overall deficit for 2010 would narrow to a financeable level of about 6 percent of GDP.13 Staff views the implied structural consolidation of about 3 percentage points of GDP (year-on-year) as striking the right balance between the need to exit from crisis-support policies and protecting the growth recovery and social safety nets.

19. Considerable uncertainty over the fiscal outlook for 2010 exists. Two factors appear to be contributing to this uncertainty (Appendix III). First, the government’s official definition of budgetary aggregates excludes off-budget expenditures, onlending, and the subnational fiscal surplus but includes principal repayments, thus precluding a clear assessment of the actual fiscal stance. Second, in the absence of official recognition of the expected revenue overperformance, or of government intentions to save it, it is difficult to form an informed view on the size of the 2010 deficit and associated financing needs.

20. Over the medium term, Vietnam needs to implement fiscal consolidation with a view to lowering the public debt-to-GDP ratio. A cross-country comparison (Figure 1) of 2009 fiscal indicators suggests that Vietnam’s deficit level is quite elevated (due, in large measure, to the stimulus-related surge in investment spending). Public and publicly-guaranteed debt, at 50 percent of GDP (based on staff’s definition), also appears relatively high, especially when considering Vietnam’s large state-owned enterprise (SOE) sector, prospective graduation from concessional financing, and vulnerability to refinancing and exchange rate risks. Staff thus supports the authorities’ current strategy of setting the ceiling on public and publicly-guaranteed debt at 50 percent of GDP (based on the authorities’ definition,14 the current debt level is 44 percent of GDP). Staff proposed that, over time, the ceiling be revised down toward the 40 percent of GDP level, a more prudent threshold for emerging economies in general, and considering Vietnam’s afore-mentioned contingent risks, in particular. Although the DSA places Vietnam at a low risk of debt distress, it also shows that the debt-to-GDP ratio could rise rapidly above 60 percent, if there is an adverse exchange rate shock or if deficits are not reined in. There are also growing concerns about the quality of public investment in Vietnam, indicating that any medium-term fiscal adjustment strategy would likely involve a rationalization of investment spending.

Figure 1.General Government Indicators: Vietnam vs. Regional Comparators

(2009; percent of GDP)

Sources: World Economic Outlook (April 2010 vintage); Vietnam Ministry of Finance; and IMF staff estimates.

21. The authorities broadly concurred with staff’s assessment of the fiscal outlook. The Ministry of Finance (MOF) recognized that the 2010 revenues would likely turn out to be significantly larger than the level envisaged in the approved budget plan, and indicated the intention to save much of the revenue overperformance, provided no legitimate spending needs arose. The MOF also emphasized the need to distinguish what the government must continue to provide and what can be left to the market, which would help streamline the government’s fiscal responsibilities. On the issue of communication with markets, the MOF noted plans to introduce a new budget law (see below) that would, inter alia, bring national fiscal definitions closer to international standards. Staff stressed the more urgent need to release the government’s near-term spending and borrowing plans, to help reassure markets that fiscal policy is working in tandem with monetary policy to ensure macroeconomic stability. Staff also reiterated the need to further streamline expenditure, especially on large infrastructure projects, and to use revenue overperformance as far as possible for deficit reduction.

22. Staff welcomed the authorities’ intentions to reduce the deficit in the context of the 2011-15 SEDP. The authorities agreed that much of the consolidation would have to come from the expenditure side, especially investment spending, while preserving outlays for key public infrastructure projects and social spending to protect the poor. Revenues would remain under pressure due to the anticipated decline in oil revenues (as existing oilfields mature) and the loss in trade taxes arising from import tariff reductions linked to Vietnam’s WTO commitments and ASEAN-China FTA. Staff welcomed the authorities’ willingness to consider public private partnership (PPP) and other methods to mobilize private sector funding for infrastructure investment. At the same time, staff highlighted the importance of preserving a high tax-to-GDP ratio by the introduction of new taxes (such as the environmental tax, and land and housing tax, currently under consideration), broadening the tax base, and introducing and better enforcement of existing taxes. Staff also recommended a medium-term fiscal plan that could reduce the deficit to about 3½ percent of GDP by 2015, and sustainably put debt on a downward path below 50 percent of GDP.

23. Staff welcomed the move to modernize and strengthen fiscal management. The new State Budget Law is expected to take effect from January 1, 2013, if approved by the National Assembly. The new law seeks to align fiscal reporting and accounting with international standards, institute medium-term planning, introduce performance budgeting, and reduce overlap of budgetary responsibilities between various levels of government. Public debt management reforms, including in the context of draft decrees to accompany the Public Debt Law of 2009, are also underway, aimed at, inter alia, introducing prudent limits on the ratios of external debt and public debt to GDP (both at 50 percent) as an anchor for fiscal management, as discussed above, and reforming the microstructure of T-bill/bond issuance to allow more market-based determination of Treasury yields, which is crucial to enable the authorities to rollover bond redemptions during 2010-12 especially in view of the recent shortening of the maturity structure of public securities.15

B. Addressing Financial Sector Vulnerabilities

24. Bank profitability received support from high loan growth and low loss provisioning in 2009. Average return on asset of the six largest banks (the four SOCBs, including partially privatized Vietcombank and Vietinbank, and the two largest private banks, covering over half of the banking system) increased to an annualized 1.9 percent (1.5 percent in 2008). Noninterest income (e.g., gold trading) contributed to higher profitability in some private banks, according to a report by Fitch.

Vietnam: Banking Indicators, 2006-09

(In percent)

Source: State Bank of Vietnam

25. Reversing the deceleration in 2008, banking system assets grew rapidly in 2009. Over a longer horizon, private sector credit has roughly doubled to over 110 percent of GDP and has increased in real terms by over 150 percent in last five years. Of the increase, both direct (lending to real estate and construction sector) and indirect (collateral) exposure to the real estate sector against the backdrop of sharp increases in asset prices can pose future challenges to the banking system.16

26. The banking sector will likely experience downward pressure on profitability in 2010. Narrowing interest margin, higher provisioning costs, the moderation of credit growth, and the closure of gold trading could constrain profitability at some banks this year. Atend-2009, nonperforming loans (NPL) declined to 2.0 percent (2.1 percent in 2008)according to the official report,17 partly due to rapid credit growth; special-mention loans(SML) declined to 6.5 percent (9.4 percent in 2008).18 However, pressure on credit quality, including of the large loan portfolio disbursed under the interest subsidy program, maytranslate into higher NPL down the road.

27. Private banks are expanding their balance sheet more rapidly than SOCBs. Credit growth in recent years has been quite pronounced in the private sector banks, resulting in their increased market share. SOCBs now constitute less than half of total banking sector asset, down from over 60 percent in 2006. The SBV noted that SOCBs and large JSBs are performing well and improving their capitalization. They added that some of the smaller JSBs have faced some liquidity pressure and are being closely monitored for any early signs of stress.

Vietnam: Private Sector Credit, 2003-09

(In percent of GDP)

Sources: International Financial Statistics; and IMF staff calculations.

28. Staff emphasized further strengthening of the regulatory and supervisory framework to safeguard banking sector soundness. Various financial soundness indicators, including leverage ratios, concentration, and liquidity risks, need to be developed and closely monitored. Going forward, the results from the recent risk-based pilot project to assess borrowers’ repayment capacity conducted by the Banking Supervision Agency could help guide the strengthening of banking supervision. Bringing the classification and provisioning to international best practice will also enhance the resilience of the sector. The authorities concurred and pointed out that they are upgrading the classification and provisioning rules and prudential ratios, and moving from compliance-based toward risk-based supervision. Furthermore, the need for greater supervisory vigilance toward the rapidly growing nonbank financial institutions was acknowledged.

29. The SBV acknowledged the importance of increasing capitalization in the banking system. They expressed strong commitment to raising the minimum capital requirement (MCR) to VND 3 trillion by end-2010.19 The affected small banks will have to report to the banking supervision agency their capitalization plans by June 30 and their merger and acquisition plans by September 30. The authorities need to carefully evaluate the planned level and pace of increases in MCR (to VND 10 trillion by 2015, high by international standard), so that there is some room for small and efficient banks to operate. The SBV agreed on the importance of transparent communication with the market regarding small banks’ progress with their capitalization plans. They also noted that measures have been taken to ensure that undercapitalized banks do not engage in aggressive lending practices.20

30. Staff welcomed the SBV’s interest in requesting the joint IMF-World Bank Financial Sector Assessment Program (FSAP) and shared general information on the process. Staff welcomed the new Law on Credit Institution, which would help improve theSBV’s banking supervision.

C. Structural Reform Priorities

Efficiency of the economy

31. The authorities want to raise efficiency of its public investment projects. The government believes that efficiency of its public investment projects is lower than other regional economies (when they were at a similar development stage). Indeed, because a broad framework does not exist to ensure the coherence of public investment plans and the quality of individual projects, public infrastructure projects, including donor-funded projects, often experienced delays.21 Moreover, without sufficiently developed monitoring mechanisms, some public investments went to “unproductive” sectors, such as the real estate sector.

32. The efficiency of foreign invested enterprises (FIEs) is constrained by insufficient infrastructure and the shortage of skilled labor, and also there are limited technology spillovers from FIEs to domestic private sector. The FIE sector has been using up Vietnam’s supplies of skilled labor. If skilled labor supplies are not replenished fast enough, the output growth from FDI will slow.22 Moreover, relatively low levels of labor skills limit FDI within low value-added industries and make technology transfer via labor movement difficult. As a result, the technology spillovers from FIEs to domestic firms are limited.23

33. The authorities are well aware of, and concerned about these problems. In the 2011-15 SEDP currently under preparation, inefficiencies of public investment and lack of competitiveness of domestic private enterprises are considered as key limitations of the economy. General objectives and solutions are to be specified in the plan. Staff welcomed the initiatives and stressed that improving the efficiency of public investment is essential in maintaining capital expenditures on key infrastructure projects while achieving fiscal consolidation at the same time.

Trade strategy

34. Value-added in Vietnam’s major export industries, including processing trade, is relatively low.24 The low value-added is associated with low labor cost, which has been a key comparative advantage of Vietnam, and was essential in attracting export-oriented FDI in the past. However, as wage cost increases,25 foreign investors seriously begin to consider whether it is wise to establish their production base for export in Vietnam, given the need to import many intermediate goods owing to the lack of supporting industries. If such high inflation and real appreciations observed in the past few years continue in the medium term, Vietnam’s competitiveness in exports would be impaired. As concerns over Vietnam’s competitiveness rise, more foreign investors are interested in the potential of Vietnam’s domestic consumer market, which has been buoyant in the last few years. However, to attract foreign investment aiming at domestic market, it is important to maintain a stable dong exchange rate, and more generally, a stable macroeconomic environment, which would provide predictability and boost investor confidence.

35. More measures are needed in the transition to higher value-added export industries in the longer term. These measures include developing human capacity, improving infrastructure and business environment, and promoting supporting industries. The authorities shared these views, and have been working to specify the high value-added industries to be targeted, together with strategies in improving infrastructure, education, and business environment in the context of the 2011-15 SEDP.

State-owned enterprises

36. Following a successful equitization and consolidation program, SOE reform must now focus on potential risks posed by the large state-owned economic groups. The lastdecade has seen a significant decline in the share of the state-owned sector, in terms of both assets and profits (see figure below). Attention is now focusing increasingly on the larger state-owned economic groups (conglomerates specializing in particular sectors), as their profitability and efficiency have been called into question with implications on fiscal soundness. Some SOEs have extremely low capital ratios, such as Vinashin, necessitating budgetary outlays for recapitalization (as in 2009), or support via onlending.26 Moreover, many of these conglomerates have indicated their plans to undertake very large investments over the medium-term, raising questions about the quality of the underlying projects as well their financeability. Large domestic financing could crowd out resources for the budding private sector, while sovereign-backed issuance abroad may threaten debt sustainability. In addition, their role in the economy, following diversification strategies that have included investments in financial institutions, has raised governance and competition concerns. These concerns have been amplified by recently announced plans to increase the number of economic groups from 7 to 30.

Vietnam: State-Owned Sector Vis-a-Vis Other Enterprise Sectors

Source: Enterprise Survey 2008.

Vietnam: State-Owned Enterprises—Balance Sheet: Size and Composition

(In percent of GDP) 1/

AssetsEquityDebtEquity/Assets 2/
200620072008200620072008200620072008200620072008
Major economic groups (EGs)48.048.752.323.822.822.723.424.526.749.649.543.4
EVN (electricity)14.116.213.85.56.54.58.69.48.038.840.232.8
PETROVN (petroleum and gas)15.112.519.110.28.410.64.84.17.967.466.955.6
VNPT (post and telecommunications)8.17.76.95.75.34.71.81.62.170.468.567.2
VINASHIN (shipping/ship-building)5.76.86.20.30.50.55.46.25.75.86.88.4
VINACOMIN (coal and minerals)2.22.83.30.91.01.01.31.72.139.235.130.4
VINARUBBER (rubber)2.01.82.21.01.01.10.90.80.652.154.449.8
VINATEX (textiles)0.91.00.80.30.30.20.60.70.529.126.329.6
Other EGs/special general corporations11.112.44.44.46.57.739.835.4
Other general corporations18.119.35.46.512.512.430.033.7
All EGs and general corporations 1/77.280.433.733.742.544.743.641.9
Sources: Ministry of Finance; National Steering Committee for Enterprise Reform and Development (NSCERD); and IMF staff calculations.

Combined, the EGs and general corporations account for about 80 percent of total state capital invested in SOEs (estimated at 43.7 percent of GDP at end-2007).

In percent.

Sources: Ministry of Finance; National Steering Committee for Enterprise Reform and Development (NSCERD); and IMF staff calculations.

Combined, the EGs and general corporations account for about 80 percent of total state capital invested in SOEs (estimated at 43.7 percent of GDP at end-2007).

In percent.

Vietnam: State-Owned Enterprises—Profitability Indicators

(In percent; asset-weighted averages) 1/

Pre-tax Profit RateReturn on AssetsReturn on Equity
200620072008200620072008200620072008
Major EGs20.221.014.99.59.67.417.217.815.1
EVN (electicity)5.87.42.81.92.30.94.95.82.8
PETROVN (petroluem and gas)36.032.224.715.516.511.423.024.720.5
VNPT (post and telecommunications)27.938.524.714.113.212.620.019.318.8
VINASHIN (shipping/ship-building)4.13.92.70.91.10.915.016.410.6
VINACOMIN (coal and minerals)8.97.911.212.49.613.331.627.543.7
VINARUBBER (rubber)39.232.229.823.622.215.145.240.730.2
VINATEX (textiles)1.62.23.32.32.73.17.810.410.4
Other EGs/special general corporations3.03.32.93.27.39.1
Other general corporations4.66.04.56.015.017.9
All EGs and general corporations11.310.97.47.216.917.2
Sources: Ministry of Finance; NSCERD; and IMF staff calculations.

Combined, the EGs and general corporations account for about 80 percent of total state capital invested in SOEs (estimated at 43.7 percent of GDP at end-2007).

Sources: Ministry of Finance; NSCERD; and IMF staff calculations.

Combined, the EGs and general corporations account for about 80 percent of total state capital invested in SOEs (estimated at 43.7 percent of GDP at end-2007).

State-owned commercial banks

37. Staff argued for further reforms, as SOCBs still do not totally follow market-based business principles. Although they have a declining share in the banking system (about 45 percent of total banking assets), the SOCBs still exert a significant influence on the financial landscape of Vietnam as the primary agents for implementing certain government policies (e.g., interest rate subsidy of 200927). Therefore ensuring the market-based operation of SOCBs (some of which underwent significant recapitalization in early 2010) can contribute to continued financial sector development by providing a level playing field for the private sector. In this respect, SOCB reform, including through continued equitization28 by selling stakes to domestic and foreign strategic investors, can contribute to a more efficient banking system through improved governance and risk management, better quality of service, and greater product innovation. The SOCB reform also needs to be mindful of the fiscal implications associated with any need for capital injection by the government.

IV. Other Issues

38. Staff emphasized that an effective public communication strategy is needed, especially when the macroeconomic balance is fragile and market sentiment could change rapidly. Market confusion and speculations over the recent policy announcements underscore the urgency of improving public communication strategy. The authorities should present a regular assessment of the economic situation and policy direction to the public in a transparent and consistent manner, in order to manage market expectations more effectively and enhance investor confidence.

39. The authorities should improve the quality and timeliness of data, especially in the monetary, international reserves, fiscal, SOE, and banking sectors. More timely data on monetary survey and on international reserves are essential in analyzing monetary development and policy stance, as well as developments on the external position. Higher quality fiscal and SOE data would allow for better analysis of fiscal developments and the policy stance. There is also a significant perception gap on the banking sector soundness between the public and the authorities. The authorities shared these concerns and indicated that efforts will be made to provide more information in a timely manner.

V. Staff Appraisal

40. Vietnam has managed to ride out difficult challenges in recent years, which deserves international acknowledgment. As soon as an overheated economy in 2007, owing to rapid capital inflows, was successfully cooled down, an external demand shock triggered by the global crisis had to be countered in 2009 by a sizable stimulus package. Asthe stimulus policy began to threaten macroeconomic stability toward end-2009, a successful exit (monetary and fiscal tightening) was made. The fact that most fiscal measures were introduced with a sunset clause also helped the timely exit.

41. Delicate macroeconomic stability is maintained for now. The policy tightening that started at end 2009 has stabilized economic and financial conditions, and helped restore market confidence, as evidenced by the stable dong exchange rates in both the interbank and the parallel markets. Whether the current stability can be sustained through the rest of 2010 and beyond depends on whether the government can maintain and enhance market confidence by limiting, for instance, deterioration in the trade deficit or a decline in the U.S. dollar liquidity in the financial system. The repeated announcements by the government about the need to lower the commercial lending rates thus appear counter-productive.

42. Maintaining a solid economic recovery will require the government to prioritize among its multiple goals. The government has stated that in 2010 it aims at the growth target (6.5 percent), inflation target (7 percent, now officially projected at 8 percent), credit growth target (25 percent), and money supply growth target (20 percent), while maintaining a stable dong exchange rate. It may be difficult to convince the market that the government can achieve all these objectives with relatively blunt policy tools, namely OMOs and budget, especially if there’s no apparent hierarchy of objectives. A lack of coordination between monetary and fiscal policies, or the appearance thereof, would amplify market skepticism. The government, therefore, needs to convince market participants that its priority rests with macroeconomic stability. For this purpose, staff believes that maintaining the current stable exchange rate, and taking the opportunity to rebuild GIR, should be the immediate goal for the government. Once the government’s credential for macroeconomic stability is established, and GIR is further built up, staff believes that the government will be able to adopt a more flexible exchange rate regime without risking resurgent devaluation pressures.

43.Monetary policy should be prudent and its effectiveness should be further strengthened. Further loosening, real or perceived, could disrupt the existing delicate macroeconomic stability, and could inflict substantial damage to the growth prospect, not just for 2010, but even for the medium term. To enhance the effectiveness of monetary policy, the operational improvement in OMOs, and the gradual normalization of the interest rate, structure should also progress. The early indications are that the new SBV Law, approved in late June, strengthened operational authority of the SBV, though the details have yet to be clarified.

44. Exchange rate regime should be reformed over the medium term. In the medium term, a move from the current regime that focuses on the bilateral dong/U.S. dollar exchangerate to a system that is based on a basket of currencies including those of regional trading partners may be appropriate. In the process, a wide use of the U.S. dollar in the economy(partial dollarization) could be wound down. In addition, further exchange rate flexibility is encouraged once necessary infrastructure, particularly in terms of hedging instruments, isreadily available for the private sector to manage foreign exchange rate risks effectively.

45. There is room for further reduction in the budget deficit in the medium term. In 2010, total investment spending is expected to decline by 3 percentage points of GDP from the 2009 level to about 11 percent of GDP. Staff believes that there is room for further reduction in investment spending, for example, by project prioritizing, increased cost efficiency, and the use of PPP and other innovative financing methods. This would enable the government to reduce both the budget deficit and the public and publicly-guaranteed debt levels over the medium term.

46. Strengthening the financial sector requires further reform. While welcoming the ongoing efforts to strengthen supervisory capacity, more could, and should be done. An FSAP is expected to help the authorities establish a reform agenda and a concrete timeline. One of the fundamental problems facing Vietnam is over-banking: while the introduction of the minimum capital requirement at end-2010 could promote consolidation of smaller banks, further streamlining should be pursued in the medium term. The equitization (privatization) of SOCBs should also be advanced.

47. As the economy is driven more by market principles, the government is required to change its style of policy conduct. For instance, moral suasion could create distortions that need to be addressed later at a higher cost. Reforms of SOEs and SOCBs would not only provide a level playing field, but also raise the efficiency of the economy. Most importantly, transparency in government intentions, based on higher quality data published timely, should be further advanced to provide market players predictability.

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

Notes

1

Trade balance registered a surplus of about 13 percent of GDP in 2009 Q1 owing to large one-off gold re-exports (of about US$2½ billion) and a collapse in imports. As the stimulus measures gathered strength, however, trade balance quickly reversed to deficit, which rapidly widened to about 14¼ percent of GDP in 2009 Q3 and about 16½ percent of GDP in 2009 Q4.

2

Including SDRs allocated in 2009 Q3, amounting to SDR276.1 million (about US$410 million).

3

In November 2009, the government announced a rise in the policy interest rate by 100 basis points, devaluation of the official central exchange rate by 5½ percent, and phasing out of the interest subsidy scheme for short-term loans by end-2009. In February 2010, the government announced a further devaluation of 3.4 percent, a cap on enterprises’ dollar deposit rate at 1 percent, and removed the lending rate cap on medium- and long-term commercial loans. The lending rate cap on short-term commercial loans was removed in April 2010.

4

Vietnam’s Civil Code stipulates that financial institutions cannot charge lending rates exceeding 1.5 times the base (prime) rate. During much of 2009, therefore, the maximum lending rate was capped at 10.5 percent (7 times 1.5). The SBV finally allowed loan rates to be negotiated between the lender and the borrower, without an amendment of the civil code. As a result, in some cases, loan rates are said to have risen from a subsidized 6 percent to a negotiated 16-18 percent, before declining to 14-15 percent.

5

Staff has found that large private banks (joint stock banks (JSBs)) either charge fees and other extras on top of the advertized loan rate, or ration the credit to selected borrowers. Similarly, competition for deposits following effective liberalization of deposit rates has also kept deposit rates high. Some banks are said to continue offering bonuses to depositors.

6

There are reportedly investors who borrow in U.S. dollars (at around 5 percent interest rate) to benefit from a high dong deposit rate at around 10 percent), a sign of confidence that the dong’s devaluation prospect is limited in the short term.

7

Banks are not allowed to fund more than 20 percent of their loans from the money market by a regulation.

8

The timing of normalization process depends on changes to the factors that have contributed to rising deposit rates. It is also conditional on how fast the banking sector can adapt to the recent interest rate liberalization and be able to find the market equilibrium. Addressing an excessive competition problem through regulation/supervision would also be important to prepare the ground for normalization.

9

Open market operations rates are normally higher than deposit rates at the short end of the maturity structure.

10

The mission has adopted the new IMF definition of the overall balance that excludes net lending by theVietnam Development Bank (VDB), estimated at 1.2 percent of GDP during 2001-08 and 1.5 percent of GDP during 2009-10. The change in definition brings fiscal reporting closer in line with GFSM 2001 principles. Themission will track the VDB balance sheet for potential losses that might represent a contingent liability. In themeantime, bonds issued by the VDB will continue to be recorded as part of publicly-guaranteed domestic debt.

11

The only two stimulus measures remaining are the interest subsidy scheme on medium- and long-term loans and a one-quarter extension on corporate income tax deferral.

12

The authorities have traditionally adopted unrealistically conservative revenue projections. The revenue projection by staff is 3 percentage points of GDP above the 2010 budget plan by the government.

13

Staff project foreign financing to reach about 3½ percent of GDP, 2 percentage points of GDP above the 2010 budget plan. This implies net domestic financing need of 2½ percent of GDP, which appears manageable, given therecent uptick in domestic bond issuance.

14

The authorities’ definition uses the official exchange rate to convert foreign currency debt, and excludes certain banking sector claims and implicitly-guaranteed VDB debt.

15

Because the government has been reluctant to accept market-based yield on Treasury securities, there have been large under-subscriptions and failed auctions in the past 18 months,

16

Although the SBV reports that direct real estate related lending remains slightly above 10 percent, 80-90 percent of collateral in the banking system is held in the form of land and real estate. Loan to valueratio ranges from 50-70 percent.

17

According to a report by Moody’s, the NPL ratios in the banking system under International FinancialReporting Standards (IFRS) could be up to three times those under Vietnamese Accounting System.

18

Loan classification under Vietnamese Accounting Standards focuses primarily on past-due status and is lessstrict than IFRS. In contrast, IFRS puts more emphasis on individually assessed loans on the borrower’sfinancial situation.

19

Currently over 20 credit institutions have less than VND 3 trillion of capital, but none has less than VND 1 trillion. The authorities noted their plans to increase the minimum capital requirement to VND 5 trillion by 2012 and to VND 10 trillion by 2015 in order to achieve capital cushion and consolidation in the banking system. Besides upgrading minimum capital requirement, the authorities have announced plans to increase their minimum capital adequacy ratio from 8 percent to 9 percent by October 2010.

20

They include regular monitoring of lending by undercapitalized banks and limiting lending funded by interbank borrowing.

21

World Bank, “Vietnam—First Public Investment Reform Development Policy Loan Program,” 11/19/2009.

22

For example, the mission heard complaints from a number of manufacturers, both domestic and foreign, that they could not fully benefit from the recovery in external demand, as they cannot hire enough workers even at a higher wage, and hence have to be cautious in accepting new orders.

23

For a comprehensive study on this issue, see “The Impacts of Foreign Direct Investment on the EconomicGrowth,” the Central Institute for Economic Management, 2006.

24

It was reported, anecdotally, that about two-thirds of inputs and intermediate goods for noncommodity exports are imported.

25

A salary survey conducted by the Navigos Group, a recruitment solutions provider in Vietnam, suggested that the average gross salary increased about 16½ percent during the period from April 2008 to March 2009, against the inflation rate of about 9 percent over the same period. The survey collected data from 163 companies acrossVietnam, spanning more than 15 industries and covering 75 job categories. Among the companies surveyed, 47 percent are completely foreign-owned, and only 11.7 percent are local companies.

26

The proceeds of the US$1 billion bond issued in January 2010 were on-lent to state-owned oil refineries (US$700 million), Vinashin, and other projects (US$300 million).

27

The SOCBs extended a large share—about two-thirds—of loans under the interest rate subsidy scheme.

28

The government still fully owns Bank for Investment and Development, Agribank, Mekong Housing Bank, and Vietnam Bank for Social Policies. After partial equitization, the government holds 91 percent of VietcomBank and 89 percent of Vietinbank, equitized in 2007 and 2008 respectively.

Appendix I. Vietnam: Stimulus Measures in 2009

Monetary policy

The base (prime) rate was cut by a total of 700 basis points (bps) between October 2008 and February 2009, and kept at 7 percent until November 2009.

The SBV injected liquidity through OMOs as well as lowering reserve requirement on dong deposits from 11 percent in October 2008 to 3 percent in March 2009.

Fiscal policy

The fiscal stimulus package was announced piecemeal since December 2008, and finalized in May 2009. It focused on four main objectives (projected cost at the time is shown in parentheses):1

  • Supporting small and medium enterprises (SMEs):
    1. -corporate income tax reduction/deferral (0.8 percent of GDP)
    2. -the interest rate subsidy scheme (1.0 percent of GDP)
  • Stimulate private consumption:
    1. -halving VAT rates on selected items (0.5 percent of GDP)
    2. -personal income tax reductions/deferrals (0.4 percent of GDP)
  • Accelerate public investment:
    1. -frontloading implementation of rural multi-year projects for rural irrigation, infrastructure, and student and teacher housing (2.2 percent of GDP)
    2. -announcing additional off-budget projects in transportation, education, and health (1.2 percent of GDP)2
  • Strengthening the social safety net:
    1. -boosting financial aid for low-income earners, students, and loss-making enterprises; and introducing food support payments to local governments (0.4 percent of GDP).

Notes

1

Other measures whose cost was not explicitly quantified included: (i) provision of credit guarantees to SMEs by the Vietnam Development Bank; (ii) acceleration of VAT refund procedures for exporters; (iii) speeding up of customs clearance processes; and (iv) reduction in import tariffs on goods used for the production of export items (offset by higher tariffs on some items competing with domestically produced goods).

2

Excludes the 2 percentage points of GDP carryover in investment capital disbursements from 2008.

Appendix II. Vietnam: Spill-over Risks from Europe

Recent disruptive moves in the Euro area have raised concerns over the near-term prospects of emerging market economies and low-income countries around the globe. While Vietnam’s direct financial linkages to the most vulnerable euro area economies, namely, Greece, Ireland, Italy, Portugal, and Spain (GIIPS) are limited, contagion effects from a Europe-wide credit event could materialize through such channels as external trade, bank funding, portfolio and bond investment, and FDI. This appendix discusses possible spillover risks to Vietnam through each of these channels, and finds that, overall, potential spillover risks are limited.

Trade channel

Vietnam: Exports to European Union, 2007-10

(In percent change, 3mma, SAAR)

Sources: Eurostat; and IMF staff calculations.

Vietnam: Garment Exports to European Union, 2007-10

(In percent change, SAAR)

Sources: Eurostat; and IMF staff calculations.

Europe is traditionally one of the most important export destinations for Vietnam. Although Vietnam’s direct exports to GIIPS are small (about 3 to 5 percent of total non-oil exports), its exports to the European Union (EU) is about 20 to 25 percent of total non-oil exports. Vietnam’s main export products to the EU are textile and garments (relatively low end), and food items, which account for about 40 percent and 25 percent of total exports to Europe, respectively.

Recent data suggest little negative impact on Vietnam’s exports to the EU. Vietnam’s exports to the EU remained resilient during the global crisis, and have been picking up strongly since September 2009. Despite of euro depreciation and its negative impact on demand from Europe, there is little sign of a substantial slowdown in exports to the EU. A key reason for this resilience is that (low-end) textile and garments and food items are primary goods, demand for which tends to be less cyclical and less dependent on financial conditions.1

Financial channel

Spillover risks through financial channels may affect bank funding, portfolio, and bond investment and FDI inflows to Vietnam. However, the overall impact is expected to be limited, because the absolute size of exposure to financing inflows from Europe is relatively small.

  • Bank funding. Based on BIS data on consolidated banking statistics, 51 percent of Vietnam’s total liabilities to foreign banks were to European banks, about average in the region as of December 2009. However, the size of total liabilities itself is only around 14 percent of GDP, which is on the lower end for the region. The share of domestic lending market served by foreign banks is at 14 percent (Moody’s, August 2009). Strategic investment by European banks in Vietnamese banks also remained very limited (less than 1 percent of banking sector assets). Hence, the possible deleveraging may have rather limited impact on the credit market in Vietnam on the banking sector.
  • Portfolio and bond investment. In 2008, around 41 percent of total portfolio investment was from European countries according to Coordinated Portfolio Investment Survey Data. The participation of foreign investors in the equity market was sizable, at around 18-25 percent of total volume. After the bust of the stock market bubble at the end of 2008, however, most of the foreign portfolio investments flew out of the country, and since then have remained very small, reflecting continued concerns overmacroeconomic risks. Similarly, foreign bond investments were significant during2007, but have largely disappeared since late 2008. The small size of foreign portfolioand bond investments, coupled with restrictions on foreign holdings of domestic listedcompanies’ shares, helps limit the funding risks.
  • FDI. FDI commitments from the EU have been very buoyant so far this year.2 In the first five months of this year, FDI commitments from EU amounted to about US$2.4 billion, four times of the commitments from the EU in 2009 as a whole. Also, FDI commitments from the EU was only about 3 percent of total FDI commitments in 2009, but so far this year, they accounted for about 30 percent of total FDI commitments. Actual FDI disbursements, however, can be very different fromcommitments. Historical data suggest that the former is generally one-third of the latter.Even assuming no disbursement is made for European FDI, it would only mean areduction of FDI inflows by about US$0.8 billion, less than 10 percent of the financialaccount surplus projected for 2010.

Notes

1

Other major Asian exporters of lower-end textile and garments experienced similar resilience in exports during the global crisis. See “How Have Low-Income Countries in Asia Fared Amid the Global Crisis?” Bi and Chensavasdijai, Asia and Pacific Economic Outlook Chapter 1 Box 1.1, October 2009.

2

Data on FDI commitment by source country are very limited, starting from mid-2008 only. Data on FDI disbursement by source country are not available.

Appendix III. Vietnam: The Fiscal Projections Regime, Deficit Definitions, and Opacity of Fiscal Policy

The assessment of Vietnam’s fiscal stance is complicated by the interplay of two distinct features of the budget system:

  • The national definition of fiscal aggregates (and hence the deficit) differs substantially from international definitions more suited for cross country comparison (see Appendix Table 1). The national definition, which is enshrined in the public finance act: (a) relies on a “central” government concept and excludes the local government surplus; (b) categorizes debt-reducing item, principal repayments, as expense; (c) treats any authorized but unpaid spending commitments as part of total expenditure for the year; and (d) excludes significant debt-creating items, such as off-budget items like ODA onlending from expenditures. As can be seen, the two deficit measures differed substantially in 2006 and 2009, and not just in direction, but also in magnitude: in 2006, the overall balance was -5 percent of GDP under the national definition (D) - perfectly in line with the budget projection; but -0.1 percent of GDP according the IMF definition. The converse pattern emerges in 2009 due, mainly, to the large off-budget items not included in the national definition.
  • The deviation of fiscal out-turns published in the final accounts (released 18 months after year-end) from the budget plans are alarmingly large (see Appendix Figure 1). During 2004-09, the average difference in revenues was 5 percentage points of GDP, of which about half showed up in higher spending and half was saved. Moreover, the first estimate (annual projection based on nine-month data which forms the basis for the following year’s budget plan) also appear systematically biased vis-á-vis the final accounts, with revenues being under-estimated by about 4 percentage points of GDP, on average. The bias for the second estimate (released in April of the following year) is comparatively smaller but stil nontrivial, at about 2 percentage points of GDP. Conservative revenue projections are often encouraged as prudent practice for budget preparation, and sometimes also help constrain expenditure. However, the magnitudes involved here are simply too large and undermine the realism of the budget plan and subsequent estimates.
Table 1.Vietnam: Illustrating Divergence between National and IMF Definitions of Overall Budget Balance(In trillions of Vietnamese dong)
20062009
PlanFin.Acc.PlanEst. 2
State budget balancing revenues (A) 1/245.9350.8404.0605.3
National Plan revenues237.9279.5389.9442.3
Oil revenue63.483.363.760.5
Non-oil revenue172.0188.2321.2375.3
Domestic132.0145.4233.0269.7
Foreign40.042.888.2105.7
Grants2.57.95.06.5
Other (including “brought forward” revenues from previous year) 2/8.071.414.1163.0
State budget balancing expenditures (B) 1/294.4385.7491.3696.4
National Plan expenditures294.4308.1491.3567.5
Development81.688.3112.8180.3
Recurrent spending (including contingency)171.9171.4319.6322.3
Transfer to reserve fund0.10.10.10.1
Debt service40.848.258.864.8
Principal repayment (including aid and other)32.040.235.540.9
Interest8.88.023.323.9
Expenditure “carried forward” to next year 3/77.6129.0
Local budget surplus (C)13.825.0
Budget balance (national definition) (D=A-B-C)-48.5-48.6-87.3-116.0
(Ratio to GDP; in percent)-5.0-5.0-4.8-7.0
Investment from bond issues (E)18.08.436.046.0
Net onlending (F)12.24.720.68.1
Onlending borrowing12.27.825.723.7
Less: Repayments to Sinking Fund3.15.115.6
Interest rate subsidy scheme (G)17.010.0
Overall budget balance (H=D-E-F-G)-78.7-61.6-160.9-180.2
(Ratio to GDP; in percent)-8.1-6.3-8.9-10.9
Overall budget balance (H) after:
Adding back principal repayments-46.7-21.4-125.4-139.2
Adding back transfer to reserve fund-46.6-21.3-125.3-139.1
Adding back expenditure carried forward-46.656.3-125.3-10.2
Adding back local budget surplus-46.670.1-125.314.8
Deducting other revenues (including B/F revenues)-54.6-1.3-139.4-148.2
IMF overall balance-54.6-1.3-139.4-148.2
(Ratio to GDP; in percent)-5.6-0.1-7.7-8.9
Source: Ministry of Finance.

State Budget covers general government, although off-budget spending and onlending are excluded.

Other revenue (revenue brought forward) in year t is an accounting entry to balance the expenditure carried over from year t-1 plus the local budget surplus in year t-1. to slow project implementation are project-related expenditures originally planned for year t-1 but postponed to year t.

“Expenditure carried over” from year t-1 into year t consists of (i) salary reform; (ii) excess revenue; (iii) paid-out items; and (iv) expenditure carryover due to slow project implementation. Both the first two items relate to carry forward of surplus revenues, with “salary reform” earmarking some of that surplus revenue for wages and salaries. “Paid out items” refers to expenditures paid in year t-1 that will be accounted for in year t. Expenditure carryover due to slow project implementation are project-related expenditures originally planned for year t-1 but postponed to year t.

Source: Ministry of Finance.

State Budget covers general government, although off-budget spending and onlending are excluded.

Other revenue (revenue brought forward) in year t is an accounting entry to balance the expenditure carried over from year t-1 plus the local budget surplus in year t-1. to slow project implementation are project-related expenditures originally planned for year t-1 but postponed to year t.

“Expenditure carried over” from year t-1 into year t consists of (i) salary reform; (ii) excess revenue; (iii) paid-out items; and (iv) expenditure carryover due to slow project implementation. Both the first two items relate to carry forward of surplus revenues, with “salary reform” earmarking some of that surplus revenue for wages and salaries. “Paid out items” refers to expenditures paid in year t-1 that will be accounted for in year t. Expenditure carryover due to slow project implementation are project-related expenditures originally planned for year t-1 but postponed to year t.

Figure 1.Vietnam: Comparison of National Plan Fiscal Aggregates Reported in Budget Plans, First and Second Estimates and Final Accounts, 2004-09 (percent of GDP) 1/

Sources:

1/ Numbers show n on the charts are deviations (in percentage points of GDP), in each year, of final account figures from budget projections; numbers are for total revenues, total expenditures and general government overall balance.

The confluence of the above two factors lends an opacity to the fiscal stance that is not easily surmountable. The ultimate cost of this is borne by the government: a systematic understatement of revenues can undermine the credibility of fiscal policy plans and create unnecessary uncertainty about the government’s ability to meet gross domestic financing needs, even when they appear manageable, as was the case in late 2009 and is the case in 2010. The authorities have recently articulated plans to align budgetary reporting in line with international standards (via the new public finance act), as well as to devote more resources to strengthening fiscal forecasting. While these changes are welcome, they will take some time to take effect. In the meantime, considerable scope remains to enhance communication with markets on both fiscal out-turns and up-to-date and realistic projections in order to reduce unnecessary anxiety about macroeconomic stability.

Appendix IV. Vietnam: Monetary Policy Regime

The SBV is a government agency with constrained autonomy to formulate and conduct monetary policy. Under the new SBV Law, the Governor of the SBV remains a cabinet member, and assigned to follow government policies. The objectives of monetary policy have been simplified and focused on stabilizing the currency value and controlling inflation.1 The Government is charge with submitting an annual inflation target, based on the recommendation of the SBV, for approval by the National Assembly. The Prime Minister and Governor of SBV are charged with conducting monetary policy, in consultation with the Prime Minister, and in accordance with government regulations, to achieve the monetary policy objectives, including the inflation target approved by the National Assembly.

Monetary policy regime in Vietnam can be characterized as a combination of exchange rate targeting and monetary targeting regimes, made possible by existing capital controls.2 A bilateral exchange rate target is set vis-á-vis the U.S. dollar with limited flexibility currently in the form of central parity and a symmetric band. At the same time, the SBV also sets targets for monetary aggregates and credit growth consistent with the inflation target approved by the National Assembly. To achieve the quantitative target, the SBV makes use of a range of conventional monetary instruments alongside some administrative controls. It also employs moral suasion.

Vietnam: Interest Rates, 2009-10

(In percent)

Sources: State Bank of Vietnam; and Reuters.

A mixture of controls on prices and quantities in the conduct of monetary policy without readily accessible lender of last resort facilities has led to interest rate volatility. The daily operations involve liquidity forecasting and the use of OMOs, particularly in the form of repurchase agreements at different tenors ranging from 7 to 28 days. Currently, both prices (OMO rates) and quantities (amount offered) are set by the SBV for all tenors. As such, market signals on liquidity conditions and market expectations on the policy direction cannot be fully reflected particularly when offered quantities become binding constraints. Impaired market signals may prevent the SBV from managing liquidity effectively. Furthermore, administrative procedures3 have made refinancing and rediscount facilities less accessible as the true lender of last resort. As a result, immediate or unexpected short-term liquidity shortage needs to be accommodated by repurchase and/or interbank market transactions leading to volatile money market rates. When banks with significant liquidity shortage, particularly at year-end and during Tet holidays, were unable to engage in repurchase transactions due to lack of collaterals, the overnight interbank rate could shoot up, which partly explains the volatility observed earlier in 2010. To help minimize interest rate volatility, the SBV might also revisit earlier technical assistance recommendations to establish standing facilities to create an interest rate corridor.

Appendix v. Vietnam: Changes in Trade Patterns During 2000-09

Vietnam’s trade with the outside world has achieved an impressive average annual growth above 20 percent between 2000 and 2008. Trade slowed down somewhat in 2009 due to the global recession.

During the period, Vietnam benefited from new markets and strong demand for commodities. The U.S. domestic market was truly opened up for exports from Vietnam by the U.S.-Vietnam bilateral trade agreement, which came into effect in November 2001. Exports to the United States doubled in 2002, and the U.S. market became the largest destination of exports in early 2007. It currently accounts for about 20 percent of total Vietnamese exports. While new markets are being developed, especially in Canada and other countries in the Western Hemisphere and Europe, the share of exports to more traditional markets of ASEAN and other regional countries, especially neighboring Cambodia, started to rise again recently, raising expectations for potential future growth. China is an important market for commodity exports from Vietnam, while it is the largest supplier of imports to Vietnam, overtaking Japan. Thus, the bilateral trade balance with China has turned from a surplus of US$135 million in 2000 to a deficit of about US$10 billion in recent years, accounting for over half of Vietnam’s overall trade deficit.

Exports items such as footwear, textiles, and garments, and major commodities have driven the growth, but there are signs that room for further growth may be limited. Concerns over competitiveness of its labor intensive industries are increasing, owing to rising wages and shortage of qualified workers. The ship-building industry has grown rapidly, bringing Vietnam to the fifth largest exporter in the world, but its future growth may be hampered by competition and by uncertain financial prospects for the dominant ship-building SOE. Oil fields are maturing and thus difficult to maintain production levels, and new domestic fields are harder to develop. Major agricultural products have experienced unstable production conditions amid volatile world and domestic prices. More recently, exports of more value-added items such as computer components, electronics, and machinery and equipment have posted significant growth, although their share in the total exports remains relatively modest. These new sectors could become the next driver for exports.

Imports have been driven by strong development needs (e.g., machinery and equipment, and steel), as well as by the need to import for processing trade (e.g., intermediary goods). Because of the latter, rising exports are usually accompanied by increasing imports. Although Vietnam is an oil-producing country, it imports most of petroleum products for domestic use, due to the lack of refinery capacity. In addition, imports of vehicles have increased as income levels rise especially in the city area. Luxury goods have also begun to flow in, albeit in a comparatively small amount in the value terms. Share of consumer goods in total imports have slightly declined, partially replaced by unofficial cross-border trade. The China-ASEAN free trade agreement, which took effect January 1, 2010, could somewhat facilitate more Vietnamese exports to the world’s most populous market. However, it would be more likely to intensify the current trade deficit and challenges. Under the agreement, Vietnam will have to gradually reduce tariffs on most Chinese goods and eliminate them entirely in 2015. Major industries, particularly those manufacturing consumer goods, should face harsher direct competition from China in both domestic and regional markets. Therefore, identifying a new trade strategy, including supporting high value-added industries and finding new niche products and markets, will be an urgent task for Vietnam to achieve sustainable medium-term growth.

Vietnam: Trade Balance with Selected Partners

(In billions of U.S. dollars)

Source: Direction of Trade Database

Vietnam: Selected Export Products

(In percent)

Sources: Authorities’data; and IMF staff estimates.

1

Under the old SBV law, promoting economic growth was also included in the objectives, which had a significant influence over the stance of monetary policy

2

Controls apply to all transactions in capital and money market instruments and in collective investment securities.

3

Request processing for approval, which includes verification of collaterals and purposes of fund usage, may take up to two days.

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