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Vietnam: Staff Report for the 2014 Article IV Consultation

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
October 2014
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Context

1. Economic performance has improved over the last year, with the challenge now to mitigate vulnerabilities. Growth is improving gradually, underpinned by robust exports and foreign direct investment (FDI) while domestic activity remains subdued. Inflation has declined to mid-single digits. The external current account remains in large surplus and international reserves have increased. Significant gains in poverty reduction made in recent decades have been preserved (Box 1). Notwithstanding, growth is below its previous trend, and the economy is exposed to spillovers from downside external shocks. Domestic vulnerabilities also exist, including banking sector weakness and inefficient state-owned enterprises (SOEs), both of which are restraining activity. Public and publicly guaranteed debt has risen to a level that requires attention.

Poverty Headcount

(In percent of population) 1/

Citation: 2014, 311; 10.5089/9781498305181.002.A001

Sources: World Bank Development Indicators and Vietnamese authorities.

1/ Headcount at US$1.25 per day, for Vietnam official rate (2012).

2. The authorities place a high priority on securing macroeconomic stability and strengthening fundamentals. The government’s socio-economic development plan (through 2020) targets average growth of 6½–7 percent with single-digit inflation. It prioritizes macroeconomic stability, tackling banking sector vulnerabilities, and reforming SOEs and public investment. Accelerating and deepening the agenda, creating fiscal space to address potential contingent liabilities from reforms while safeguarding critical social and investment spending, would mitigate risks and facilitate achievement of the development goals. Moving gradually toward using inflation as a nominal anchor with greater exchange rate flexibility would provide a monetary policy framework more conducive to maintaining stability and buffering external shocks.

3. Policies are broadly in line with past Fund advice, although along a more cautious timeline. The authorities have made progress on many priorities outlined in the last Article IV consultation. Banking system reforms have been initiated, including individual bank restructuring plans, and a scheme to transfer nonperforming loans (NPLs) to an asset management company. However, full implementation of prudential regulations to bring asset classification and provisioning closer to international standards has been delayed, with concurrent slow progress in NPL resolution and bank recapitalization. SOE restructuring has moved forward with plans for equitization, enhanced transparency, and improvements in the legal framework, although implementation has been slow. Fiscal consolidation has not materialized.

Box 1.Vietnam: Poverty Reduction, Inclusive Growth, and Remaining Challenges1

Vietnam has made remarkable progress improving living conditions and reducing poverty. It employs two approaches to measure poverty. The first uses a “basic needs” poverty line adjusted for inflation, adopted in the early 1990s with assistance from the World Bank and updated in 2010. By this measure, the national poverty rate declined from 58 percent in 1993 to around 17 percent in 2012. A second approach, initially based on rice equivalents and revised in 2005 to use basic needs, but adjusted for inflation only every five years, shows poverty fell from around 28 percent in the early 1990s to around 9½ percent by 2012—the official rate.

Poverty Reduction

(In percent)

Source: World Bank.

While growth has been pro-poor under both measures, success has brought some additional challenges. Inequality has risen slightly compared to the 1990s, spurred by changing patterns of employment away from agriculture, and from low-skill to higher-skill work. The Gini coefficient was 0.39 in 2012, comparable to that of other middle-income countries in the region. The remaining poor depend heavily on subsistence agriculture and live in remote upland rural regions, isolated from main markets. Poverty has also taken an increasingly ethnic dimension, as the income gap between ethnic minorities and the Kinh majority has grown. Many incomes remain close to the poverty level, and are susceptible to falling back into poverty as a result of macroeconomic shocks. The quality of, and access to, public services and social assistance vary between rich and poor households.

Based on these findings and cross-country experience, a number of policies could reinforce poverty reduction and support inclusive growth:

  • Ensuring macroeconomic stability and reducing vulnerabilities, and structural reforms to support robust, sustainable growth.

  • Supporting productivity growth in rural areas through improved connectivity, strengthening skills, improving the investment climate, expanding access to basic services, better targeting agricultural and social support, and fostering the occupational and geographic mobility of labor. Improving access of the poor to higher-quality education and health services, particularly in rural areas and by minority ethnic groups, would help address inequality of opportunities.

  • As the economy is restructured, social spending and social assistance should be better targeted to take into account regional differences in the cost of living and basic services.

  • Improving the system for monitoring and publishing data on poverty to deliver reliable and accurate information to policymakers and the public.

New Poverty Estimates for 2012 by Urban and Rural Areas
Official PovertyPopulation
WB-GSO Poverty EstimatesEstimatesShares
Poverty Rate (Percent)Contribution (Percent)Poverty Rate (Percent)(Percent)
National17.21009.6100
Urban5.41030
Rural22.19070
Sources: World Bank and Ministry of Labour, Invalids and Social Affairs.
Sources: World Bank and Ministry of Labour, Invalids and Social Affairs.
1“Well Begun, Not Yet Done: Vietnam’s Remarkable Progress on Poverty Reduction and the Emerging Challenges,” World Bank in Vietnam, Hanoi (2012).

Macroeconomic Developments, Outlook, and Risks

4. Growth is improving gradually and inflation has declined. Real GDP expanded by about 5½ percent in 2013, underpinned by robust exports and FDI. Domestic activity remained subdued despite supportive countercyclical policies, reflecting in part headwinds from a weakened banking sector and slow progress in SOE reform. A negative output gap is estimated to have emerged (Box 2), and headline and core inflation have fallen, to 5 and 3½ percent, respectively, in mid-2014. The unemployment rate remains low, but underemployment exists, particularly in rural areas, and economy-wide wage growth was flat.

5. Fiscal policy eased. The 2013 fiscal deficit is estimated at 5½ percent of GDP (GFS 2001), compared to 4¼ percent implied by the budget.1 Tax revenues fell short of the plan by about 1½ percentage points of GDP, mainly due to sluggish economic growth, tariff reductions, and new exemptions, while nontax revenues significantly outperformed in part due to increased dividend receipts from SOEs. Current spending was close to budget while capital expenditure was higher than planned.

6. Monetary conditions remain accommodative. With inflation on a downward trajectory and growth below potential, the State Bank of Vietnam (SBV) reduced policy rates by 50 basis points in early 2014. Overnight interbank rates have been well below policy rates due to ample liquidity and the domestic government bond benchmark yield curve has declined. Sovereign spreads narrowed by about 100 basis points early this year, but gave back some of those gains following regional geopolitical tensions in May. The official exchange rate was depreciated by one percent in mid-June.

7. The current account remains in significant surplus and international reserves increased. Robust growth in exports, tourism, and private remittances led to a current account surplus of 5½ percent of GDP in 2013. The financial account saw large net inflows of FDI and loans. However, in mid-2013 these were balanced by large capital outflows associated with the unwinding of gold deposits at commercial banks and following the announcement of U.S. Federal Reserve tapering. As a result, the overall balance of payments saw only a small surplus in 2013. With continued robust exports, gross international reserves rose in early 2014, to above US$36 billion, 2½ months of prospective imports of goods and services.

8. Bank credit to the private sector has been sluggish and profitability has weakened. Despite accommodative monetary conditions and strong deposit growth, private sector credit growth was 2¼ percent (s.a., ytd) in March 2014, reflecting weak demand and ongoing adjustment due to weakened balance sheets. The system-wide loan-to-deposit ratio has fallen to below 90 percent from a peak of around 105 percent in 2011, helped partly by sales of NPLs to the Vietnam Asset Management Company (VAMC). The official NPL ratio rose to 4.2 percent and capital adequacy is reported above the 9 percent regulatory minimum, but stricter loan classification and provisioning, and adjustments to account for multiple gearing and connected lending would likely cause both to show a significantly weaker situation. NPLs and sluggish credit growth resulted in weaker profitability, with the system-wide ROA and ROE in 2013 at 0.5 and 5.6 percent, respectively. Prices of real estate, a significant source of banks’ loan collateral, have yet to turn around after falling by about 50 percent from their peak.

Figure 1.The economy is gradually recovering

Sources: Vietnamese authorities; Bloomberg LP; and IMF staff estimates.

Figure 2.The external position recovered strongly after capital outflows mid-2013

Sources: Vietnamese authorities; Bloomberg LP; IMF, DOTS; IMF, WEO; and IMF staff estimates.

Box 2.Vietnam: Productivity, Technical Efficiency, and Potential GDP

Total factor productivity (TFP) calculations using data from the national accounts show that the contribution of TFP to growth in Vietnam has declined in the last decade. Capital’s contribution increased, but by less than TFPs’ decline, and consequently growth slowed.

Production function frontier analysis confirms this finding.1 A production function frontier represents the optimal output that can be achieved given a set of inputs. The basic stochastic production frontier can be characterized in the Cobb-Douglas form with a “composed error term” as follows:

Real GDP growth and TFP -National Accounts

(percent contribution to GDP growth)

Sources: Vietnamese authorities; and IMF staff estimates

where yt is real GDP, xnt are capital and labor inputs, and vt is a traditional error component. The last term ut is a technical inefficiency component of the error term restricted to be non-negative (ut ≥0). Intuitively, it represents the gap between the frontier, which is the optimal output, and the actual output achieved, which is usually below the frontier given productive inefficiencies in the economy.

Potential GDP Frontier vs. Actual

Source: IMF staff estimates

The stochastic production function is estimated for Vietnam using maximum likelihood estimation and data from the Penn World Tables from 1970 to 2013. The estimated inefficiency parameter ut then provides an index of how close or far the economy is from its most efficient frontier in each time period. The inefficiency gap varies over time but is shown to increase in the early 1990s, early 2000s and again from 2009 forward. This is consistent with the previous findings of a decline in the contribution of TFP to growth from 2009 forward.

Potential output and the output gap can be calculated using this estimated production function. Following standard procedure, trend series for labor, capital and estimated inefficiency (u) are calculated using an HP filter. Based on this, potential growth is currently around 6 percent (below the 7 percent average of the last decade), and would remain close to that rate in coming years, assuming inputs, TFP, and inefficiency remain around current levels, consistent with the gradual reform scenario in staff’s baseline projection. A negative output gap opened after the global financial crisis, and widened to around 1½ percent of potential GDP in 2013. This output gap tracks well with recent inflation trends.

Output Gap and Inflation

(Year-on-year percent change)

Sources: Vietnamese authorities; and IMF staff estimates.

1 For a discussion of stochastic frontier analysis see Subal C. Kumbhakar and C. A. Knox Lovell, Stochastic Frontier Analysis, Cambridge University Press (2000).

9. Growth is projected to continue its gradual recovery with subdued inflation. Staff’s baseline scenario assumes the authorities will maintain an expansionary policy stance to offset headwinds from slow banking and SOE reform implementation. For 2014, real GDP growth is projected at 5½ percent, inflation around 5¼ percent, the current account in surplus, and reserves around 2½ months of prospective goods and services imports. Over the medium term, growth is projected around 6 percent, reflecting a cyclical recovery of the domestic economy, with inflation remaining in single digits. A rebound in imports would return the current account to a deficit. The current fiscal stance would result in the accumulation of public sector debt to around 60 percent of GDP, slightly below the authorities’ legal limit of 65 percent.

10. Under this scenario, domestic risks are tilted to the downside. Slow progress in banking reform raises the economy’s vulnerability to adverse shocks and heightened distress, the realization of which could result in negative macro-financial feedback, significantly undermining growth and adding to public-sector liabilities. Delays in fiscal consolidation would reduce fiscal space that may ultimately be required for banking and SOE reforms, and could pressure interest rates, crowd out growth-enhancing spending, erode public confidence, and ultimately undermine debt sustainability.

Vietnam: Risk Assessment Matrix 1/
RiskUp/Down-SideLikelihoodImpactTransmission ChannelsPolicy Response
Banking distress becomes acuteLHAdverse macro-financial feedback loopActivate crisis management plan, ensure emergency liquidity while maintaining monetary control, orderly bank resolution and recapitalization, strengthen safety nets.
Fiscal consolidation delayedMMPersistently higher interest rates; business confidence underminedBroaden revenue base, reduce exemptions, strengthen administration, introduce a property tax, curtail non-essential spending.
Surges in global financial market volatilityHLCapital outflows pressure exchange rate and reservesGreater exchange rate flexibility and stand ready to raise interest rates. Accelerate fiscal consolidation, and structural reforms to support confidence and FDI.
Protracted period of slower growth in advanced and emerging economies, growth slowdown in China (medium-term)H/MMWeaker export growth and remittancesAdopt monetary policy framework with more exchange rate flexibility. Accelerate financial sector and SOE reforms to improve productivity, FDI, and domestic activity.
Disruptions triggered by geopolitical incidents in East AsiaHMCapital flight, weaker FDI inflows, lower tourism, export and import growthStand ready to raise interest rates, allow exchange rate flexibility. Accelerate structural reforms to support confidence and investment.
Earlier-than-expected implementation of TPP or FTAsLMStronger exports and investment; productivity improvementAccelerate SOE and market reforms, and adopt monetary policy framework with more exchange rate flexibility.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

11. The economy is also vulnerable to spillovers from external shocks. In the short-term, surges in global financial market volatility, higher global interest rates, or protracted regional geopolitical tensions could undermine confidence, and reduce international reserves absent greater exchange rate flexibility. In the medium-term, a high degree of openness and reliance on FDI make the economy vulnerable to slower growth in major trading partners. In particular, China is an important trade partner, main source of imports into the electronics and garments supply chain, and source of FDI and tourism (Figure 3). Early agreement on Trans Pacific Partnership (TPP) negotiations and Free Trade Agreements (FTAs) with the European Union and Korea are upside opportunities that would secure access to main export markets and spur market-based reforms.

Figure 3.Vietnam: Regional Linkages

Sources: Vietnamese authorities; UN Comtrade; IMF, DOTS; and IMF staff estimates.

12. The authorities broadly concurred with the near-term macroeconomic outlook. To mitigate external risks they have reassured investors following recent geopolitical events, and reinforced the importance of structural reforms, trade diversification, and on-shoring of supply chains through TPP and other FTAs. They noted that the current account surplus, capital flows management, and the relatively small holdings of domestic assets by nonresidents limited the impact of global financial volatility on domestic markets. On domestic risks, they emphasized work was underway on bank and SOE restructuring, with progress in line with their plans, and they viewed the risk of systemic distress as small. They considered the level of public debt as manageable, but recognized the risks of a further increase, and were looking to tighten fiscal policy gradually going forward.

Policy Discussions

Discussions focused on the near-term macroeconomic stance to entrench stability; measures to underpin a growth-friendly fiscal consolidation and address rising public debt; strengthening the monetary policy framework and moving toward greater exchange rate flexibility; broadening the banking sector reform agenda; and advancing SOE reforms.

A. Fiscal Policy

13. As growth has slowed in recent years, an expansionary countercyclical policy has been adopted. Tax and tariff reductions and exemptions have contributed to a downward trend in revenues as a share of GDP, in contrast to regional experience, resulting in an expansionary revenue stance in cyclically adjusted terms. The expenditure stance has also been stimulative. For 2014, the deficit is projected to rise to around 6½ percent of GDP (GFS 2001), with lower revenue (reflecting a cut in the corporate income tax rate from 25 to 22 percent, continued tariff reductions, exemptions, and subdued growth) more than offsetting expenditure restraint, including capital outlays and a freeze on the size of the civil service and wages.

Revenue and Expenditure Stance

(In percent of GDP)

Sources: Vietnamese authorities and IMF staff calculations.

14. Efforts have been made to broaden the revenue base, but buoyancy has declined. Improved administration measures include reducing tax evasion and arrears, disclosing incidents of tax fraud, and streamlining VAT refund procedures while introducing thresholds. Profitable SOEs have been required to pay dividends in 2013–14. Vietnam compares favorably in the region in terms of tax revenue productivity but the base has eroded, reflecting in part exemptions and incentives. At the same time, the VAT rate was halved for certain housing projects and a further corporate income tax rate reduction, to 20 percent in 2016, is planned.

Figure 4.The fiscal position has deteriorated, and public debt is rising

Sources: Vietnamese authorities; IMF, WEO; and IMF staff estimates.

Tax Revenue Productivity, 2013

Sources: World Economic Outlook and IMF staff calculations.

Note: Revenue productivity is revenue to GDP ratio divided by tax rate. Earlier data are used if 2013 data are unavailable.

15. Room exists to adjust the composition of expenditure. Spending on education is commendably higher than in comparator low-income and emerging-market countries. However, expenditure on public employee compensation is significantly higher as a share of GDP. Capital spending has historically been in line with other low-income countries, but a decline is budgeted this year. Maintaining high-quality investment spending would improve the stock of public capital in a regional comparison.

Expenditure: International Comparison

(In percent of GDP)

Sources: World Economic Outlook; World Bank, World Development Indicators; IMF staff and authorities estimates.

Public Capital Stock

(In percent of GDP, 2011)

Sources: Center for International Comparisons, OECD, IMF staff.

Note: ASEAN-4 includes Indonesia, Malaysia, Philippines and Thailand.

16. Public debt is projected to increase to around 55 percent of GDP in 2014, substantially higher than just a few years ago, requiring increased attention (Box 3, and debt sustainability analysis). Maintaining the current policy trajectory would lead to higher debt even with continued expenditure restraint—including on investment, which undermines long-run growth potential—and temporary revenue measures such as SOE dividend payments. The effectiveness of the current expansionary stance is undermined by the economy’s structural constraints, it takes up fiscal space raising vulnerability to shocks, and risks crowding out lending to the private sector. Moreover, international experience indicates that public debt could rise substantially were systemic banking sector distress to materialize. SOE restructuring may also ultimately require public funds.

Box 3.Vietnam: What is an Appropriate Medium-Term Public Debt Target?

Public debt in Vietnam has increased considerably in recent years. In contrast, other low income economies have generally reduced public debt ratios. Public and publicly-guaranteed debt almost doubled since 2000, and at around 55 percent of GDP in 2014, is higher than average in the region and among low-income economies.

General Gross Government Debt: International LIC comparison

Source: IMF staff calculations.

1/ LIC-frontier market countries are a subset of low income countries (LIC) that have small financial sectors and/or have low annual turnover and liquidity, but nonetheless demonstrate a relative openness to and accessibility for foreign investors.

The rise has resulted from an easy fiscal stance, reflecting primary deficits, and recently, an output gap. The rise in debt accompanied higher current expenditure over this period, while capital spending remained broadly unchanged as a share of GDP.

While external concessional loans remain a large share of the debt portfolio, domestic debt has accounted for most of the increase. Domestic bond market development has provided the government additional financing sources, but vulnerabilities are building. The maturity structure has been shortened greatly, with maturities of less than seven years comprising 94 percent of total annual domestic bond issuance in the 2008–13 period. As well, agencies other than the Ministry of Finance are allowed to issue bonds with maturities exceeding one year.

Domestic Bond Annual Issuance: by Maturity

Source: Hanoi Stock Exchange.

Cross-country experience suggests that Vietnam’s public debt is rapidly approaching an unsafe level. Three econometric models are estimated to determine thresholds beyond which debt distress could materialize. Probit and signal models are estimated using cross-country data and the results are applied using data for Vietnam, while a debt intolerance model estimates the relation between public debt and investment ratings for Vietnam.1 To calculate a safe debt threshold, a buffer for potential contingent liabilities is subtracted from the estimated debt distress thresholds—the value of the buffer is the average debt increase that has materialized in international experiences of systemic banking distress.2 The results suggest a safe debt level ranging from 40 to 45 percent of GDP for Vietnam.

Debt Threshold
(Percent of GDP)Probit ApproachSignal ApproachDebt Intolerance Framework
Debt distress threshold656970
Buffer for contingent liabilities252525
Safe threshold404445
1 For methodologies, see Bannister and Borrot (2013), Jarmuzek and Miao (2013), and IMF (2014), forthcoming.2 Claessens and others (2011).
1 For methodologies, see Bannister and Borrot (2013), Jarmuzek and Miao (2013), and IMF (2014), forthcoming.2 Claessens and others (2011).
1 For methodologies, see Bannister and Barrot (2013), Jarmuzek and Miao (2013), and IMF Working Paper (2014), forthcoming.2 Claessens and others (2011).

17. Staff recommended a fiscal consolidation that protects social spending and investment and makes space for potential restructuring costs. A growth-friendly consolidation that returns the debt ratio over the medium term closer to 45 percent of GDP, around the level that existed a few years ago, is achievable. The aim would be to support robust inclusive growth and poverty reduction, and mitigate risks. The adjustment would provide space for potential bank and SOE restructuring costs, higher capital spending, and maintaining critical social expenditures.

Fiscal Consolidation Scenario 1/
(In percent of GDP)201420152016201720182019202020212022
Total revenue and grants20.320.921.622.423.023.724.324.925.4
Capital expenditure6.56.56.66.66.76.86.96.97.0
Non-interest current expenditure18.918.618.418.117.917.617.417.116.9
Interest expense1.51.51.61.61.61.61.41.41.2
Net lending (+)/borrowing (-)−6.6−5.7−4.9−4.0−3.1−2.3−1.4−0.60.3
Public and public-guaranteed debt54.856.858.258.457.656.053.650.847.3
Real growth impact (in percentage point)−-−0.1−0.20.0−0.1−0.2−0.2−0.3−0.2
Source: IMF staff.

Public guaranteed debt, ODA onlending and valuation change are the same as in the baseline.

Source: IMF staff.

Public guaranteed debt, ODA onlending and valuation change are the same as in the baseline.

18. Reversing the decline in the revenue to GDP ratio is a priority. Staff recommended broadening the tax base by eliminating exemptions, reducing incentives, introducing a property tax, and including pensions under personal income tax. Forgoing the planned reduction in the corporate income tax rate would contribute around ⅓ percentage points of GDP in revenue, and making permanent the requirement for SOEs to pay dividends to the budget would also contribute importantly. Strengthening administration could return revenue productivity to past higher levels and result in significant revenue gains.

19. Staff proposed expenditure reforms along three dimensions: ensuring the sustainability of social spending and targeted measures to address inequality and growth inclusiveness; safeguarding well-targeted capital expenditure to support growth potential; and rationalizing the public wage bill in a sustainable way by replacing the across-the-board wage and hiring freezes with deeper, efficiency-enhancing civil-service reforms.

20. The authorities broadly agreed with staff’s baseline fiscal assessment. They aim to broaden the tax base and strengthen administration, but noted a property tax and personal income tax on pensions would be difficult to enact. Consideration is being given to raising excises, while income tax rate reductions are needed to support growth and competitiveness, and should result in higher revenues. Social spending will be protected with priority given to poverty reduction, agriculture and rural areas; the law on public investment has been revised to enhance efficiency and prioritization; and greater use of public-private partnerships is under consideration. The authorities concurred with the objective of containing the public sector wage bill, highlighting the importance of addressing redundant employees, and plan to undertake a public expenditure review with World Bank assistance.

21. The authorities are fully aware of public debt risks. They expect the debt-GDP ratio to peak around 2016 and decline afterward with a gradual consolidation, and emphasized that the government’s ceiling of 65 percent of GDP would not be breached. This would allow sufficient space for countercyclical policies. They noted that downside risks could exist if adverse external shocks materialized, or if SOE performance deteriorates, but they reiterated that public funds would not be used for banking sector restructuring.

B. Monetary and Exchange Rate Policy

22. Maintaining a supportive monetary stance is appropriate as long as inflation pressures remain absent. Evidence of an excess supply gap exists, growth is below potential, core inflation has declined, and wage pressures are benign. As well, the transmission of easier monetary conditions to credit growth appears to have been dampened in recent years (Box 4). At this juncture, easy monetary conditions do not pose a risk to financial stability. Real estate prices remain subdued and equity market price/earnings ratios are around 15 percent. Indeed, supportive liquidity conditions are currently facilitating banking system adjustment. If significant capital outflows were to occur, greater exchange rate flexibility should be the first line of defense, and consideration might also be given to raising domestic interest rates.

23. Moving gradually toward using inflation as a nominal anchor would provide a better framework for monetary policy. Currently there exist multiple targets and instruments, including broad money, bank credit, and various interest rates. A daily US$/VND exchange rate target is announced, with a band of ±1 percent. Maintaining a supportive stance and the exchange rate peg will be challenging in the near term if global interest rates rise. In the medium term, the economy will increasingly face asymmetric shocks and would benefit from an independent monetary policy. To start, the band for exchange rate fluctuation could be gradually widened, reforms initiated to promote a deep and liquid foreign exchange market and establish an interest rate instrument while reducing reliance on quantitative targets, liquidity forecasting and management improved, and monetary policy communications increasingly geared toward price stability.

24. Greater exchange rate flexibility would help absorb external shocks and facilitate reserves accumulation. The real effective exchange rate has appreciated by about 2 percent compared to a year ago. However, the results of CGER-type analysis and broader trends in the balance of payments suggest there is no convincing evidence of misalignment. Notwithstanding, further strengthening international reserve adequacy would improve resilience (Box 5).

25. The SBV viewed inflation control as a top priority since early 2011 to achieve a more stable macroeconomic environment conducive for structural reforms. Supportive monetary conditions remained appropriate in the near term, given low inflation and weak demand, as well as the dampened transmission mechanism that reflected economic restructuring, financial weaknesses, and low demand for credit. Despite the recent strong increase in reserves, the authorities considered further accumulation as desirable, to bring them more in line with adequacy metrics.

Box 4.Vietnam: The Effects of Monetary Policy on Bank Lending

Monetary policy generally affects the supply of bank credit through two channels. The first is direct and common across banks. The second may vary according to the financial position of each bank—the bank lending channel—whereby stronger banks are less reliant on central bank funding than weaker banks and therefore less responsive to changes in policy.1 This box investigates the extent to which credit supply depends on policy rates in Vietnam, and if this relationship varies with banks’ financial characteristics.

A model is estimated on a panel of balance sheet data for state-owned and other commercial banks over 2000–2013, using an Arellano-Bond GMM specification with fixed effects. To isolate the bank lending channel, the model introduces an interaction term between the policy interest rate and observed financial heterogeneity across banks. It controls for loan demand determinants, such as past loan growth, GDP growth, and the cyclical effects on banks’ profitability, size, liquidity, capital, and borrowers’ risk (loan loss provision); as well as unobserved heterogeneity, e.g., business models and risk propensity. Allowing for the possibility that monetary policy may affect credit decisions differently after the financial disruption in 2011, a time dummy interacting with relevant lagged explanatory variables is included. For bank i in period t, loan growth (Li,t) is specified as follows:2

Key findings: First, changes in monetary policy have an inverse direct impact on private credit growth that is common across banks.3

Second, the bank lending channel emerges after 2011. Credit supply by the banking system as a whole reacts less to policy rate changes compared to the earlier period, when the impact of policy did not vary with banks’ financial positions. This channel has dampened the transmission mechanism.

Elasticity of loan growth to changes in the refinancing rate, and banks’ financial position over two years

At 10 percent statistical significance level.

Third, banks’ health is an overwhelming factor determining credit supply. A weakening of banks lowers credit growth, ceteris paribus, while strengthening banks’ capital and liquidity would have a vigorous positive impact on credit growth.

1 See Kashyap and Stein (1995) on the role of bank size in monetary policy transmission mechanism; Kishan and Opiela (2000), Van der Heuvel (2002), and Bernanke (2007) on capitalization; and Kashyap and Stein (2000) and Chatelain and others (2003) on liquidity position.2 L denotes loan growth (y/y), excluding interbank positions; MP is the SBV’s refinancing rate; NGDP is GDP growth (y/y); ROE is return on equity; LLP is loan loss provisions to asset ratio; w is a vector of ROE and LLP while z is a vector of bank size, liquidity ratio, and capital ratio, standardized across banks; and d=1 during 2012Q1–2013Q4, and 0 otherwise.3 The elasticities are in line with estimates for Germany, France, and Italy during 1999–2011 (De Santis and Surico, 2013).

Box 5.Vietnam: External Sector Assessment

CGER-type analysis based on the macro-balance and external sustainability approaches suggests the real exchange rate is moderately undervalued, requiring a 5–8 percent real effective appreciation to close the gap between the underlying and estimated current account norm, ceteris paribus. In contrast, after a sharp real appreciation in 2012–13 (reflecting high relative consumer price inflation), the equilibrium real exchange rate approach points to substantial overvaluation, with a real effective depreciation of about 16 percent needed to restore equilibrium. These results are well within the margin of error, which can be large.

ApproachMacrobalanceExternal Sustainability 1/
Underlying current account balance−1.9−1.9
Current account norm−4.8−6.3
Required change in the current account−2.9−4.4
Implied over (+) / under (-) valuation−5.2−7.9
Source: IMF staff estimates.

NFA norm of -68 percent of GDP.

Source: IMF staff estimates.

NFA norm of -68 percent of GDP.

Broader trends also suggest there is no convincing evidence of misalignment. The external balance of the FDI-intensive export-oriented sector remains in significant surplus, with the recent overall current account improvement largely reflecting a correction in the domestic economy, and thus cyclical weakness. Wages remain competitive, and foreign direct investment inflows remain robust. These considerations are tempered by the level of reserves (see below) and the risk of the exchange rate becoming overvalued if large public contingent liabilities are realized during bank restructuring.

Equilibrium Real Exchange Rate

Source: IMF staff estimates.

Capital and financial account flows have been dominated by foreign direct investment and relatively smaller portfolio flows into the country’s two stock markets. Despite the lack of large and internationally integrated capital markets, other financial flows have been quite volatile, as demonstrated by the large outflows recorded in the balance of payments in the second quarter of 2013 and large negative errors and omissions.

External Current Account

(In percent of GDP)

Sources: Vietnamese authorities; and IMF staff estimates

Although they increased recently, measured against several metrics Vietnam’s international reserves are lower than before the global financial crisis, and below regional comparator countries. In early-2014, reserves made up about 2½ months of prospective imports of goods and services, well below the 8 months average of regional emerging market countries, and below the minimum level desirable for countries with a fixed exchange rate, according to the Fund’s reserve adequacy metric.

Staff’s overall assessment is that the external position would benefit from further strengthening. The relatively strong current account position is the result of productivity gains in the FDI-dominated export sector, a well diversified export base and markets, and the weak cyclical position of the domestic economy. As domestic demand recovers in the baseline scenario, the external position will likely deteriorate owing to high import elasticity. An accelerated pace of structural reforms beyond staff’s baseline are needed to improve productivity, particularly in the domestic sector, and increase investment efficiency to bolster external sustainability. Fiscal consolidation, a more flexible exchange rate and higher reserves would also reduce vulnerabilities.

Reserve Adequacy Metric Dynamics

(Reserves in percent of reserve metric)

Sources: Vietnamese authorities; and IMF staff estimates

Regional Comparison of Reserve Indicators
Months of Imports of G&S 1/Percent of Exports of G&SPercent of Broad MoneyPercent of Short-Term DebtPercent of GDP
China201592259742
India6621928316
Indonesia6483222911
Malaysia7523340743
Philippines111155449231
Singapore6486892
Sri Lanka448297011
Thailand7593229243
Average 2/8743633936
Vietnam3251733121
Source: Vietnamese authorities; IMF, WEO; and staff estimates.

In months of prospective imports of G&S.

Excludes Singapore for short-term debt indicator.

Source: Vietnamese authorities; IMF, WEO; and staff estimates.

In months of prospective imports of G&S.

Excludes Singapore for short-term debt indicator.

26. The SBV broadly agreed with recommendations to enhance the monetary policy framework. The authorities explained that they had increasingly implemented monetary policy through short-term interbank interest rates, and were beginning to view money and credit targets as indicative. Liquidity forecasting had improved, and progress had been made in communicating the rationale for policy action to help guide market expectations. They noted that a stronger banking system and increased confidence in the currency would be needed to facilitate a smooth transition from the exchange rate to inflation as a nominal anchor over the medium term.

C. Banking Sector Reform

27. The implementation of several recent policy measures will help improve the functioning of the banking sector. Liquidity has improved thanks to accommodative monetary conditions and FDI and remittance inflows. Most banks have been asked to submit restructuring plans to the SBV. A new risk management regulation based on Basle II is being drafted and an adoption roadmap has been developed, which will be piloted in ten banks.2 The VAMC has begun purchasing NPLs from commercial banks and is planning liquidation, restructuring, and outright sales to unwind them. Its capital will be increased. A revised bankruptcy law has been adopted and related legislation is under review to provide smoother enterprise restructuring and debt resolution. The limit on banks’ single foreign owner was increased slightly under an unchanged overall foreign ownership cap of 30 percent.3 A new Monetary and Financial Stability Department was created in the SBV, and the SBV has issued an action plan for the banking sector to supplement existing strategies.

28. Improved liquidity has given the banking system much needed breathing space, but a number of key problems remain. Asset quality remains under pressure from weak domestic activity and recent years’ sharp decline in real estate prices, and profitability is low. Full implementation of tighter loan classification has been postponed, to 2015, allowing loan rescheduling and new lending to delinquent customers without reclassification, and some merged institutions are granted time to comply with key prudential norms. Banks have five years to provision against NPLs sold to the VAMC in exchange for bonds that are nonmarketable, pay no interest, and are not government guaranteed. Significant legal hurdles for the transfer of loan titles and collateral impede NPL resolution. The macroprudential framework requires refinement. Administrative levers including sector-specific lending directives and interest rate limits remain.

29. To be successful, reforms must address the root causes of the problem and be bold. Weak balance sheets, regulatory forbearance, connected lending and cross ownership (including between banks and SOEs), weak risk management, and the presence of special interest groups will result in credit being channeled to unprofitable and unproductive businesses and may become a drain on public resources both in the form of foregone earnings and potential recapitalization costs. International experience shows that a resumption of robust economic growth is unlikely as long as banks remain undercapitalized and the monetary policy transmission mechanism is impaired.

Figure 5.Overall financial conditions have improved, but banks remain weak

Sources: Vietnamese authorities; Bloomberg LP; IMF, WEO; and IMF staff estimates.

30. Staff recommended using breathing space created by improved liquidity conditions to adopt a more comprehensive and sequenced reform agenda (Box 6). Core pillars include: a more expeditious recognition of NPLs, supported by bank diagnostic assessments and legal and SOE reforms; restructuring and recapitalization of viable banks; and orderly exit of insolvent institutions, supported if necessary by a stronger safety net. A revamped VAMC, with ability to buy and sell impaired loans at market value as is currently under consideration, could play a significant role. The crisis management framework and supervision should be strengthened, and the use of administrative measures gradually eliminated.

31. The authorities agreed with the thrust of staff’s recommendations, but argued for a more gradual pace. More time was needed to match banks’ capacity to absorb losses generated by stricter regulatory standards, and to support the economic recovery. In their view, the root causes of banking sector weakness were clearly identified, forbearance had been tightened, banks were required to report NPLs to the SBV under stricter norms, and financial weaknesses were not systemic. The constraints imposed by the existing legal system and connected lending that complicate NPL resolution, and the decision not to use public funds for recapitalization, were well understood. The authorities acknowledged the recommendation that a comprehensive reform package, including solutions to tackle the constraints of budgetary resources and legal reforms, is needed to accelerate banking reform and NPL resolution. They emphasized that progress had been made in this process.

D. SOE Reform

32. SOE reform is progressing. Restructuring plans have been developed, and efforts are focused on amendments to the legal framework, divestment from noncore areas, and equitization. To improve the legal framework, the government has issued new regulations to enhance SOEs’ financial reporting and transparency, improve internal controls by defining different government agency responsibilities, and improve corporate governance. To facilitate equitization, enterprises can now sell assets below book value with the approval of the government, and several have had IPOs.

33. While improvements to the legal framework are welcome, implementation remains a challenge, in part due to capacity constraints. Approved restructuring plans have been made public, but implementation progress is uneven, particularly among some SOEs’ subsidiaries. Oversight of SOEs by government agencies is fragmented, and the focus on partial equitization risks diverting attention away from operational reforms to enhance efficiency. Public disclosure of SOEs’ financial condition should be enhanced with timely publication based on international accounting practices.

34. Restructuring could be enhanced by several measures. A high-level steering committee to oversee the reform agenda, facilitate coordination among ministries, and monitor implementation would expedite progress. Expanding the scope of divestment beyond noncore areas would improve efficiency and level the playing field for the private sector, particularly if it were accompanied by external management expertise. Capacity at various ministries could be enhanced, and restructuring costs estimated to quantify fiscal implications.

Box 6.Vietnam: Bank Reform and Contingency Planning

Key pillars of a comprehensive reform include:

  • Assessing banks’ recapitalization needs. Prioritize systemically important banks and undertake diagnostic assessments: (i) on the basis of audits conducted by internationally reputed firms; (ii) under strict application of prudential norms; and (iii) accounting for connected lending, multiple gearing, and loan-financed equity injections.

  • Revising classification criteria to guide resolution options. Based on the diagnostic assessments, modify banks’ classification as: (i) healthy; (ii) undercapitalized but viable; or (iii) insolvent and nonviable. Identify systemically important institutions to determine resolution options.

  • Recapitalizing, restructuring and resolving. Foreign strategic partnerships have provided welcome capital and management expertise for a number of banks, and the increase in single foreign ownership limit is welcome, although unlikely to provide significant new capital. Recapitalization of SOCBs immediately after the diagnostic assessments, along with elimination of forbearance and implementation of restructuring plans, would support confidence in the system and mitigate moral hazard. Undercapitalized but viable credit institutions should submit time-bound plans to raise capital to the regulatory minimum. Non-viable and insolvent institutions should be resolved in an orderly manner, supported by a legal framework for purchase and assumption transactions.

  • Strengthening the VAMC. To contribute to effective NPL resolution, the VAMC will likely need more capital, in the form of equity rather than bonds, and an enabling legal framework to facilitate the transfer of loans and collateral. It should also be granted legal and operational independence and transparent governance, given incentives for rapid disposal of assets, and operate with a clearly defined sunset clause.

  • Developing additional options to deal with NPLs. Other resolution options designed for different types of NPLs—which pose different legal challenges—include: (i) a court-led track for large and complex economic groups; (ii) a bank-led track, facilitated through legislation establishing a “prepackaged” plan covering negotiation and approval mechanisms; and (iii) a special administrative restructuring track for selected SOEs financed exclusively by SOCBs. NPL resolution should be carried out in coordination with restructuring programs for the indebted SOEs.

  • Tightening supervision to ensure sound lending practices going forward. Risk mitigation would require the immediate elimination of measures allowing lending to defaulted borrowers. Regulatory forbearance should be phased out as soon as feasible, while reform towards risk-based supervision continues over the medium term.

  • Revamping the architecture and procedures for crisis management, including: (i) a senior policy group (SPG) for decision making comprising the SBV Governor, Minister of Finance and relevant deputies; (ii) a technical secretariat to provide daily reports and analysis to the SPG; (iii) preparation of templates for notifications and instructions to banks; and (iv) a communications strategy.

  • Strengthening financial safety nets during the reform process. Extraordinary liquidity provision and extended coverage of deposit insurance (DI) may be necessary during the reform process, but the conditions under which they are provided and the funding of the DI should be identified ex-ante and in a fiscally transparent manner.

35. The authorities emphasized their efforts to develop the legal framework, and to improve the management and supervision of SOEs. They agreed that the current ownership structure of SOEs is fragmented. Equitization efforts are constrained by weak economic conditions, and budgetary resources are not available to fund SOE restructuring. The authorities hoped to make significant progress by end-2015. They also explained they are currently drafting a law to make dividend payments from profitable SOEs permanent.

Staff Appraisal

36. Vietnam has made significant progress with macroeconomic stabilization and important steps in banking and SOE reform. Growth is recovering and inflation has been reduced to mid-single digits, substantially lower than a few years ago. The current account remains in surplus and gross international reserves have risen in recent years. Banking system liquidity has improved, and steps toward bank restructuring—albeit gradual—are underway. The VAMC continues to purchase NPLs and is planning resolution. SOE reform has also moved forward with restructuring plans, amendments to the legal framework and equitization.

37. Nevertheless, economic growth remains below potential and important risks exist. Growth continues to be constrained by weak banks and inefficient SOEs. Public debt is rising and approaching a level that reduces fiscal space for critical expenditures and potential costs of banking and SOE reforms. The gradual pace of banking reform leaves the system vulnerable to adverse shocks and negative macro-financial feedback, which could undermine growth and add significantly to public sector debt. The economy is also vulnerable to spillovers from external shocks including surges in global financial volatility, slower trading partner growth and regional geopolitical tensions.

38. Fiscal consolidation that creates space for critical expenditures and possible contingent liabilities would reduce risk and support growth. A medium-term plan to return public debt to around 45 percent of GDP should be implemented in a growth-friendly manner, and would provide space for potential bank and SOE restructuring costs. Raising revenue would allow consolidation to take place while safeguarding social spending and well-targeted capital expenditure to support growth and inclusiveness. This is achievable with a strategy to broaden the base, improve administration, forego further corporate income tax rate reductions, and institutionalize SOE dividend payments to the budget. There is also space to rationalize public expenditure, including broader civil service reforms that raise efficiency and address the large public wage bill. Reforms to increase public investment efficiency are welcome.

39. The current monetary policy stance is appropriate and the monetary policy framework should gradually shift from the exchange rate to inflation as the nominal anchor. With output below estimated potential, supportive monetary conditions are appropriate as long as inflation pressures remain muted. The recent increase in international reserves is welcome, and greater exchange rate flexibility would help buffer shocks and facilitate higher reserve adequacy. Preparing the groundwork for moving toward inflation as a nominal anchor will be crucial for a successful transition. Initial steps could be taken to promote a deep and liquid foreign exchange market, initiate reforms to establish an interest rate instrument, improve liquidity forecasting and management, and gear policy communications toward price stability.

40. A comprehensive approach to banking sector restructuring is critical to reduce macro-financial risks and for sustainable robust economic growth. The current gradual approach charts a risky path forward. Not addressing weaknesses forcefully, and instead relying on de facto forbearance and liquidity will deprive economic growth of a key engine—new credit to profitable enterprises—and makes the system susceptible to adverse shocks and asset deterioration against which banks would not be adequately provisioned. This is compounded by a high risk of contagion brought about by cross-ownership among banks, and between banks and enterprises, with the potential for adverse feedback loops.

41. A more expeditious recognition of losses on NPLs, restructuring of viable banks, and an orderly exit of insolvent institutions is recommended. Prioritized diagnostic assessments of banks under application of stricter prudential norms would focus restructuring efforts and provide estimates of recapitalization costs. Recapitalization, including greater foreign participation and using public funds under strict conditions for systemically important institutions, elimination of forbearance, and continued strengthening of supervision would improve confidence, credit flows and the monetary policy transmission mechanism, and allocation of resources. Legal reforms to facilitate NPL resolution—beyond the revision to the bankruptcy law—are also needed. Plans to strengthen the VAMC with equity capital and the ability to buy and sell NPLs at market value are welcome. Additional options to deal with NPLs, such as bank- and court-led and administrative tracks, should also be considered. Finally, a stronger crisis management framework should be pursued.

42. Accelerating SOE reform will reduce risks and support growth by improving the allocation of resources. While the authorities have made progress, further efforts are needed to accelerate implementation and improve coordination of the reform agenda, which is fragmented over different agencies and ministries. It will be important that efforts go beyond partial equitization and focus on strengthening corporate governance and ensuring a level playing field.

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

Table 1.Vietnam: Selected Economic Indicators, 2009–15 1/
Est.Projections
2009201020112012201320142015
Output
Real GDP (percent change)5.46.46.25.25.45.55.6
Prices (percent change)
CPI (period average)6.79.218.79.16.65.25.2
CPI (end of period)6.511.718.16.86.05.35.0
Core inflation (end of period)6.69.814.39.66.4
GDP deflator6.212.121.310.94.86.46.2
General government finances (in percent of GDP) 2/
Revenue and grants25.627.325.922.622.920.320.1
Of which: Oil revenue3.43.24.03.83.42.62.3
Expenditure31.630.026.929.428.526.926.2
Expense19.319.218.420.421.320.420.2
Net acquisition of nonfinancial assets12.310.88.69.07.26.56.1
Net lending (+)/borrowing(-) 3/−6.0−2.8−1.1−6.8−5.6−6.6−6.1
Public and publicly guaranteed debt (end of period)46.948.446.748.551.654.857.1
Money and credit (percent change, end of period)
Broad money (M2)29.033.312.118.518.818.115.7
Credit to the economy39.632.414.38.712.712.012.2
Interest rates (in percent, end of period)
Nominal three-month deposit rate (households)10.711.614.99.48.3
Nominal short-term lending rate (less than one year)12.714.016.412.912.4
Balance of payments (in percent of GDP, unless otherwise indicated)
Current account balance (including official transfers)−6.5−3.80.26.05.64.13.4
Exports f.o.b.56.264.172.073.677.579.780.2
Imports f.o.b.63.768.672.368.072.476.477.3
Capital and financial account6.65.54.85.6−0.12.31.9
Gross international reserves (in billions of U.S. dollars) 4/14.112.413.525.426.038.048.8
In months of prospective GNFS imports1.91.41.42.32.02.63.1
Total external debt (end of period)38.038.838.838.038.538.138.3
Nominal exchange rate (dong/U.S. dollar, end of period)18,47919,49821,03520,82521,105
Nominal effective exchange rate (end of period)80.881.168.267.970.1
Real effective exchange rate (end of period)116.0117.4122.5127.5136.1
Memorandum items:
GDP (in trillions of dong at current market prices)1,8092,1582,7803,2453,5844,0244,513
GDP (in billions of U.S. dollars)101.6112.8134.6155.6170.6187.8204.5
Per capita GDP (in U.S. dollars)1,1811,2971,5321,7531,9022,0732,233
Sources: Vietnamese authorities; and IMF staff estimates and projections.

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

Follows the format of the Government Finance Statistics Manual 2001.

Excludes net lending of the Vietnam Development Bank.

Excludes government deposits.

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

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

Follows the format of the Government Finance Statistics Manual 2001.

Excludes net lending of the Vietnam Development Bank.

Excludes government deposits.

Table 2.Vietnam: Balance of Payments, 2009–15 1/(In billions of U.S. dollars, unless otherwise indicated)
Est.Projection
2009201020112012201320142015
Current account balance−6.6−4.30.29.39.57.87.0
Trade balance−7.6−5.1−0.48.78.76.26.0
Exports, f.o.b.57.172.296.9114.5132.1149.7164.1
Imports, f.o.b.64.777.497.4105.8123.4143.5158.1
Nonfactor services−2.4−2.5−3.2−1.4−1.4−2.3−2.5
Receipts5.87.58.79.610.511.712.7
Payments8.29.911.911.111.914.015.1
Investment income−3.0−4.6−4.8−6.2−7.3−5.8−6.5
Receipts0.80.50.40.30.30.30.3
Payments3.85.05.26.57.66.16.7
Transfers6.47.98.78.29.59.710.0
Private (net)6.07.68.37.98.99.19.4
Official (net)0.40.30.40.30.60.60.5
Capital and financial account balance6.86.26.58.7−0.24.33.8
Direct investment (net)6.97.16.67.26.97.07.2
Of which: Foreign direct investment in Vietnam7.68.07.58.48.99.19.4
Portfolio investment−0.12.41.52.01.51.92.0
Medium- and long-term loans4.52.83.34.33.44.23.8
Disbursements6.14.75.77.88.17.97.2
ODA loans6.93.97.16.65.05.05.8
Commercial loans−0.80.8−1.41.23.12.91.4
Amortization1.71.92.43.54.73.73.4
Short-term capital 2/−4.5−6.0−4.8−4.7−11.9−8.8−9.2
Net foreign assets−4.8−7.1−6.4−6.0−12.0−11.8−7.1
Of which: Commercial banks−0.50.40.1−2.3−0.3−0.2
Trade credit (net)0.31.01.61.30.10.70.5
Other short-term capital… …2.5−2.5
Errors and omissions−9.0−3.7−5.6−6.1−8.80.00.0
Overall balance−8.9−1.81.111.90.612.010.8
Memorandum items:
Gross international reserves 3/14.112.413.525.426.038.048.8
In months of prospective GNFS imports1.91.41.42.32.02.63.1
Current account balance (in percent of GDP)−6.5−3.80.26.05.64.13.4
Export value (percent change)−8.926.534.218.215.413.39.7
Export value (in percent of GDP)56.264.172.073.677.579.780.2
Import value (percent change)−14.319.625.88.716.616.210.2
Import value (in percent of GDP)63.768.672.368.072.476.477.3
External debt37.243.051.359.265.570.577.2
In percent of GDP 4/38.038.838.838.038.538.138.3
GDP101.6112.8134.6155.6170.6187.8204.5
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Data up to 2009 reflect an old presentation; from 2010, part of errors and omissions began to be reflected in net foreign assets.

Incorporates a projection for negative errors and ommissions going forward.

Excludes government deposits; data for 2009 include the SDR allocation of SDR 267.1 million.

Uses interbank exchange rate.

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

Data up to 2009 reflect an old presentation; from 2010, part of errors and omissions began to be reflected in net foreign assets.

Incorporates a projection for negative errors and ommissions going forward.

Excludes government deposits; data for 2009 include the SDR allocation of SDR 267.1 million.

Uses interbank exchange rate.

Table 3.Vietnam: General Government Budgetary Operations, 2009–15 1/
EstimatesProjections
2009201020112012201320142015
(In trillions of dong)
Total revenue and grants463588719733821819909
Tax revenue373483608617676713792
Oil revenues6169110125120105103
Non-oil tax revenues312414497493555608689
Grants8121210555
Other revenue8293100106140100113
Expenditure572648749954102110831184
Expense349414511662762820911
Interest20253040486065
Other expense328389481622714760845
Net acquisition of non-financial assets223234238292259263273
Net lending (+)/borrowing (-)−109−59−29−221−200−264−275
Net incurrence of financial liabilities125181112222278280291
Domestic329255176185208196
Securities−26033115130
Loans3433226155
Foreign93895647937295
Disbursement103998075121105121
Amortization10102428273227
Net acquisition of financial assets−16−121−82−2−78−16−16
(In percent of GDP, unless otherwise indicated)
Revenue25.627.325.922.622.920.320.1
Tax revenue20.622.421.919.018.817.717.5
Oil revenues3.43.24.03.83.42.62.3
Non-oil revenues17.219.217.915.215.515.115.3
Grants0.40.50.40.30.10.10.1
Other revenue4.54.33.63.33.92.52.5
Expenditure31.630.026.929.428.526.926.2
Expense19.319.218.420.421.320.420.2
Interest1.11.21.11.21.31.51.4
Other expense18.218.017.319.219.918.918.7
Net acquisition of non-financial assets12.310.88.69.07.26.56.1
Net lending (+)/borrowing (-)−6.0−2.8−1.1−6.8−5.6−6.6−6.1
Net incurrence of financial liabilities6.98.44.06.97.87.06.5
Domestic1.74.32.05.45.25.24.4
Securities−0.12.81.23.53.6
Loans1.91.50.81.91.5
Foreign5.24.12.01.42.61.82.1
Disbursement5.74.62.92.33.42.62.7
Amortization0.60.50.90.90.80.80.6
Net acquisition of financial assets−0.9−5.6−3.00.0−2.2−0.4−0.4
Memorandum items:
Public and publicly guaranteed debt46.948.446.748.551.654.857.1
Net ODA onlending0.41.70.50.50.40.40.4
Primary balance−4.9−1.60.0−5.6−4.2−5.1−4.6
Non-oil primary balance−8.3−4.8−4.0−9.4−7.6−7.7−6.9
Cyclically adjusted NOPB−7.8−4.9−4.3−9.3−7.3−7.5−6.9
Fiscal stance3.4−0.2−1.84.02.63.52.9
Fiscal impulse5.3−3.6−1.65.8−1.40.8−0.6
Nominal GDP (in trillions of dong)1,8092,1582,7803,2453,5844,0244,513
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Government Finance Statistics 2001 presentation.

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

Government Finance Statistics 2001 presentation.

Table 4.Vietnam: Monetary Survey, 2009–15 1/(In trillions of dong at end-period, unless otherwise indicated)
Est.Projections
2009201020112012201320142015
Net foreign assets3122673005486139021,180
State Bank of Vietnam (SBV)2812242715225408201,093
Commercial banks31432926738188
Net domestic assets1,7802,5232,8263,1553,7884,2974,837
Domestic credit2,0402,6903,0633,4043,8764,4585,085
Net claims on government170214232326407572725
SBV76825543
Credit institutions94132177283
Credit to the economy1,8692,4762,8303,0783,4703,8864,360
Claims on state-owned enterprises (SOEs) 2/550464489524573
Claims on other sectors1,3192,0122,3412,5532,897
In dong1,5421,9902,2642,5403,010
In foreign currency327485567538460
By state-owned banks (SOCBs)8871,1071,2701,4271,625
By non-SOCBs9821,3691,5601,6511,844
Other items net−260−167−237−249−88−161−248
Total liquidity (M2)2,0922,7893,1263,7034,4015,1996,017
Dong liquidity1,6652,2732,5883,2283,852
Deposits1,3721,9352,2172,7733,3453,952
Currency outside banks293338371456507
Foreign currency deposits427517538475549649
Memorandum items:
Money multiplier 3/5.06.36.05.66.36.36.3
Velocity0.90.80.90.90.80.80.8
Reserve money (year-on-year percent change)11.44.118.925.46.118.616.4
Liquidity (M2; year-on-year percent change)29.033.312.118.518.818.115.7
Currency/deposits (in percent)16.313.813.514.013.0
Credit/deposits (total, in percent)103.9101.0102.794.889.184.581.9
Credit/deposits (dong, in percent)112.4102.9102.191.690.0
Credit/deposits (foreign currency, in percent)76.593.9105.3113.383.7
Credit to the economy
Total (in percent of GDP)99.1114.7101.894.896.896.696.6
Total (year-on-year percent change)39.632.414.38.712.712.012.2
In dong (year-on-year percent change)44.129.013.712.218.5
In FC (year-on-year percent change)21.748.416.8−5.1−14.5
In FC at constant exchange rate (year on year percent change)15.140.76.1−5.0−15.3
To SOEs (year-on-year percent change) 2/32.9−15.75.47.29.2
To other sectors (year-on-year percent change) 2/42.552.516.49.113.5
To SOEs (percent of total) 2/29.418.717.317.016.5
Dollarization
Foreign currency deposits/total deposits (in percent)23.721.119.514.614.1
Foreign currency loans/total loans (in percent)17.519.620.017.513.3
Banks’ net foreign exchange position (millions of U.S. dollars) 4/−3,8865832,8164,277−796
Government deposits (in percent of GDP)3.12.72.42.32.8
Nominal GDP (in trillions of dong)1,8092,1582,7803,2453,5844,0244,513
Sources: SBV; and IMF staff estimates and projections.

Includes the SBV and deposit-taking credit institutions.

Break in series in 2010.

M2 over reserve money.

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

Sources: SBV; and IMF staff estimates and projections.

Includes the SBV and deposit-taking credit institutions.

Break in series in 2010.

M2 over reserve money.

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

Table 5.Vietnam: Medium-Term Projections, 2009–19
Est.Projections
20092010201120122013201420152016201720182019
Output(Percent change)
Real GDP5.46.46.25.25.45.55.65.75.85.96.0
Prices
CPI (period average)6.79.218.79.16.65.25.24.94.74.64.5
CPI (end of period)6.511.718.16.86.05.35.04.84.64.54.5
GDP deflator6.212.121.310.94.86.46.24.25.14.34.4
General government finances 1/(In percent of GDP, unless otherwise indicated)
Revenue and grants25.627.325.922.622.920.320.120.120.320.420.5
Expenditure31.630.026.929.428.526.926.225.825.324.724.6
Expense19.319.218.420.421.320.420.220.220.220.020.0
Net acquisition of nonfinancial assets12.310.88.69.07.26.56.15.65.14.74.7
Net lending (+)/borrowing(-)−6.0−2.8−1.1−6.8−5.6−6.6−6.1−5.7−4.9−4.3−4.1
Non-oil primary balance−8.7−6.5−4.5−9.9−8.0−8.1−7.3−6.5−5.4−4.5−4.1
Public and publicly guaranteed debt (end of period)46.948.446.748.551.654.857.159.560.360.760.7
Balance of payments
Current account balance−6.6−3.80.26.05.64.13.42.61.2−0.7−1.9
Exports f.o.b.57.164.172.073.677.579.780.281.881.681.880.6
Imports f.o.b.64.768.672.368.072.476.477.379.480.682.782.5
Capital and financial account (net)6.65.54.85.6−0.12.31.92.73.13.43.5
Gross international official reserves (in billions of U.S. dollars)14.112.413.525.426.038.048.860.470.877.882.1
In months of prospective GNFS imports1.91.41.42.32.02.63.13.43.63.73.6
Total external debt (in billions U.S. dollars)37.243.051.359.265.570.577.284.392.5100.1106.8
In percent of GDP38.038.838.838.038.538.138.338.939.139.038.3
Memorandum items:
Nominal GDP (in trillions of dong)1,8092,1582,7803,2453,5844,0244,5134,9735,5306,1086,761
Nominal GDP (in billions of U.S. dollars)101.6112.8134.6155.6170.6187.8204.5219.4238.8259.0281.4
Per capita GDP (in U.S. dollars)1,1811,2971,5321,7531,9022,0732,2332,3712,5542,7412,948
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Follows the format of the Government Finance Statistics Manual 2001.

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

Follows the format of the Government Finance Statistics Manual 2001.

Table 6.Vietnam: Progress Toward the Millennium Development Goals 1/
Goal/TargetProgressStatus
Goal 1: Eradicate extreme poverty and hunger
Target 1Reduce extreme poverty by half between 1990 and 2015Poverty reduced by three-quarters between 1990 and 2008Achieved
Target 2Ruduce hunger by half between 1990 and 2015Proportion of population below minimum consumption reduced by more than three-quarters between 1993 and 2012Achieved
Goal 2: Achieve universal primary education
Target 3Universal primary schooling by 2015Net enrollment ratio in primary education at 99.4 enrolees per 100 childrenLikely to be achieved
Goal 3: Promote gender equality
Target 4Eliminate gender gaps in primary education no later than 2015Ratio of girls to boys in primary education of 0.94Close to parity
Goal 4: Reduce child mortality
Target 5Reduce by two-thirds between 1900 and 2015, the under-five mortality rateReduced by more than half between 1990 and 2012 (down from 51 to 23 deaths per 1,000)Likely to be achieved
Goal 5: Improve maternal health
Target 6Reduce maternal mortality by three-quarters, between 1990 and 2015Fell by 75 percent, from 240 per 100,000 births in 1990 to 59 in 2010Achieved
Goal 6: Combat HIV/AIDS and other diseases
Target 7By 2015, halt and begin to reverse the spread of HIV/AIDSInfection rate was 0.04 per year per 100 people aged 15–49 in 2011Likely to be achieved
Target 8By 2015, halt and reverse the incidence of tuberculosis (TB)Cases severely reduced; with only 33 TB-related deaths per 100,000 in 2011Likely to be achieved
Goal 7: Ensure environmental sustainability
Target 9Embrace sustainability and reverse the loss of forestsForest cover up but loss in closed-canopy forest and biodiversityLikely to be achieved
Target 10Halve by 2015, share of people without safe drinking water and basic sanitationRapid progress on drinking water, much slower on hygienic sanitationUncertain to be achieved
Sources: United Nations Development Program, General Statistics Office of Vietnam, and the World Bank.

As of December 2013.

Sources: United Nations Development Program, General Statistics Office of Vietnam, and the World Bank.

As of December 2013.

GFS 2001 presentation is different from the authorities’ presentation, mainly reflecting the inclusion of off-budget capital expenditure and the exclusion of principal repayments above the line.

The piloted banks are expected to implement the Basel II basic indicator approach and standardized approach by 2015 and 2018, respectively, while the remaining joint stock banks will have to comply with the basic indicator approach by 2018.

Higher shares of foreign capital are allowed upon the Prime Minister’s approval.

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