1. Our authorities highly appreciate the candid and constructive discussions on macroeconomic developments and policy issues in Vietnam during the 2014 Article IV Consultation of the IMF mission led by Mr. John Nelmes. Our authorities broadly agree with staff’s assessment and main policy recommendations. Achievements of containing inflation, preserving macro stability, and accelerating SOEs and banking sector reforms, whilst ensuring sustainable economic growth and social security of Vietnam have been well acknowledged by the Staff. The useful advice rendered during the Article IV Consultation should be reflected upon and considered in the authorities’ development plan. In this statement, we will elaborate our view on some key areas.
2. Despite challenging global environment and domestic difficulties, with great efforts of Vietnam government, the economy continues to gain commendable achievements in macroeconomic stabilization and inflation containment, with accelerating GDP growth. These positive developments have contributed to record high international reserves of more than USD36 billion as at the end of May 2014, equivalent to around 12 weeks of prospective imports of goods and services, and expected to be built up further.
Monetary, exchange rate and credit policies
3. Exchange rate policy is flexibly managed in line with other monetary instruments in order to stabilize the market. Given low inflation for the first five months of 2014 and stable exchange rates for a long time, the SBV proactively depreciated the VND by 100 bps on June 19, 2014 to promote economic activities. The market quickly restores its stability and the VND has been appreciated recently that facilitates the SBV to continue to buy USD from the market to increase its international reserves.
4. Liquidity in the banking system is ample that facilitates banking sector reforms. It appears that banks would like to provide credit to customers while also focus on improving credit quality and safety in banking system operations. In addition, although credit growth is low due to weak domestic demand as well as difficulties in the economy, credit policy has been conducted in a flexible manner including lending in foreign currency and channeling credit to prioritized sectors.
5. The authorities view fiscal consolidation as a crucial element to ensure fiscal sustainability in the long run and commit towards fiscal consolidation. The recent difficult external and domestic conditions have had adverse impacts on businesses, especially domestic enterprises. To provide some breathing space for businesses, the Government allowed reductions, deferrals, and exemptions in certain types of taxes and revenue that will foster economic development and increase budget revenue in the long run. In addition, budget expenditure will continue to be tightened. To ease pressure on budget spending and enhance public service efficiency, the Government plans to reduce the size of public service staff in the next few years and delays the planned roadmap of public salary increase. We share the Staff recommendation that fiscal consolidation should protect social spending and investment and makes space for potential NPL resolutions and banks recapitalization.
6. Public investment reform has always been an important agenda of the authorities. The revised Public Investment Law was adopted by the National Assembly in 2014 to enhance the efficiency of public investment activities, and greater use of public-private partnership.
Financial Sector Reform
7. The Government and the SBV have proposed comprehensive and synchronous measures to solve the root cause of the system’s weaknesses. As a result, the credit institution (CI) restructuring has gained significant progresses and the financial condition of the banking system has made improvements. We share the IMF’s recommendation that there needs to be a comprehensive reform package to promote the banking reform process and NPL resolution, especially to allocate state budget for those activites and accelerate legal reform.
8. While we find the IMF’s recommendation to push ahead with further banking sector reform and NPL resolution are plausible, significant progresses have been made regarding banking governance and supervision as well as legal framework for banking sector in Vietnam. The risk-based supervision has been improved following the SBV’s Action plan for the implementation of 2011-2015 Banking Restructuring Plan. In addition, all banks are required to submit their operational and financial restructuring plans for approval of the SBV.
9. NPL resolution has also achieved positive outcomes given the constraints of budgetary resources and legal reforms. The VAMC initially appears to be effective in curbing and resolving NPLs. A large portion of NPLs has been removed from the system. To accommodate the VAMC’s enlarged operations, its chartered capital will be tripled by end-2014.
10. Legal framework on loan classification and provisioning has been improved. Circular 02 was effective from June 1, 2014. However, due to the slow pace of recovery of the Vietnamese economy, we believe that the full implementation of Circular 02 would have great impacts on the banking system, especially on restricting credit expansion and accessibility. Therefore, to support the economic activities, the authorities issued Circular 09 that amend and supplement some articles of Circular 02 by allowing loan rescheduling without reclassification from 20 March 2014 to 31 March 2015 subject to very rigorous conditions, such as: (i) loan rescheduling can only be undertaken once during the term of the loan; (ii) customers have to provide a feasible repayment plan in line with the purpose of the borrowing in the credit contract, production and business conditions, satisfying prudential ratios and limitation requirements; (iii) CIs have to issue internal regulations to strictly control and supervise the loans and periodically report to the SBV; and (iv) CIs have to maintain loan classification based on consolidated results from the Credit Information Center.
11. Although facing many challenges, we see that the authorities have made great efforts in supporting SOE restructuring, and believe significant reform progresses can be achieved by end-2015. Restructuring plans have been developed, and efforts are focused on amendments to the legal framework by issuing new regulations to enhance SOEs’ financial reporting and transparency, improve internal controls and corporate governance, and support SOEs in equitization and divesting from non-core businesses, such as Resolution No. 15/NQ-CP, Land Law 2013 and Bankruptcy Law 2014. That would facilitate to remove constraints on bankruptcy proceedings, help VAMC timely handle debts and mortgaged assets, and contribute to speeding up NPL resolution.
While Vietnam will continue to implement its reform agenda to take full advantage of the country’s growth prospects within the growing Asian region, they are mindful of considerable challenges ahead and realize that sustainable results would take time to materialize. We share the full commitment and determination of the authorities towards undertaking necessary restructuring measures and policies to help improve the investment climate and sustain economic growth, while providing buffers against external and domestic shocks. These efforts need to be supplemented by support from multilateral institutions and other countries.