- 1. On behalf of the Vietnamese authorities, we would like to thank the IMF’s Article IV mission team for the candid and constructive policy discussions as well as for their objective and comprehensive assessment. The authorities were encouraged by staff’s positive assessment of the Vietnamese current economic situation, and took note of variance in views, particularly on Vietnam’s external position in 2018.
- 2. In the context of rising trade tensions, heightened uncertainties and downside risks in the global economy, the Vietnamese economy in 2018 and early 2019 remained resilient, supported by strong macroeconomic fundamentals. Appropriate policy framework together with sound and timely policy responses will help ensure sustained economic growth in 2019. Our authorities remain vigilant against near-term risks and continue to be committed towards sound policies and upgrading institutions of macroeconomic management in order for Vietnam to successfully navigate its transition to upper middle-income status by 2030.
Latest economic developments and outlook
- 3. Our authorities remain committed to macroeconomic stability and private sector-led growth. They agree with staff’s assessment that solid growth with low inflation will continue even as credit and monetary policies are becoming more prudent. In 2018, the economy remained strong and resilient with GDP growth of 7.1 percent, slightly above the 6.7 percent target, supported by robust external performance, firm domestic demand and a rebound in industrial production and construction. The momentum continued in the first quarter of 2019. The broad-based expansion is fueled by healthy growth in incomes and domestic consumption and by strong trade, tourism and remittances. Manufacturing is surging, the trade surplus has widened, and direct investment inflows remain strong. Headline inflation averaged 3.54 percent with core inflation of 1.48 percent in 2018. In Q1 2019, inflation increased slightly to 2.63 percent (ayoy), due to fuel and administrative services price increases but remains below the authorities’ 4.0 percent target.
- 4. For 2019, the authorities project the economy to sustain its strong growth momentum driven by sound economic fundamentals, including gains in productivity, and more effective investment, particularly public investment. The authorities believe that the growth target of around 6.8 percent is achievable Headline inflation for 2019 is projected to be well-anchored at around 3.7 percent, below the target of 4.0 percent, and core inflation at 1.7 – 2.0 percent (yoy). This would be supported by a wide-range of administrative measures and structural reforms to streamline administrative and licensing procedures and to further ease the domestic private sector’s access to land and credit that would help level the playing field and boost potential growth.
- 5. The authorities concur with staff that downside risks to growth outlook have risen. As a small and highly open economy, global trade tensions and elevated trade policy uncertainty will likely weigh on the Vietnamese economy through trade, financial and expectations channels. Fully aware of these risks, the authorities, therefore, has been pursuing reforms and policies to reduce vulnerabilities and build buffers. The fiscal adjustment will be accelerated and its quality improved to help narrow infrastructure and social spending gaps and meet the coming challenge of rapid aging. Further modernization of monetary framework will be pursued while the supervision of the banking sector will be upgraded. The recapitalization of banks will continue while the adoption of Basel II standards is scheduled for 2020. The management of SOEs will be further strengthened to allow for privatization of government- owned companies in non-strategic sectors. Data provision and dissemination will also be further enhanced. Additional efforts are needed to improve governance and fight corruption, including through greater fiscal transparency and better public investment management, as well as a stronger AML/CFT framework and execution.
- 6. The Vietnamese authorities remain committed to significant fiscal consolidation. The state budget deficit is expected to stabilize at 3.46 percent of GDP in 2018, lower than the target. A strong economy and better tax administration helped buoy 2018 revenues, while tight disbursement of public investment contained spending. Gross public and publicly guaranteed debt declined to 58.4 percent of GDP at end of 2018 and is expected to further fall below 50 percent of GDP by end-2024. Growing reliance on non-debt creating deficit financing, including privatization, lengthening of debt maturities, and low long-term interest rates are all expected to help contain debt service costs. The authorities agree with staff’s assessment that Vietnam currently has some fiscal space given the downward sloping debt path and continued strong fundamentals and the quality of fiscal consolidation should be further improved.
- 7. For 2019, the authorities are committed to contain public debt of around 61.3 percent of GDP and budget deficit of less than 3.6 percent as targeted. To do so, the authorities plan to implement fundamental tax reform to broaden tax bases and reduce informality of incentives. In 2019, the authorities will be taking necessary measures to preserve strong revenue mobilization in the context of declining ODA and oil revenues. These would include the envisaged broad review of tax policy, tax base widening, and revision of tax laws (VAT, excises, and CIT). In this regard, the authorities appreciate the Fund’s technical assistance tosupport the authorities’ efforts in reviewing the current tax laws and strengthening tax administration. On the expenditure side, the authorities confirm that urgently needed public investments would be increased while rationalizing the public sector wage bill and improving public investment efficiency. The reforms recommended by the recent PIMA mission will be carefully considered for implementation at an opportune time.
- 8. The authorities’ medium-term fiscal strategy aims to contain the budget deficit to3.8 percent of GDP by 2020. The strategy involves drawing up a fiscal strategy to deal with the longer-term fiscal challenges related to rapid population aging which is projected to set in around 2030–35, and the adoption of high-quality, sustained measures that are balanced between revenues and expenditures while safeguarding public investment and social protection spending.
- 9. Public debt management has improved significantly with a more diversified maturity profile for T-bond issuances to allow for more active cash management and facilitate money market development. The authorities agree with staff’s advice that more active cash management would help minimize net borrowing costs by avoiding unnecessary idle cash balances. Cash balance of around 9 percent of GDP as stated in the staff report includes not only cash balance of State Treasury but also the extra-budget funds (equitization, cumulative sinking fund etc.) and financial reserves of provincial government, which are required by law to be held at the Treasury. The authorities fully recognize the benefit of sweeping cash resources at the SOCBs into the State Treasury’s single account at the SBV to consolidate and manage government’s cash resources, thus minimizing its borrowing costs. Therefore, the authorities are considering Fund TA advice together with alternative models and approaches for designing a TSA that takes into account country specificities as well as preconditions and desirable sequencing for its successful implementation.
Monetary and exchange rate policy
- 10. In 2018, credit growth has declined to below 14 percent, lower than the SBV’s 17 percent ceiling. Credit growth is expected to decelerate further in 2019. The authorities believe this is appropriate from both perspectives of monetary and financial stability since it helps contain excessive foreign exchange movements and close the credit gap while remaining supportive of growth objectives. Administrative allocation of credit will be retained for an extended period of time. When all banks are able to adopt Basel II standards and supervisory and regulatory preconditions are met, further relaxation or gradual phasing out of credit ceilings can be considered in order to move to a monetary policy framework based on indirect instruments.
- 11. The authorities welcome staff’s view that the SBV has skillfully maintained orderly market conditions while ensuring ample liquidity amidst heightened volatility in 2018. During the year, the SBV allowed for greater two-way exchange rate flexibility within the current band to absorb shocks, including from volatile capital flows. The gradual reserve accumulation continued, as conditions allowed, with fully sterilized interventions. As a result, the depreciation has been less than those seen in some other emerging markets, only 2.2 percent against the U.S. dollar. The authorities remain strongly committed to having a flexible exchange rate as a primary shock absorber and reiterate that market intervention was never intended to resist trend appreciation. However, as a small and highly open economy, external developments will continue to affect investment behavior, and periods of heightened capital flows and exchange rate volatility are inevitable. The authorities believe that prolonged periods of excessive exchange rate volatility could disrupt orderly financial market activity and eventually spill over to the real economy. Therefore, the authorities’ key consideration is to ensure that levels of volatility are not excessive to preserve orderly market conditions, maintain public confidence and promote overall financial stability.
- 12. On the external balance assessment, the authorities observed that the different approaches yield opposite results. Moreover, authorities reiterate that the large current account surplus in recent years is attributed to Vietnam’s structural factors which could not be fully explained by the EBA-lite model. As the structural adjustment takes time to materialize, the authorities emphasize that external rebalancing should not be borne solely by an exchange rate adjustment. A well-designed and appropriate mix of policies and measures should be pursued flexibly in line with changing economic circumstances specific to the country to achieve not only external rebalancing but also economic and financial stability. The current account surplus has been adjusting in the right direction and will continue to decline over the medium term. It is noted that the ongoing public investment and number of structural reforms would help strengthen domestic demand and moderate the current account surplus going forward.
- 13. The banking sector’s performance has improved significantly in recent years and bank recapitalization is on track. The authorities agree with staff that bank earnings have risen in response to a shift to retail lending and consumer finance. The share of non-interest incomes related to corporate bond issuance, credit card, and cash transfer has increased and contributed to profitability. As large firms issue more corporate bonds, banks have increased credit to SMEs recently, thus improving SMEs’ access to credit. Fintech helps banks to expand their customer base while fostering financial inclusion.
- 14. The resolution of legacy loans was also significantly stepped up, aided by the strong economy. NPL ratios have been declining and banks have aggressively resolved NPLs with the Vietnam Asset Management Corporation (VAMC). The SBV coordinated with institutions and the VAMC in aggresively implementing solutions stipulated in the 2016 – 2020 Masterplan of Restructuring of Credit Institution System and the National Assembly’s Resolution No 42 on Piloting NPL Resolution, ensuring that the implementation is on track and in line with NPL resolution’s and control’s objectives, roadmap and plan, while preventing risks to the banking system’s stability.
- 15. Strengthening bank capital is a top priority. As the January 1, 2020, deadline for implementing Basel II rules, approaches, the authorities formulated a bank-by-bank strategy for recapitalizing large state-owned commercial banks (SOCBs), using private money where possible and allowing SOCBs to retain earnings and equitization proceeds as needed. The authorities are fully aware that while there is progress in NPL resolution, NPL ratios remain high and there is a risk that it could be interrupted by a downturn in the economy. Bank balance sheets are still vulnerable to shocks and could be a risk to macroeconomic stability. Therefore, the authorities consider bank recapitalization, especially for SOCBs, a top priority and should be accelerated.
- 16. The authorities are of the view that vulnerabilities in the non-banking sector, if not properly contained, could have adverse impact on economic and financial stability. As rightly pointed out by staff, the authorities agree that there should be greater coordination and cooperation among key financial regulators in jointly addressing the bouts of volatility. Therefore, the authorities intend to form a multi-agency financial stability committee chaired by a Deputy Prime Minister to discuss system-wide risks and policy measures on a regular basis. The SBV is making substantial progress in improving its Financial Stability Report, and will consider to disseminate its main conclusions across key agencies so that it could better inform policy decisions. Going forward, the authorities will remain vigilant to changes in the financial landscape from Fintech developments and potential challenges arising from cybersecurity issues.
- 17. The authorities consider reform and modernization of macroeconomic frameworks and institutions a key priority. The Vietnamese government is committed to private sector- led growth and has shifted to a model that emphasizes the state’s enabling function over public production. Regulatory quality and ease of doing business have improved. The legal framework for SOEs was revamped with the creation of an independent State Capital Management Committee (SCMC) to oversee all large SOEs to improve accountability and efficiency, while leaving management and regulation with line ministries and regulatory bodies.
- 18. Moving forward, the authorities will focus on modernizing institutions of macroeconomic management, strengthening the supervision and management of the banking sector and SOEs and allowing 100 percent foreign ownership in areas not critical to national security; modernizing regulation, reducing the concentration of land in state hands, and strengthening data provision and dissemination.
Governance and AML/CFT
- 19. The authorities are strengthening its governance and anti-corruption efforts. The 2018 anti corruption law strengthens the system for assets declaration and is in line with best practices to enhance its effectiveness. Additional reform priorities for the future include greater fiscal transparency and stronger public investment management.
- 20. The authorities have conducted the National Risk Assessment (Assessment) on money laundering and terrorism financing for 2012 – 2017 period. The Assessment has identified the overall ML risk of the country as “higher medium” and the overall FT risk as “low”. Based on the Assessment, the authorities have issued Decision No. 474/QD-TTg dated April 30, 2019 adopting the National Action Plan (Plan) to address deficiencies and risks associated with AML/CFT framework for the period of 2019–2020 as identified in the Assessment. The Plan aims at strengthening the effectiveness of AML/CFT regime in Vietnam, addressing any related risks and deficiencies identified in the National Risk Assessment, adopting FATF standards, and preparing for the upcoming APG assessment. The Plan also includes outreach activities on AML issues, training and regulatory capacity building, as well as closing regulatory gaps by November 2019.
- 21. The authorities will continue to implement their reform agenda to help realize the country’s full growth potential. However, the authorities are also mindful of the considerable challenges that lie ahead and realize that sustainable results would take time to materialize. The authorities are fully committed and determined towards steadfast implemention of necessary structural reforms and policies that will continue to improve the investment climate and sustain economic growth, while providing buffers against external and domestic shocks. Growth will be made more inclusive and made more resilient with continued focus on fiscal prudence, well-grounded monetary management and financial stability, improved competitiveness of SOEs, and sound banking system. The depth of these reforms and the pace of their implementation would be appropriately calibrated to achieve the desired outcomes while minimizing unintended consequences.
- 22. Finally, the authorities are cognizant that these efforts need to be supplemented by support from multilateral institutions and other countries. In this light, our Vietnamese authorities would like to express their appreciation to the Fund in providing policy advice and invaluable technical support, and look forward to continued cooperation in the years to come.