The information provided below has become available since the issuance of the staff report (SM/05/351, 9/14/05). The thrust of the staff appraisal remains unchanged.

41. Recently-released data point to continued buoyant activity during the third quarter of 2005. Preliminary data indicate that real GDP growth picked up to 8.1 percent year-on-year (yoy) during the first nine months of 2005, compared with 7½ percent projected growth for the full year in the staff report. Inflation picked up to 7¾ percent in September (yoy), reflecting the effects of the latest round of increases in petroleum prices and continuing food price inflation. Inflationary pressures can be expected to remain strong in the fourth quarter of 2005 due to seasonal factors as well as the recently-announced 20.7 percent increase in the common minimum wage, which took effect on October 1, 2005 (see below). Preliminary projections by the State Bank of Vietnam (SBV) point to full-year inflation of about 8 percent, compared with a projection of 7 percent in the staff report.

42. The increase in the minimum wage has clouded the outlook for inflation and the fiscal accounts. The common minimum wage, which is the basis for the determination of the salaries and pensions of civil servants and provides a floor for salaries of employees of state-owned and non-FDI private enterprises, had last been raised in January 2003 (by 38 percent). However, average civil service wages were increased by another 30 percent in October 2004, when the civil service wage structure was decompressed, in line with the government Master Program on Public Administration Reform for the Period 2001-2010. The latest increase in the minimum wage, which will affect the incomes of about 11 million salaried workers, can be expected to add to consumption demand in 2006, while at the same time depressing the profitability of state-owned and domestic private enterprises. Although the impact on the overall budget deficit may be buffered in the short run by the large oil revenue windfall, the government wage and pension bill is projected to increase by at least 1 percentage point of GDP in 2006, thus increasing the burden of adjustment on investment and nonwage recurrent spending.

43. The rate of growth of credit to the economy fell marginally to 38 percent (yoy) in June. Broad money growth remained unchanged at around 26½ percent, while total bank deposits continued to expand at a rate of about 30 percent. Although reserve money growth slowed from 15½ percent in May to 11½ percent in June, commercial banks have used their considerable excess liquidity to finance continued rapid credit expansion. These trends are likely to have continued in recent months, as the SBV has maintained a broadly accommodative monetary policy. Moreover, on August 25, 2005, the Governor of the SBV issued an official letter to commercial banks encouraging them to actively consider granting loans to big government projects to support the achievement of the government economic growth target for the remainder of 2005. Continuation of the recent policy stance would likely lead to a significant overshooting of the SBV official credit growth objective for 2005.

44. On September 21, 2005, the Prime Minister issued a decision to equitize the Vietnam Bank for Foreign Trade (VCB) on a pilot basis. This decision stipulates that the state is to maintain its majority share of VCB, with the sale of shares to be carried out in various phases to bring about a gradual reduction of the state equity ratio. In the first phase in 2006, equitization is to be carried out in stages, with the shares to be sold at each stage limited to 10 percent of equity for the purpose of recapitalization, and with state ownership maintained at no less than 70 percent of VCB’s total equity. The sales of shares are to continue during 2007-2010, with the state guaranteed to retain at least 51 percent of shares by the end of the period. Among eligible buyers, each legal entity can own up to 10 percent of the equity; each individual can own up to 5 percent; and each foreign investor up to 10 percent, with the total share holdings of foreign investors to be limited to 30 percent. Thus, while one of the stated objectives of equitization is to improve VCB’s corporate governance, the envisaged ownership limits would make it difficult for any foreign strategic investors to make an important contribution in this area.