Vietnam
2007 Article IV Consultation-Staff Report; Staff Supplement and Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Vietnam
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International Monetary Fund
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Publication Date:
17 Dec 2007
eISBN:
9781451840438
Language:
English
Keywords:
ISCR; CR; article consultation; article; consultation; authority; core inflation; U.S. dollar rate; foreign currency; WTO accession; poverty line; Exports; Global
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This 2007 Article IV Consultation highlights that Vietnam has recorded continued strong economic performance since the conclusion of the last Article IV Consultation. GDP growth rose to 8.2 percent in 2006, with non-oil exports remaining an important engine of growth. Private investment has also expanded briskly. The near-term outlook remains broadly favorable, and Vietnam has good prospects for sustained growth and poverty reduction over the medium term, provided that the government can take timely action to rein in demand pressures.

Abstract

This 2007 Article IV Consultation highlights that Vietnam has recorded continued strong economic performance since the conclusion of the last Article IV Consultation. GDP growth rose to 8.2 percent in 2006, with non-oil exports remaining an important engine of growth. Private investment has also expanded briskly. The near-term outlook remains broadly favorable, and Vietnam has good prospects for sustained growth and poverty reduction over the medium term, provided that the government can take timely action to rein in demand pressures.

I. Economic Developments and Outlook

A. Background

1. Vietnam has recorded impressive economic performance in recent years. GDP has recorded the second-highest growth rate in Asia over the last decade, poverty has fallen from 58 percent in 1993 to less than 25 percent in 2006, and most social indicators have shown marked improvement (Table 1). These gains have been achieved with the help of an outward-oriented development strategy, including far-reaching reforms to open up the trade and investment regimes.

Table 1.

Vietnam: Social and Demographic Indicators

article image
Sources: Vietnam: Statistical Yearbook (various years), and General Statistical Office, Vietnam Living Standards Survey 1997-1998; World Bank: Vietnam Development Report 2000: Attacking Poverty; Vietnam Development Report 2001: Entering the 21st Century.

The upper poverty line is constituted by the cost of a representative food bundle yielding 2,100 calories per day, plus a representative nonfood component. The food poverty line represents the approximate cost of this food bundle only.

For 1993 and 1998, rural population.

For 1993 and 1998, net enrollment ratios.

For 1998 and 2002, comprises revised data.

uA01fig01

Average GDP Growth in Emerging Asia, 1996-2006

(In percent)

Citation: IMF Staff Country Reports 2007, 387; 10.5089/9781451840438.002.A001

2. WTO accession has further improved Vietnam’s economic prospects, but has also given rise to new challenges. Growing access to foreign markets and a continuing opening up of the economy can be expected to yield significant benefits (Box 1).1 Capital inflows have contributed to a decline in domestic-currency bond yields and a boom in the stock market, boding well for the financing of Vietnam’s investment needs. However, portfolio capital flows are posing complex challenges for macroeconomic management. Increasing global competition will also call for faster market-oriented reforms in the state-dominated sectors of the economy.

uA01fig02

Vietnam and Emerging Asia: FDI

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 387; 10.5089/9781451840438.002.A001

Sources: WEO; and Fund staff estimates.
uA01fig03

Vietnam: Indicators of Trade Openness

Citation: IMF Staff Country Reports 2007, 387; 10.5089/9781451840438.002.A001

Sources: IMF, Direction of Trade; and IMF staff calculations.1/ Vietnam’s exports as a percentage of world imports.

B. Recent Macroeconomic and Financial Market Developments

3. Overall macroeconomic performance has been strong since the conclusion of the last Article IV consultation, but demand pressures pose risks to the outlook.

  • GDP rose by 8.2 percent in 2006, led by continued rapid growth in exports (Figure 1). Despite lackluster performance by the state sector, industrial activity, retail sales, and trade data point to a sustained strong expansion so far in 2007.

Figure 1.
Figure 1.

Vietnam: GDP Growth: Some Stylized Facts

Citation: IMF Staff Country Reports 2007, 387; 10.5089/9781451840438.002.A001

Sources: WEO Database; General Statistics Office; and Fund staff estimates.

Vietnam: Activity Indicators, 2004–07

(Percentage change)

article image
Sources: General Statistics Office; and Fund staff estimates.

  • However, inflation has crept up to 8.4 percent (y/y) in July. This pick-up is due partly to rising food and world commodity prices, and overdue adjustments in administered prices.2 However, Vietnam’s core inflation has remained stubbornly high, compared with other countries in the region (Figure 2). Shortages of skilled labor, increases in the minimum wage, and strong demand for housing and construction materials also appear to be pushing up prices.

  • The balance of payments remains sound. Import growth picked up to 30 percent (y/y) during the first seven months of 2007, but high oil prices and booming non-oil exports helped to restrain the current account deficit. With buoyant FDI and portfolio inflows, official reserves rose from $11.5 billion at end-2006 to $19 billion (3½ months of next year’s imports of goods and services) in May 2007 (Figure 3 and 4).

  • Vietnam’s stock market experienced an unprecedented boom in late 2006 and early 2007. The Ho Chi Minh City (HCMC) Stock Market Price Index rose by 144.5 percent in 2006, and by another 51 percent in early 2007, before receding by about 20 percent during March-July. Improved market confidence following WTO accession, a rapid expansion of the number of listed companies, and foreign investors’ increasing appetite for risky assets spurred foreign and domestic investment in shares, with the latter partly financed by local banks.3

Figure 2.
Figure 2.

Vietnam: Measures of Inflation. Regional Comparisons, 2002–07

(Year-on-year increases in prices, in percent)

Citation: IMF Staff Country Reports 2007, 387; 10.5089/9781451840438.002.A001

Sources: General Statistics Office; and Fund staff estimates.
Figure 3.
Figure 3.

Vietnam: Financial Market and External Developments

Citation: IMF Staff Country Reports 2007, 387; 10.5089/9781451840438.002.A001

Sources: Moody’s; Standard & Poor; Bloomberg; Information Notice System; APDCORE; and WEO databases.1/ LTFC refers to long-term foreign currency.2/ Stock price index with January 1, 2002 =100.
Figure 4.
Figure 4.

Vietnam: Gross International Reserve Indicators

Citation: IMF Staff Country Reports 2007, 387; 10.5089/9781451840438.002.A001

Sources: WEO and APDCORE databases.

Vietnam. Price Indicators, 2003-07

(end-of-period, annual percentage change)

article image
Sources: General Statistics Office, and Fund estimates.

Nonfood component of CPI net of fuel and fuel-related items.

  • Despite increased sterilization, the growth of credit to the economy picked up from 25 percent in 2006 to 35 percent (y/y) as of end-May 2007, with joint-stock banks recording the fastest credit growth. Reserve requirements on bank deposits were virtually doubled from June 2007 (to a range of 4 to 10 percent). However, with bank liquidity remaining ample, interbank rates rose only for a brief period in June, and subsequently reverted to the low levels recorded in previous months (Figure 5).

  • The overall fiscal deficit was lower than budgeted in 2006, but the fiscal stance appears set to be eased in 2007. A better-than-expected revenue outturn, together with slow implementation of off-budget investment plans, helped to compress the overall deficit to 3.8 percent of GDP. However, if the government fully implements its plans for 2007, the fiscal deficit could widen to well over 7 percent of GDP in 2007, with the non-oil deficit rising by at least 1-1½ percentage points of GDP.

  • Vietnam officially maintains a managed floating exchange rate regime, but the dong has been pegged de facto to the U.S. dollar over the last few years. The dong/U.S. dollar rate depreciated by 1.3 percent in 2006, and by another 0.3 percent during the first seven months of 2007. In January 2007, in the face of large capital inflows, the trading band of the dong was widened from ±0.25 percent to ±0.5 percent around the SBV’s daily reference rate, and the dong was allowed to appreciate modestly. However, this appreciation has been more than reversed since March.

  • The nominal effective exchange rate (NEER) of the dong has depreciated by about 8 percent since end-2005, but the real effective exchange rate (REER) has been broadly stable, and remains close to its long-run average.

Figure 5.
Figure 5.

Vietnam: Banking Sector Developments

Citation: IMF Staff Country Reports 2007, 387; 10.5089/9781451840438.002.A001

Source: State Bank of Vietnam.

C. Macroeconomic Outlook and Risks

4. The near-term outlook remains favorable. GDP is projected to expand by about 8¼ percent in 2007-08, underpinned by strong growth in exports, investment, and private consumption. The average rate of inflation would rise to 7½-8 percent, as higher food prices and nonfuel commodity prices compound the impact of tightening capacity constraints. The current account deficit would widen to 3¼ percent of GDP, but it would be more than financed by ODA and private capital inflows.

Vietnam: Medium-Term Scenario, 2006-12

article image
Sources: Data provided by the authorities; and staff estimates and projections.

Annual growth rate.

In percent of GDP.

uA01fig04

Vietnam: HP Estimate of Deviation from GDP Trend

(Deviation from trend, in percent)

Citation: IMF Staff Country Reports 2007, 387; 10.5089/9781451840438.002.A001

5. Vietnam has good prospects for sustained growth and poverty reduction over the medium term, provided that the government can rein in demand pressures. As illustrated in the staff’s medium-term scenario, a soft landing should be feasible if the SBV can slow credit growth in line with the stated official objectives; the real effective exchange rate of the dong is placed on a path of slow appreciation; the overall fiscal deficit declines slowly from 7 percent of GDP, in line with official projections; and the non-oil deficit peaks at 14¾percent of GDP in 2007-08, and falls to 10¾percent of GDP by 2012.

6. Under these assumptions, GDP growth would edge down to slightly below 8 percent in 2011-12, thus moving closer in line with the economy’s potential. Inflation could be placed on a declining trend from 2008 onwards as WTO-mandated tariff reductions help contain pressures on the prices of tradables and divert demand to imports. The current account deficit would edge up to around 3½ percent of GDP over the medium term, but it would continue to be more than financed by FDI and other private inflows.

7. The staff’s updated Debt Sustainability Analysis (DSA), as elaborated in Supplement 2, suggests that Vietnam’s external debt situation would remain benign under the baseline, provided that external borrowing policies remain prudent. The ratio of external debt to GDP would fall below 30 percent over the medium term, while the debt service-to-exports ratio would remain below 5 percent. The stock of total public debt would remain on an upward trend, rising from 43½ percent of GDP in 2006 to 48½ percent of GDP in 2012. However, the debt service-to-revenue ratio would be contained to 14–15 percent.

8. This favorable outlook is subject to risks.

  • Large capital inflows in the context of the de facto peg of the dong could prevent an effective tightening of monetary policy. Inflation could remain on an upward trend, possibly rising to double-digits by 2009-10. More rapid appreciation of the real exchange rate could then lead to losses in competitiveness, and a more significant widening of the current account deficit, which could, in time, threaten external sustainability and undermine investor confidence. Eventually, belated introduction of needed adjustment measures could lead to sharp falls in investment and growth.

  • Unchecked credit growth, together with a weak regulatory environment, could also threaten financial system stability. Despite the recent correction, there are still risks associated with possible volatility in stock prices, and a reversal of portfolio inflows. To the extent that bank borrowers have taken on large stock market-related risks, and unhedged foreign-currency loans on the expectation of continued exchange rate stability, there could be fall-out on the soundness of some banks.

  • On the fiscal front, key risks would stem from large increases in public wages and pensions, heavy on-lending to SOEs, and/or falling oil-related revenues. Lack of fiscal adjustment could, in turn, compound pressures on inflation and the external current account, and lead to rapid accumulation of public debt. Some of these risks are highlighted in the DSA, under alternative scenario A2, which illustrates that, if the primary balance were to remain unchanged, the debt-to-GDP ratio, the debt-to-revenue ratio, and the debt service-to-revenue ratio would all rise sharply. To protect debt sustainability, the government could eventually have to curtail investment or social outlays, thus undermining growth and poverty reduction.

  • Insufficient improvement in banking sector and SOE governance, and continued state-sector dominance of key industries, could pose additional risks. Sub-optimal lending and investment by these sectors would weaken the efficiency of investment and possibly place additional future burdens on the budget.

II. Key Challenges and Policy Discussions

9. Against this background, the main policy challenges that Vietnam needs to address are:

  • Adapting monetary and exchange rate policies to contain inflation and protect external stability;

  • Strengthening the regulatory framework in the financial system to take full advantage of the developing capital market, while reducing associated risks and vulnerabilities;

  • Moving ahead with banking system reforms to foster competition and efficiency, while reinforcing prudential supervision to ensure bank soundness;

  • Pursuing fiscal consolidation to counter potential adverse effects of capital inflows, contain the current account deficit, and promote medium-term debt sustainability;

  • Placing SOE reforms on a faster track to enable SOEs to meet the challenges of global competition, and decrease their reliance on the budget.

A. Monetary and Exchange Rate Policies

10. The authorities are wary of rising inflation, and they have taken welcome steps to tighten monetary conditions. With liquidity continuing to be fueled by rising reserves, the SBV took the bold step of doubling reserve requirements on bank deposits from June 2007, while also increasing its sales of SBV bills. However, the extent of sterilization has been insufficient to slow credit growth. Although interbank rates rose initially in response to the increase in reserve requirements, they have since fallen back to the low levels reached in April-May. The authorities recognize that further action will likely be required in the period ahead to slow the growth of money and credit, and they are ready to step up the issuance of SBV bills. Sterilization is not considered to be costly at this point, as open market operations (OMO) rates have so far remained lower than rates of return on official reserves.

11. In the staff’s view, Vietnam’s balance of payments is basically sound, and the level of the exchange rate is broadly consistent with the maintenance of external stability (Box 2). However, the maintenance of a broadly stable exchange rate vis-é-vis the U.S. dollar has resulted in a significant depreciation of the NEER as the dollar weakened vis-à-vis other major currencies over the last year, and the SBV’s intervention policies have complicated monetary management.

12. In this context, the staff argued that this is a propitious time for a move toward a more flexible exchange rate regime. In the face of continuing large inflows, greater flexibility of the exchange rate would serve to stem inflationary pressures while decreasing the need for intervention and sterilization. Increasing two-way flexibility would also help foster the development of markets for derivatives, encourage better hedging of exchange rate risks, and allow the exchange rate to act as a shock absorber in the event of future reversal of capital inflows. A more flexible exchange rate would also be an essential element of the authorities’ planned move toward the adoption of an inflation-targeting (IT) regime.

13. The authorities noted that the government’s roadmap for exchange system liberalization envisaged progressive increases in exchange rate flexibility. They agreed that, as the economy becomes more open to capital flows, allowing two-way flexibility in the exchange rate would introduce a higher degree of risk in foreign exchange operations, which could help to discourage one-way bets on the exchange rate. However, they were also mindful of the need to protect competitiveness, encourage exports, and contain the trade deficit. Given the economy’s increasing exposure to the risk of reversal of capital inflows, and the SBV’s moderate level of reserves, they considered it prudent to continue to build their reserve cushion, and were inclined to maintain a cautious pace of change in their current exchange rate and intervention policies.

B. Financial Sector Issues

Reducing vulnerabilities associated with the stock market

14. The authorities have relied on prudential measures to cool down the market, and have so far ruled out recourse to capital controls. In January, banks were required to phase out their lending to their securities company affiliates within one year, and the risk weight of securities-related loans was raised from 100 percent to 150 percent. In June, banks were required to contain their securities-related credit to less than 3 percent of total loans outstanding, with banks above this limit required to comply by end-2007. Banks were also required to report monthly to the SBV their exposures to such credit, with those exceeding the cap subject to closer monitoring. The team supported these initiatives. It also advised the authorities to thoroughly assess potential weaknesses in highly-exposed banks to determine any possible needs for supervisory action, and to apply adequate standards and procedures to better manage foreign exchange, interest rate, and liquidity risks. Securities market exposures are so far concentrated in smaller joint-stock banks. Given that all SOCBs (which account for nearly 70 percent of bank assets) are reported as below the 3 percent cap, further measures may be needed to ensure that they do not unduly increase securities-related lending.

15. The authorities are keen to improve securities market regulation. A new Securities Law came into force in 2007, and the State Securities Commission (SSC) has strengthened enforcement of disclosure and transparency requirements on listed companies. However, the SSC is facing serious capacity constraints, and its salary structure makes it difficult for it to attract and retain a sufficient number of adequately-qualified staff. In addition, the existing legislation includes weak penalties against insider trading, and there are concerns that the stock market can be easily used for money laundering.

Banking sector reform and supervision

16. Important steps are under way to open up the banking system in line with WTO commitments. A decree issued in April clarified conditions for foreign participation in domestic banks, and raised the maximum share of individual strategic investors in each bank from 10 percent to 15 percent (or 20 percent with the Prime Minister’s permission). In addition, since mid-June 2007, foreign banks can apply for the establishment of wholly owned subsidiaries, and a number of such applications have been submitted to the SBV.

17. The stock market listing and partial privatization (equitization) of SOCBs has recently been placed on a faster track. The government is injecting VND 11 trillion (US$0.7 billion or about 1 percent of GDP) to the SOCBs set for stock market listing to enable them to meet the SBV’s capital adequacy requirements. Three of the banks have hired major international banks to assist them in appraising assets, planning IPOs, and selecting strategic investors, and the IPOs are now slated for late 2007 or early 2008. The mission welcomed these steps, and stressed the need to offer adequate scope and incentives for participation by foreign strategic investors to ensure that equitization will bring about needed improvement in SOCBs’ corporate governance. The team questioned whether the recent capital infusions would suffice to restore the SOCBs’ capital adequacy under realistic provisioning. The authorities noted that, while the current provisioning was based on Vietnamese Accounting Standards, the use of IFRS would have an ambiguous effect on the capital adequacy of SOCBs, as it would require a marking to market of real estate and equity holdings now accounted for at acquisition cost. Pending the equitizations, the mission urged the authorities to allow SOCB managers to make lending decisions based on purely commercial criteria.

18. Over the medium term, the authorities plan to convert the SBV into a modern, more independent central bank. Following equitization, the responsibility for exercising the government’s ownership rights on SOCBs will be transferred from the SBV to the State Investment Capital Corporation (SCIC), thereby removing the conflict of interest that has hitherto constrained SBV’s bank supervision. New draft laws on the SBV, Credit Institutions, Deposit Insurance, and Bank Supervision are to be submitted for consideration by the National Assembly beginning in 2008. In the meantime, the SBV will strive to improve coordination among its various departments in the conduct of bank supervision. In addition, the SBV, the SSC, and the Ministry of Finance need to improve the tracking of transactions among banks, their securities company affiliates, and the buyers or issuers of securities. The team expressed concern about the risks posed by related-party transactions within SOE groups involved in a mix of industrial operations and financial services. The authorities explained that, under existing regulations, each nonfinancial company can hold no more than a 20 percent stake in at most one bank, and banks are not allowed to make any loans to their principal shareholders. The authorities considered these provisions adequate to prevent inappropriate related-party transactions.

C. Ensuring Fiscal Consolidation and Debt Sustainability

19. The authorities and the staff agreed that the risk of inflation calls for a more cautious fiscal stance. The team recommended that any unanticipated additional revenue resulting from rising income, improved tax administration and higher oil prices should be saved in 2007, and the funding of SOE projects through the issuance of sovereign bonds postponed. The authorities have decided to postpone wage increases previously planned for October. However, the government attaches great importance to removing Vietnam’s infrastructure bottlenecks, as this is essential to encourage FDI and promote growth.4 In this context, the authorities intend to use any revenue windfalls for the implementation of additional investment projects. Even so, they expect that under-execution of approved projects would likely keep the fiscal deficit to a level below the staff’s projection.

20. The need to protect medium-term debt sustainability will require a concerted effort to bolster revenues and curb expenditure growth. The authorities recognize that the import tariff reductions following WTO accession, together with pressures to align corporate income tax rates with those of regional competitors, call for stepped up efforts to protect non-oil revenues. The team recommended that existing tax reform plans be revisited, and tax administration strengthened, including by expediting the establishment of a Large Taxpayer Unit. Moreover, to contain the government’s wage bill and pension liabilities, the indexation of public wages and pensions to the common minimum wage should be discontinued, and a more differentiated and merit-based salary structure adopted instead. While slowing public investment growth is likely to be a challenge, projects funded through investment bond issues or on-lending should be screened more rigorously, and the loan appraisal and risk management capacities of the Vietnam Development Bank (VDB) strengthened.

III. SOE Reform, Data Issues, and Other Matters

21. The government’s reform strategy in the SOE sector continues to be centered on broadening the process of partial privatization through equitization. The recent boom in the stock market had created a propitious environment for a stepped up pace of equitization, and the government has decided to expand the range of SOEs to be equitized, including in strategic industrial sectors and public services. A major insurance company (Bao Viet) recently carried out an IPO, and a number of other large SOEs are slated to be equitized in the second half of 2007 or early 2008, depending on conditions in the equity market. However, the role of foreign strategic investors is to be determined on a case-by-case basis, and it remains to be seen whether they will be given enough scope to bring about needed improvements in the corporate governance of SOEs.

22. The authorities recognize the need to improve macroeconomic and financial statistics. They are keen to improve the compilation, monitoring and analysis of Financial Soundness Indicators (FSIs), showed interest in Fund technical assistance in this area, and are prepared to cooperate on improving the staff’s access to data needed for improved financial sector surveillance. In the fiscal area, the authorities intend to adopt more transparent accounting of extra-budgetary operations. In addition, they agreed that there is a need for improved coverage of data on external debt, portfolio capital flows, and government and SOE bond issues. To facilitate effective monitoring of developments in the above areas, the team stressed the importance of better coordination and information-sharing among the SBV, the SSC and the MOF.

23. The team encouraged the authorities to move ahead with the issuance of implementing regulations for Vietnam’s Anti-Money Laundering Decree.

IV. Staff Appraisal

24. Vietnam’s economic performance has been impressive over the last decade. Real GDP has increased on average by 7½ percent a year and poverty has fallen sharply. Following its historic WTO accession, Vietnam has emerged on to the world stage as one of the most attractive investment destinations.

25. The near-term outlook remains favorable, but medium-term prospects are clouded by gathering demand pressures. Growth is projected to remain above 8 percent in 2007-08, underpinned by rapid export growth, strong foreign and domestic investment, and rising consumption. However, inflation has crept up again in recent months, and remains stubbornly high relative to major trading partners. On the external front, demand pressures have been reflected in a widening current account deficit. While the deficit is being more than financed by ODA and private capital inflows, and the SBV’s cushion of reserves is being built up, Vietnam’s ongoing financial integration in the context of its relatively rigid exchange rate makes the external position vulnerable. Overheating in the stock market could pose additional risks to financial stability.

26. To promote sustainable growth and safeguard external stability, a more effective mix of monetary and exchange rate policies, vigilant financial system supervision, and a prudent fiscal stance will need to be adopted. In this regard, the staff supports the authorities’ recent steps to tighten monetary conditions, and urge the authorities to issue sufficient amounts of SBV bills, as needed, to absorb excess bank liquidity and slow credit growth on a sustained basis.

27. The staff welcomes the authorities’ plan to introduce greater flexibility in the exchange rate regime, but urges them to accelerate its implementation. While the de facto peg of the dong to the U.S. dollar has played a useful role as a nominal anchor over the last few years, and its level currently seems consistent with the maintenance of external stability, continuation of this policy would not meet the current and future needs of the Vietnamese economy. A more flexible exchange rate could facilitate the tightening of monetary policy in the period ahead, while decreasing the need for intervention and sterilization. Greater two-way flexibility would also help foster the development of hedging instruments, encourage better hedging of exchange rate risks, and protect external financial stability in the event of abrupt and disruptive reversals of capital inflows.

28. The growing securities market offers promising opportunities for cost-effective financing of Vietnam’s investment needs, but has also created new risks. The staff supports the authorities’ measures to tighten prudential controls on banks’ exposures to securities-related lending. Improved securities market regulation, including additional steps to discourage inappropriate trading practices, insider trading, and money laundering, will also be essential to protect the stability and integrity of the capital market.

29. The new possibilities for financing through the capital market, JSBs, and foreign-owned banks have increased the urgency of banking system reform. The staff welcomes the government’s plans to accelerate the equitization of the main SOCBs, and urges it to offer adequate scope and incentives for participation by foreign strategic investors. Also welcome are the authorities’ medium-term plans to grant the SBV adequate authority and independence to carry out an anti-inflationary monetary policy and more effective bank supervision. In the meantime, the SBV, the SSC, and the Ministry of Finance are urged to better coordinate their efforts to track vulnerabilities associated with transactions among banks, their securities company affiliates, and the domestic and foreign buyers of securities.

30. A more prudent fiscal policy is also appropriate. Given the limited room for maneuver in monetary policy in the short run, and the need to create space for possible recourse to a countercyclical fiscal policy in the future, the non-oil fiscal deficit needs to be placed on a declining path as soon as possible. The staff welcomes the government’s decision to reconsider earlier plans for further large increases in public wages. In addition, any revenue windfalls should be saved, and the funding of SOE projects through the issuance of sovereign bonds postponed.

31. Over the medium term, a concerted effort to boost revenues and curb expenditure growth will be required to protect debt sustainability. Efforts to bolster non-oil revenues will need to be intensified, including by carefully considering the revenue impact of planned tax reforms and strengthening tax administration. The indexation of public wages and pensions to the minimum wage will also need to be reviewed, and a more differentiated, merit-based salary structure adopted, along with reforms to rationalize civil service employment and restrain the future growth of the wage bill. In addition, increased efforts could be made to improve the screening and quality of public projects, and allow FDI participation in commercially-viable infrastructure projects.

32. Faster progress toward improving the governance of SOEs will need to be a central element of the government’s strategy to improve the quality of growth and investment and facilitate fiscal consolidation. The government’s plans to expand and expedite its equitization of SOEs are welcome. To ensure that equitization will result in meaningful improvements in SOEs’ corporate governance, every effort should be made to encourage broad-based participation by foreign strategic investors. In addition, the use of public funds for the financing of SOE projects should be discontinued as soon as possible, and extra care taken to prevent related-party lending within the new SOE groups or strategic partnerships involved in a mix of industrial operations and financial services.

33. The quality, timeliness, and dissemination of macroeconomic and financial statistics need to be improved to support informed policy decisions and build investor confidence. The staff strongly supports the authorities’ plans to develop FSIs and improve the transparency of budgetary data, and stands ready to provide technical assistance in these areas. The authorities are also urged to improve monitoring of data on external debt, portfolio capital flows, and government and SOE bond issues.

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

Vietnam’s WTO Accession: Challenges and Opportunities

WTO accession is expected to facilitate further Vietnam’s global integration by improving Vietnamese exporters’ access to foreign markets. This should be particularly beneficial for the key textile and footwear export industries, where Vietnam can now compete on an equal footing with other WTO member countries.

Import barriers in most other sectors will also decline, albeit in a more gradual fashion. Vietnam has committed to bound tariff rates on most products ranging from zero to 35 percent, although tariffs on cars and motorbikes are to remain somewhat higher. Reductions in most bound rates—from 17.2 percent on average in 2007 to 13.4 percent by 2019—are to be phased-in over periods of up to 12 years (see Table).

Vietnam: WTO Commitments on Trade in Goods

article image
Sources: WTO; Vietnamese authorities; and IMF staff calculations.

Most-favored-nation (MFN) rates applicable as of July 2006.

Excluding used motor vehicles, whose importation was prohibited until May 2006.

Applicable to sugar and tobacco products, which were subject to import bans or quotas until 2006.

Applicable to new cars and motorcycles, and used clothing, previously subject to nontariff barriers.

WTO accession should have largely positive macroeconomic effects. While the reduction in import tariffs can be expected to lower annual import duty receipts by as much as 0.5 percent of GDP over the medium term, the negative impact on revenues should be tempered over time with import growth, and should be more than offset by the welfare gains accruing to consumers. Increasing access to cheaper imports should also help contain inflation. Staff estimates point to net welfare gains from trade liberalization on the order of 1-1.2 percent of GDP a year over the medium term.

Vietnam is also likely to derive important gains in productivity from trade liberalization and the other market-friendly reforms introduced in the context of WTO accession. Increased competition with foreign banks can be expected to prod the government to speed up the restructuring of SOCBs. These reforms should help increase the efficiency and profitability of investment. Indeed, the prospect of accession has already bolstered the investment climate with FDI approvals reaching a record $10 billion last year.

However, WTO accession is no panacea. Heavily-protected and/or uncompetitive industries and SOE sectors, including auto-assembly and motorbike plants, and the financial sector, need to undertake significant reforms to remain viable. In this process, there may well be a compression of profit margins and, possibly, labor-shedding or bankruptcies in loss-making SOEs and declining industries.

Assessing the Level of the Exchange Rate

Based on available data as of mid-2007, the level of Vietnam’s exchange rate seems broadly appropriate. The CPI-based real effective exchange rate (REER) of the dong has remained around its long-term average during the first half of 2007. While the REER depreciated significantly during 2002-03, a period of rapid opening up of Vietnam’s trade system, this depreciation has since been largely reversed.

uA01fig05

Exchange rates

Citation: IMF Staff Country Reports 2007, 387; 10.5089/9781451840438.002.A001

Source: Information Notice System and authorities data.

Broad macroeconomic indicators suggest that Vietnam’s overall policies are consistent with the maintenance of external stability. Although import growth has picked up in recent months, continued rapid export growth has helped contain the current account deficit to a level that is more than financed by inflows of ODA, FDI, and portfolio capital. Developments so far in 2007 point to a current account deficit over the full year of about 3 percent of GDP, a level that is broadly consistent with the maintenance of external balance and debt sustainability.1 As elaborated in the staff’s medium-term baseline scenario, on current trends, the current account deficit would remain in a range of 3-3½ percent of GDP; the stock of external debt would be contained to 30 percent of GDP; and official reserves would level off at about 3½ months of imports.

Available indicators suggest that Vietnam’s external competitiveness is currently adequate, although continued structural reforms and improved infrastructure will be required to preserve its competitive edge. Non-oil exports, including exports of labor-intensive manufacturing products such as textiles and footwear, have grown at a robust pace of over 20 percent a year during 2002-2006, and non-oil export growth has picked up to 28 percent (y/y) during the first seven months of 2007. As a result, the market share of Vietnamese exports has recorded a sustained increase in relation to both world exports and exports from Asian countries. The adequacy of Vietnam’s external competitiveness is further evidenced by the ongoing strong expansion of FDI and other private capital inflows. Firm-level data, however, paint a more nuanced picture. Cross-country survey data compiled by the Japan External Trade Organization indicate that, although Vietnam’s large pool of relatively low-cost labor makes it an attractive destination for foreign investment, inadequate infrastructure (especially power, ports, and roads), shortages of skilled managerial and professional staff, and a nontransparent legal and regulatory system weaken its comparative advantage.

1 Preliminary staff estimates based on the macro-balance approach used by the Consultative Group on Exchange Rate Issues (CGER) suggest that the level of the current account deficit consistent with external balance over the medium term (the so-called current account norm) may be on the order of 2 percent to 3 percent of GDP. While these estimates are subject to a large margin of error, the alternative CGER methodology of estimating a reduced-form equilibrium real exchange rate equation is not feasible, given the ongoing rapid structural changes in the Vietnamese economy and the lack of a long-run cointegrating relationship for the REER of the dong.
Table 2.

Vietnam: Selected Economic Indicators, 2002–08

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

Credit and monetary aggregates and reserves data end-May 2007. Inflation numbers end-July.

It includes private debt.

Table 3.

Vietnam: Medium-Term Scenario, 2004–12

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

Includes VDB operations.

It includes private debt.

Table 4.

Vietnam: Balance of Payments, 2003–12

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

Including two debt buyback operations carried out in 2002 and 2003, respectively.

Includes US$750 million sovereign bond issue in 2005.

Including net errors and omissions and trade credit.

Table 5.

Vietnam: Summary of General Government Budgetary Operations, 2004–08

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Sources: Ministry of Finance; and Fund staff estimates and projections.

Budget data include the amount allocated as contingency.

Comprises Net Credit to Government minus government bills and securities.

Table 6.

Vietnam: Monetary Survey, 2003–07 1/

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

Data comprise the SBV, six state-owned commercial banks, and 79 non-state credit institutions.

Velocity is measured as the ratio of GDP to end-of-period total liquidity (M2) or dong liquidity, respectively.

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

Table 7.

Vietnam: Indicators of External Vulnerability, 2003–07

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

Interbank market rate.

Debt estimates based on data available as of end-August 2006.

Table 8.

Vietnam: Millennium Development Goals, 1990–2005

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Sources: World Development Indicators database, April 2006 (www.developmentgoals.org). In some cases the data are for earlier or later years than those related.

Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. Halve, by 2015, the proportion of people without sustainable access to safe drinking water. By 2020, to have achieved a significant improvement in the lives of slum dwellers.

Develop further an open, rule-based, predictable, non-discriminatory trading and financial system. Address the Special Needs of the Least Developed Countries. In cooperation with developing countries, develop and implement strategies for decent and productive work for youth. In cooperation with pharmaceutical companies, provide access to affordable, essential drugs. In cooperation with the private sector, make available the benefits of new technologies, especially information and communications.

1

Chapter 1 of the selected issues paper provides a detailed analysis of the implications of WTO accession.

2

Electricity tariffs were raised by 8 percent in January 2007, and gasoline prices were liberalized in May. However, the government has recently decided to postpone adjustments in coal and fertilizer prices previously planned for the second half of the year, reduced tariffs on some imported food products and intermediate inputs effective August 8, 2007, and advanced the introduction of WTO-mandated tariff reductions on imported cars.

3

Chapter 2 of the selected issues paper includes a further discussion of recent stock market developments.

4

Chapter 3 of the selected issues paper includes a more systematic effort to assess the extent to which public investment may crowd in or crowd out private investment in Vietnam.

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Cover IMF Staff Country Reports
Vietnam: 2007 Article IV Consultation-Staff Report; Staff Supplement and Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Vietnam
Author:
International Monetary Fund
Volume/Issue:
Volume 2007: Issue 387
Publisher:
International Monetary Fund
ISBN:
9781451840438
ISSN:
1934-7685
Pages:
79
DOI:
https://doi.org/10.5089/9781451840438.002

Average GDP Growth in Emerging Asia, 1996-2006

(In percent)

Vietnam and Emerging Asia: FDI

(In percent of GDP)

Vietnam: Indicators of Trade Openness
Figure 1.

Vietnam: GDP Growth: Some Stylized Facts
Figure 2.

Vietnam: Measures of Inflation. Regional Comparisons, 2002–07

(Year-on-year increases in prices, in percent)
Figure 3.

Vietnam: Financial Market and External Developments
Figure 4.

Vietnam: Gross International Reserve Indicators
Figure 5.

Vietnam: Banking Sector Developments

Vietnam: HP Estimate of Deviation from GDP Trend

(Deviation from trend, in percent)

Exchange rates