Vietnam
2008 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
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Publication Date:
03 Apr 2009
eISBN:
9781451840445
Language:
English
Keywords:
ISCR; CR; U.S. dollar; trading band; debt; IMF staff estimate; real GDP; stimulus plan; foreign currency; current account; interest rate; headline inflation; Credit; Global
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Following an extended period of strong economic performance, Vietnam is facing considerable challenges. Growth moderated to 6.2 percent in 2008. Rapid credit growth fueled by massive capital inflows, coupled with a surge in commodity prices, led to high inflation and large trade deficits in the first half of 2008. Executive Directors have commended the Vietnamese authorities for the significant progress they have made in stabilizing the economy, which was overheating in 2008. Directors have also welcomed the recent improvements in inflation and the trade balance.

Abstract

Following an extended period of strong economic performance, Vietnam is facing considerable challenges. Growth moderated to 6.2 percent in 2008. Rapid credit growth fueled by massive capital inflows, coupled with a surge in commodity prices, led to high inflation and large trade deficits in the first half of 2008. Executive Directors have commended the Vietnamese authorities for the significant progress they have made in stabilizing the economy, which was overheating in 2008. Directors have also welcomed the recent improvements in inflation and the trade balance.

I. Introduction

1. Following an extended period of impressive economic performance, Vietnam is facing considerable challenges. After overheating in 2007, the economic situation deteriorated significantly in the first half of 2008. Rapid credit growth fueled by massive capital inflows, combined with higher public sector spending and a surge in energy and food prices, led to high inflation and large trade deficits. These developments weighed on investor sentiment and put strong depreciation pressures on the dong. While the authorities have made commendable progress in stabilizing the economy, Vietnam has begun to experience adverse effects from the global financial turmoil and economic slowdown. These difficulties are compounded by an already large current account deficit and low international reserves, along with weaknesses in the banking and corporate sectors. Key challenges are designing and implementing policies to ensure macroeconomic and financial stability amid the global downturn, as well as pressing ahead with structural reforms to sustain growth and poverty reduction over the medium term.

II. Recent Economic Developments

2. Economic activity has slowed. Real GDP growth declined from 8½ percent in 2007 to 6¼ percent in 2008—the slowest pace since 1999—driven by subdued activity in construction and services following a steep downturn in the property market, which more than offset robust agriculture production (Table 1). Since October 2008, industrial production has also contracted on a month-on-month seasonally adjusted basis, with the foreign-invested sector hardest hit.

Table 1.

Vietnam: Selected Economic Indicators, 2005–09 1/

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

Figures in 2008-09 are staff estimates and projections unless otherwise indicated. Projections for 2009 do not take into account the recently announced stimulus plan.

Figures for 2008 are actual.

The private sector includes state-owned enterprises.

Includes off-budget expenditure and net lending.

Includes private debt.

Interbank exchange rate.

2000 annual average=100.

uA01fig01

Vietnam: Contribution to GDP Growth by Sector, 2006–08

(In percent)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Source: Vietnam, General Statistics Office.
uA01fig02

Vietnam: Inflation Developments, 2006–09

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Source: Vietnam, General Statistics Office.

3. Inflation increased to a 17-year high, but has eased recently. Headline inflation rose rapidly and peaked at 28¼ percent (y/y) in August 2008. It has since moderated to 17½ percent (y/y) in January 2009, turning negative on a monthly basis in the last three months, mainly due to lower food and energy prices. Core inflation (excluding raw food and energy) followed a similar pattern, but the decline has been more gradual. High inflation led to large wage hikes, but wage pressures have eased more recently as growth slowed.

4. The current account deficit increased sharply in 2007-08 (Table 2). While export growth was robust, strong import growth led to an increase in the current account deficit to 9¾ percent of GDP in 2007. These trends accelerated in the first half of 2008. The deficit began to narrow in the second half of 2008 as weaker import demand more than offset a slowdown in exports due to a sharp fall in global commodity prices and weakening external demand. However, it is still estimated at 10¼ percent of GDP for the year as a whole. The deficits were financed by significant capital inflows, especially foreign direct investment (FDI), keeping gross international reserves at $23 billion (about four months of imports projected for 2009) at end-2008.

Table 2.

Vietnam: Balance of Payments, 2005–09

article image
Sources: Data provided by the Vietnamese authorities; and IMF staff estimates and projections.
uA01fig03

Vietnam: Trade, 2006–09

(In billions of U.S. dollars, seasonally adjusted)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Source: Vietnam, General Statistics Office.
uA01fig04

Vietnam: Current Account and Financing Sources, 2006–08

(In billions of U.S. dollars)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Sources: IMF, International Financial Statistics; State Bank of Vietnam; and IMF staff estimates.1/ Short-term capital inflows include portfolio investments.

5. The overall fiscal balance in 2008 is estimated to have improved slightly compared to 2007.1 A small deficit was recorded in the first three quarters of 2008, with strong revenue performance—due to increases in trade and oil taxes as well as capital revenue—mostly offsetting higher-than-budgeted expenditures. The latest estimates provided by the authorities suggest that spending in the final quarter would raise the deficit to about 4¾ percent of GDP in 2008 as a whole (Table 3). The non-oil primary balance is estimated to have improved by 1½ percentage points of GDP largely on account of lower capital spending. These estimates are subject to considerable uncertainties relating to the actual disbursement of investment projects and underlying weaknesses in the fiscal data.2

Table 3.

Vietnam: General Government Budgetary Operations, 2005–09 1/

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

Based on IMF definition.

Estimates for 2008 Q4 are not available yet. The estimate for 2008 is based on budget execution through September, authorities’ estimates of Q4 expenditure, and staff revenue estimates.

The projection for 2009 is based on the authorities’ expenditure plan (excluding net lending financed by sovereign bond issuance) and staff revenue projection. This projection does not take into account the recently announced stimulus plan.

Budget data include the amount allocated as contingency.

6. The global turmoil has heightened Vietnam’s vulnerabilities. Exports of goods and services, private remittances, and FDI have all slowed. Risk perception rose more sharply than regional trends, prompting foreign investors to continue reducing their exposures to Vietnam, mainly by selling bonds.3 The stock market has declined by 75 percent since end-2007. Depreciation pressures on the exchange rate have re-emerged, with the dong depreciating by 9 percent vis-à-vis the U.S. dollar in 2008. Due to high domestic inflation, however, the dong appreciated by 21 percent in real effective terms, much larger than other countries in the region.

uA01fig05

Vietnam: Sovereign Bond Spreads, 2008–09

(In basis points)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Source: Bloomberg LP.
uA01fig06

Vietnam: Stock Market Performance, 2008–09

(January 2, 2008=100)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Source: Bloomberg LP.
uA01fig07

Vietnam: Net Foreign Purchases of Securities, 2008–09

(In millions of U.S. dollars)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Source: Vietnamese Stock Exchanges.
uA01fig08

Emerging Asia: Real Effective Exchange Rates, 2006–09

(January 2006=100)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Source: IMF, Information Notice System; and IMF staff estimates.

III. Outlook and Risks

7. The near-term outlook remains challenging, given the rapidly deteriorating global economic conditions. Growth is currently projected to slow to 4¾ percent in 2009—well below the authorities’ target of 6½ percent and historical average of 7½ percent—on the back of weaker domestic and external demand. The global downturn is likely to reduce export earnings, private remittances, and FDI, and hence domestic demand, resulting in output falling below potential. Headline inflation is projected to drop to 6 percent (y/y) by end-2009 due to easing commodity prices, although core inflation could fall more gradually.4 The current account deficit is projected to decline to 8 percent of GDP, mainly due to lower imports. However, tighter global financial conditions are expected to reduce capital inflows significantly. With low levels of gross international reserves (projected to be about three months of imports), Vietnam will remain vulnerable to external shocks.

uA01fig09

Vietnam: Contribution to GDP Growth by Expenditure, 2004–09

(In percent)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Sources: Vietnam, General Statistics Office; and IMF staff estimates.1/ Includes contribution from statistical discrepancy.
uA01fig10

Vietnam: Balance of Payments, 2004–09

(In billions of U.S. dollars)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Sources: Authorities’ data; and IMF staff estimates.

8. The near-term outlook is subject to increasing downside risks. A deeper, more prolonged global downturn, especially in advanced economies, could worsen Vietnam’s growth prospects. Low short-term external debt (at less than 10 percent of reserves) provides some protection. However, lower exports and private remittances, especially if combined with reduced capital inflows stemming from deteriorating global financial conditions or investor sentiment, could put more pressures on reserves and the exchange rate. Moreover, slower economic activity could heighten vulnerabilities in the banking system. The authorities are aware of these risks.

9. Nevertheless, the medium-term outlook is still favorable. Vietnam remains an attractive destination for foreign investors. Provided that the government maintains sound macroeconomic policies and continues reforms to enhance Vietnam’s competitiveness, real GDP growth is expected to rise to 7½ percent by 2013 (Table 4). The current account deficit is projected to narrow to about 5 percent of GDP by 2013, as export growth and private remittances are likely to rebound. Capital inflows are also expected to pick up as investor confidence recovers. The debt sustainability analysis (DSA) indicates that external debt levels would be manageable, provided that external borrowing remains prudent. However, the outlook for public sector debt is less favorable, underscoring the need for fiscal consolidation to preserve debt sustainability in the medium term.

Table 4.

Vietnam: Medium-Term Scenario, 2005–13

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

IV. Policy Discussions

Discussions focused on (i) the appropriate mix of macroeconomic and financial policies to address near-term vulnerabilities and (ii) structural reforms—in particular those related to fiscal and SOE issues—essential to sustain Vietnam’s progress toward becoming a full-fledged emerging market economy.

A. Macroeconomic Policies: Balancing Growth and Stability Objectives

10. With the balance of risks firmly shifting from inflation to growth, the authorities have been rapidly easing macroeconomic policies. They have already taken a number of measures, including a significant easing of fiscal and monetary policies and increasing exchange rate flexibility and—more recently announced—a broad economic stimulus plan. However, Vietnam’s external position is not as robust as other countries in the region, constraining the government’s ability to pursue expansionary policies (Table 5). It is thus important for the government to carefully balance growth and stability objectives and design appropriate economic objectives and policies for 2009, while standing ready to adjust them given considerable uncertainties surrounding the outlook.

Table 5.

Vietnam: Indicators of External and Financial Vulnerability, 2003–08

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

Interbank market rate.

Positive indicates appreciation.

Fiscal policy

Background

11. The fiscal stance envisaged in the original 2009 budget plan (excluding the stimulus plan) was already somewhat accommodative. Using staffs revenue estimates, which take into account lower world oil prices than envisioned in the budget, the plan implies a slight increase in the non-oil primary fiscal deficit in relation to GDP in 2009, and an increase in the overall fiscal deficit to 8¼ percent of GDP.5 This reflects lower revenue (by 3 percentage points of GDP) from oil and recent tax reforms,6 and an increase in off-budget expenditure and net lending (by 1 percentage point of GDP).

uA01fig11

Vietnam: Fiscal Balance, 2004–09

(In percent of GDP)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Sources: Authorities’ data; and IMF staff estimates.

12. The recently announced stimulus plan aims to support growth, ensure social security, and accelerate poverty reduction. The authorities are aiming to: (i) support enterprises, especially small- and medium-sized enterprises (SMEs), through temporary interest rate subsidies, credit guarantees, delays in corporate income tax (CIT) payments, and a 30 percent temporary reduction in the tax liabilities; (ii) boost public investment including through state-owned enterprises (SOEs), by frontloading existing projects and simplifying budget execution procedures; (iii) stimulate private consumption through a reduction in value-added tax (VAT) rate on certain products; (iv) support exports through a reduction in some tariffs while increasing protection for certain domestic industries; and (v) enhance the social safety net to protect vulnerable groups.7 The authorities have introduced various initiatives on a piecemeal basis, but have not announced a revised budget plan for 2009. The stimulus plan will clearly raise the fiscal deficit, but the extent of the increase is uncertain as details of the plan have yet to be clearly determined.

Discussions

13. Given deteriorating growth prospects, an accommodative fiscal stance in 2009 is appropriate. However, room for a fiscal stimulus is limited, especially given the already large domestic financing envisaged in the original budget plan. Staff cautioned that in the absence of additional concessional external financing, a stimulus package could further weaken the external position, crowd out private sector activity, and undermine fiscal sustainability prospects as indicated in the DSA. The authorities acknowledged these concerns, but emphasized that supporting growth and employment was the top priority for 2009. Staff urged the authorities to prepare a revised budget plan for 2009 that elaborates on how the fiscal stimulus would be financed.

14. Staff stressed that the stimulus plan should focus on effective, well-targeted and temporary measures and be financed through reprioritizing existing spending and/or mobilizing additional concessional external financing. In this context, staff welcomed the authorities’ plan to enhance the social safety net and accelerate existing high quality public investment projects and those financed by official development assistance. However, the proposed tax measures are likely to be ineffective in stimulating aggregate demand, are not well targeted, and would complicate tax administration, while several trade tariff increases would create additional distortions. Staff is also concerned that measures to support SMEs may not be effective unless fundamental weaknesses of SMEs are addressed.

Monetary and exchange rate policies

Background

15. The monetary policy stance has been adjusted swiftly in response to rapidly changing economic conditions during 2008. The SBV took a number of commendable steps to stabilize the overheating economy earlier in the year, notably through a significant tightening during May-June 2008. It increased policy rates aggressively, tightened market liquidity conditions, and restricted bank lending activities through moral suasion. This led to a sharp decline in credit growth (Table 6). As the authorities became increasingly concerned about growth and inflation pressures began abating in the second half of the year, the SBV rapidly eased monetary policy. Policy rates are now below the level where the tightening cycle began,8 and interbank interest rates as well as bank lending and deposit rates have fallen sharply (Table 7). Nevertheless, credit activity has remained subdued as banks have become more reluctant to lend due to increased risk perception, while credit demand has waned in light of weaker business prospects.

Table 6.

Vietnam: Monetary Survey, 2005–09 1/

article image
Sources: State Bank of Vietnam; and IMF staff estimates and projections.

Data include the State Bank of Vietnam and all deposit-taking credit institutions.

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

Table 7.

Vietnam: Interest Rates, 2006–09

(In percent per annum, average)

article image
Sources: State Bank of Vietnam; and Reuters.

End of period.

uA01fig12

Vietnam: Exchange Rate Developments, 2006–09 1/

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Sources: State Bank of Vietnam; and Bloomberg LP.1/ An upward movement indicates an appreciation.
uA01fig13

Vietnam: Interest Rates, 2006–09

(In percent)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Sources: State Bank of Vietnam; and Reuters.
uA01fig14

Vietnam: Credit Growth, 2006–08

(Month-on-month percent change, seasonally adjusted)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Source: State Bank of Vietnam.

16. The authorities responded to depreciation pressures by increasing exchange rate flexibility. In June 2008, the SBV devalued the dong against the U.S. dollar by 2.4 percent, widened the dong-U.S. dollar trading band from ±1 to ±2 percent, and stepped up foreign exchange market intervention. These measures, together with tighter monetary conditions, helped stabilize the foreign exchange market. With monetary conditions having since eased sharply and the economic outlook worsening, depreciation pressures on the dong re-emerged in the final quarter of the year. The authorities have intervened in small amounts to support the exchange rate, widened the band further to ±3 percent, and subsequently devalued the dong-U.S. dollar rate by another 3 percent. Despite these efforts, the dong has continued to trade at the weaker end of the band.

Discussions

17. The authorities should assess how the recent significant monetary easing and increased fiscal spending will feed through the economy before relaxing monetary conditions any further. Staff emphasized that further monetary loosening may have only limited impact in supporting growth, but could add to depreciation pressures on the dong. The SBV was mindful that placing too much emphasis on growth could have negative consequences on macroeconomic stability, but maintained that policies would need to be accommodative to mitigate an economic downturn. In addition, aggressive monetary easing by other central banks in the region and advanced countries has added peer pressures for the SBV to move in tandem. On the SBV’s liquidity management framework, staff noted that there remains ample room to strengthen open market operations and liquidity forecasting and management, along the lines recommended by the Fund technical assistance (TA), which would help reduce interest rate volatility and provide a clearer signal of the monetary policy stance.

18. Staff welcomed recent moves toward greater exchange rate flexibility, but noted that the dong continues to face depreciation pressures. Staff’s exchange rate assessment suggests that the dong is somewhat overvalued from a medium-term perspective (Box 1). Staff recommended that if depreciation pressures persist, exchange rate flexibility be further increased through a combination of widening the band and adjusting the official exchange rate, supported by appropriate macroeconomic policies to boost credibility in the exchange rate system. The scope for sustained foreign exchange market intervention is limited by the relatively low level of reserves. Greater exchange rate flexibility would also help improve the effectiveness of monetary policy, deepen the foreign exchange market, and pave the way for a smooth transition to inflation targeting—a framework the authorities plan to adopt in the future. The authorities agreed that increasing exchange rate flexibility was an appropriate strategy, but stressed that they would allow the exchange rate to adjust only gradually to avoid disruptions in confidence and economic activity.

Equilibrium Exchange Rate Assessment

Three standard, model-based approaches indicate that the exchange rate is somewhat overvalued compared with its medium-term equilibrium level.

The macroeconomic balance approach suggests some overvaluation. The current account norm is estimated at a deficit of 2.6 percent of GDP. This can be explained by the fact that Vietnam has a higher fiscal deficit, higher output growth, and a lower level of economic development than its trading partners. The underlying current account deficit in 2008 is estimated at about 4 percent of GDP, taking into account a number of temporary factors, including rapid credit growth and an investment boom by SOEs. In addition, the current account deficit is projected to decline to 5 percent of GDP in 2013.

The equilibrium real exchange rate approach produces a somewhat higher estimate of overvaluation than the macroeconomic balance approach. The equilibrium real effective exchange rate was estimated by four fundamental variables—changes in the net foreign assets of the banking system as a ratio to GDP, external terms of trade, government consumption (measured as purchase of goods and services plus government wages), and trade openness (the sum of exports and imports as a ratio to GDP).1

uA01fig15

Vietnam: Real Effective Exchange Rate, 1990–2008

(In natural logarithm)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Sources: IMF, INS database; and IMF staff estimates.

The external sustainability approach produces a somewhat lower result than the other two approaches. The current account deficit stabilizing net foreign assets is estimated at 3½ percent of GDP, somewhat higher than the current account norm.

1Due to structural breaks in the series and other data issues, the sample period was constrained to 1990-2008.

B. Addressing Financial Sector Vulnerabilities

Background

19. Strains in the banking system emerged in 2008. Banking conditions were mainly affected by tighter domestic liquidity conditions, higher interest rates, and a sharp decline in asset prices in the first half of 2008 as well as slowing growth in the second half of the year. Given high loan-to-deposit ratios and reliance on short-term interbank funding, a number of banks experienced liquidity problems when the SBV tightened monetary policy. Smaller private joint-stock banks (JSBs) were reportedly most affected, with some receiving emergency liquidity support from the SBV. Banks’ net interest margins were squeezed by the higher funding costs and caps on lending rates.9 Asset quality also deteriorated, with nonperforming loans (NPLs) increasing to 3 percent of total loans in October 2008 (double the end-2007 level), but provisioning coverage against NPLs at 82 percent appears sufficient, with JSBs having a higher coverage (Table 8). The banking system on the whole is still expected to report positive profits for 2008 due to higher noninterest income mainly through gains on bond trading. While full year data are not yet available, a number of banks appear to have strengthened further their capital base.10

Table 8.

Vietnam: Key Financial Soundness Indicators, 2006–08 1/

(In percent, unless otherwise specified)

article image
Sources: State Bank of Vietnam (SBV) data; and IMF staff estimates.

The SBV does not report financial soundness indicators (FSIs). The FSIs are constructed from the balance sheet information of the consolidated banking sector.

Excludes Mekong Housing Bank.

Includes shareholder capital and retained earnings. Excludes provisioning. Assets are not risk-weighted.

Liquid assets comprise cash, foreign currency and gold holdings, deposits at other banks, deposits at the SBV, and SBV bills. Excludes holdings of government securities. Five percent of liquid assets can be held in government securities.

Short-term liabilities include all deposits, interbank borrowing, and SBV borrowing.

Foreign liabilities are claims by non-residents on banks, both in domestic and foreign currency.

uA01fig16

Vietnam: Banking Indicators, 2006–08

(In percent)

Citation: IMF Staff Country Reports 2009, 110; 10.5089/9781451840445.002.A001

Source: State Bank of Vietnam.

20. The year 2009 will be challenging for Vietnamese banks, with credit risk expected to be the main concern. The rapid credit growth in the past two years, together with the projected slowing in economic activity, could lead to asset quality problems. Banks are heavily dependent on corporate lending (about two-thirds of total loans), default rates of which, in particular among SMEs, are projected to rise. Banks are also exposed to the property market through their reliance on collateral and mortgage loans (about 10 percent of total loans), although conservative practices on loan-to-value ratios by banks (35–50 percent) may help somewhat protect against a property market downturn. Foreign currency lending (about 20 percent of total loans) could also potentially turn into NPLs if the dong weakens, but banks indicated that most of the foreign currency loans were extended to companies such as exporters which were naturally hedged against exchange rate risks. Banks also face liquidity risks, especially smaller banks.

21. Vulnerability varies across the types of banks. Smaller and some mid-sized JSBs with weak liquidity position and rapid loan growth in the recent past are considered most vulnerable to a cyclical downturn, but are not systemically important as they account for less than 5 percent of total banking assets. Asset quality, coupled with relatively thin capital base and lower provisioning, also remains a problem for state-owned commercial banks (SOCBs), which account for about 50 percent of total banking system assets, although they may be able to receive government support.11 Larger JSBs appear more stable and sound, as they have solid profit margins and a more diversified revenue base and are well capitalized. Some also have benefited from investment and knowledge transfer by major foreign banks in recent years.

Vietnam: Key Financial Soundness Indicators, 2007

(In percent)

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Sources: State Bank of Vietnam; Bankscope; and banks’ financial statements.

Excludes Mekong Housing Bank.

22. Overall, banks’ strengthened capital position may help Vietnamese banks mitigate the impact from the economic slowdown.12 Nevertheless, significant shortcomings in financial transparency and banking supervision complicate the analysis of banking vulnerabilities in Vietnam. The SBV has yet to release financial soundness indicators (FSIs), such as capital adequacy or profitability. Moreover, only a few of the 41 commercial banks publish detailed financial statements and disclose FSIs in their annual reports. There are also gaps in the Vietnamese accounting standards with regard to valuation of financial instruments and fixed assets.

Discussions

23. The authorities broadly agreed with staff’s assessment of the banking sector and associated risks, but were more sanguine on the outlook. While recognizing the potential vulnerabilities stemming from an economic downturn, the authorities reiterated that the liquidity-related stresses in the banking system that emerged in mid-2008 had been addressed, and that risks are under control. They noted that JSBs have been closely monitored, in particular the smaller ones considered at risk, and that banks have increased capital and set aside adequate provisions, while strengthening their risk management systems. They added that there have so far been no major bank runs or failures despite the global financial crisis and heightened market volatility.

24. Staff emphasized the importance of closely monitoring developments and addressing any rising vulnerabilities in the banking system in a timely and effective manner. Vulnerable banks should be placed under close supervisory watch, and banks should formulate a restructuring plan in the event their capital falls below certain critical levels. Staff also recommended that SOCBs address provisioning shortfalls in a timely manner and cautioned against channeling directed policy lending programs through them. The authorities pointed out that while the SBV is not given a well-defined mandate to intervene in troubled banks, such banks could be handled by measures—such as mergers, withdrawal of licenses, and recapitalization—which have been used in the past.

25. The authorities acknowledged the importance of developing an effective contingency plan to deal with the impact of the global turmoil. They indicated that, if needed, necessary measures would be taken to secure financial system stability. In this context, staff noted that a number of countries had prepared such plans, key elements of which include a temporary blanket guarantee covering all bank liabilities to minimize the risk of any runs on deposits,13 temporary emergency liquidity support to illiquid but solvent banks subject to strict conditions, a broadening of the existing lender of last resort support system, and a restructuring or liquidation of insolvent banks, including through mergers and bank recapitalization with public funds, subject to appropriate and transparent restructuring conditions and safeguards against moral hazard.

26. It was agreed that banking supervision needs to be further strengthened. Recent initiatives to undertake large-scale onsite supervision, enforce strict limits on securities-related lending, raise minimum capital requirements for banks, strengthen loan classification and provisioning rules, and apply strict conditions on the provision of liquidity support, have all enhanced the SBV’s oversight of the banking system. The decision to tighten criteria and conditions for granting licenses to new banks and to integrate regulatory and supervisory functions in a single department within the SBV is also welcome. Main priorities going forward include upgrading banks’ reporting requirements, introducing stress testing as an offsite supervisory tool, establishing an early warning system, and strengthening the SBV’s onsite supervision program. The SBV should also strictly enforce compliance with prudential rules and address gaps in the accounting regulations. The authorities broadly agreed with these priorities and indicated that the new banking supervision department would be able to undertake more effective supervision. In addition, they were hopeful that the Fund’s long-term resident advisor would help enhance the SBV’s supervisory practices.

27. Staff urged the authorities to sustain the momentum for financial sector reforms. The authorities’ plan to amend laws on the SBV and credit institutions in 2010 is welcome. Staff underscored the importance of strengthening the SBV’s operational autonomy and clearly defining the objectives of monetary policy and banking supervision. In particular, the new SBV law should spell out the SBV’s legal authority and operational autonomy, including the power to supervise banks and to intervene in banks, if necessary. The authorities noted that these reforms are currently under discussion and requested IMF support in advancing them.

C. Structural Reform Priorities

Fiscal reform

Background

28. The authorities have been taking a number of steps to preserve debt sustainability. Tax reforms include the introduction of a new PIT, and revision of the CIT, VAT, excise taxes, and tariffs on petroleum products. However, these reforms are unlikely to provide adequate revenue support, especially in the short run. On the expenditure side, the authorities are planning to move a significant portion of public investment into public-private partnership projects (PPPs). To ensure fiscal sustainability, the authorities are considering introducing a limit on government debt and balancing the budget in the long run. The authorities are also planning to introduce a new budget law in 2010, which is expected to cover a broad range of issues, including plans to develop a medium-term fiscal framework, reform fiscal decentralization, and introduce performance-based budgeting. The new law may also help address serious fiscal data shortcomings.

Discussions

29. Staff stressed the importance of a longer-term framework of revenue and expenditure management. While the recent tax reforms are welcome, staff underscored the need for further efforts to identify alternative revenue sources, particularly in light of anticipated revenue declines associated with WTO commitments and in the longer run a decline in oil production. The authorities agreed with staff’s view and requested IMF TA to help develop the next phase of their revenue reform strategy, which will focus on property, environmental, and natural resource tax laws currently under preparation. They also noted that a large taxpayer office was under consideration, which could increase the tax yield. Staff also recommended that expenditure structure be reviewed to improve the efficiency of public investment while ensuring sufficient protection to vulnerable groups, and cautioned against the fiscal risks arising from contingent liabilities associated with PPPs. Such projects would require a solid investment planning framework, a strong legal and institutional framework, and a clear, comprehensive, and transparent accounting framework. A careful assessment of fiscal and macroeconomic risks associated with PPPs would also be crucial.

30. The initiative to revise the state budget law is welcome. Staff called for its careful planning and implementation, especially in the areas of fiscal decentralization and performance-based budgeting, to avoid complicating fiscal management. Bringing the definition of the budget balance closer to international standards, including elimination of off-budget transactions, would facilitate fiscal policy decision-making and help inform the public about fiscal policy stance and direction.

SOE reform

Background

31. The pace of SOE reform has slowed significantly, and the economic slowdown appears to have weakened its momentum. There were approximately 1,800 SOEs at the end of 2007, accounting for about 40 percent of GDP and 30 percent of credit to the economy. Assessing the financial position of the SOE sector remains difficult in the absence of information on their performance, but it is expected that the financial position of some of the larger SOEs has come under increased strain in 2008.

Discussions

32. Staff stressed the need to advance SOE reform. The authorities should step up the monitoring of SOEs and identify and restructure those representing significant fiscal risks. They should also press ahead with the equitization process (including SOCBs) as market conditions improve, which would help strengthen the performance and governance of SOEs, especially if the participation of foreign strategic investors is broadened. The authorities reiterated their commitment to SOE reform, recognizing that it would help sustain Vietnam’s rapid economic development. The authorities explained that the slower-than-expected equitization process was due to unfavorable market conditions and intend to press ahead with their plans to equitize the remaining nonstrategic SOEs.

V. Other Issues

33. Staff emphasized that an effective public communication strategy will help bolster investor confidence, which is needed especially in the difficult period ahead. The SBV has taken steps to improve its communication, by providing updated monetary and reserves data on the Fund’s website, posting weekly statements on monetary and banking operations on its newly launched English-language website, and organizing regular press conferences and interviews. Another important step for the SBV is to more clearly communicate its stance on monetary and exchange rate policy to the public. More generally, government agencies should present policy initiatives in a coordinated, consistent, and comprehensive manner.

34. The authorities should improve the quality and timeliness of data, especially in the fiscal, SOE, and banking sectors. Higher quality fiscal and SOE data would allow for better analysis of fiscal developments and the policy stance. There is a significant perception gap on the banking sector soundness between the public and the authorities. Posting regularly key financial soundness indicators of the banking system on the SBV’s website could help close the gap. The SBV indicated that efforts will be made to provide more information to the public, in line with practices of central banks and regulatory agencies in the region. They also agreed that the provision of financial information of SOEs would help foster a better understanding of their soundness.

VI. Staff Appraisal

35. Vietnam made significant progress last year in stabilizing an overheating economy, but is now facing substantial challenges amid the volatile global environment. Growth is expected to slow in 2009. While the current account deficit is likely to remain large, capital inflows would decline significantly. The government has rapidly eased macroeconomic policies and recently announced a broad stimulus plan to support growth. However, Vietnam’s fragile external position places a constraint on its ability to pursue expansionary policies.

36. Against the background of deteriorating growth prospects, an accommodative fiscal stance in 2009 is appropriate. Given the already substantial domestic financing requirement and the weak external position, however, there is limited room for a fiscal stimulus in the absence of additional concessional external financing. The government should focus on measures that are effective and temporary, while ensuring that these measures are calibrated to fit within available fiscal and macroeconomic space. In this context, the authorities’ intention to enhance the social safety net and expedite existing efficient public investment projects is appropriate. However, many tax measures and those to support SMEs may not be effective, and the use of import and export tariffs will cause distortions.

37. The effects of recent significant policy adjustments should be assessed before monetary conditions are eased further. Given a stalled credit market, further monetary action may have limited impact on growth, and instead increase depreciation pressures on the dong. To increase policy effectiveness, greater efforts should be made to improve open market operations and liquidity forecasting and management.

38. A move toward a more flexible exchange rate regime is an appropriate strategy. Notwithstanding moves to widen the trading band and devalue the exchange rate, the dong continues to face depreciation pressures. Staffs exchange rate assessment also suggests that the dong is somewhat overvalued compared with its medium-term equilibrium level. If depreciation pressures persist, exchange rate flexibility should be further increased, supported by appropriate macroeconomic policies to maintain confidence in the dong.

39. Safeguarding banking sector soundness is high priority. While commendable efforts have been made, the SBV needs to improve supervision further and address vulnerabilities in a timely and effective manner. Having a contingent plan to deal with the global financial turmoil is also useful. Over the medium term, advancing financial sector reform will be crucial, in particular strengthening the SBV’s operational autonomy.

40. A longer-term revenue and expenditure framework will help preserve fiscal sustainability. While the recent tax reforms are a key step in this direction, further efforts are needed to broaden the tax base. The expenditure structure should be reviewed to increase efficiency of public investment and ensure adequate protection for vulnerable groups. It is also important to minimize risks associated with PPPs. The initiative to revise the state budget law is timely, but requires careful planning and implementation.

41. The authorities should press ahead with SOE reform. Given their large role in the economy, efforts should be stepped up to monitor SOEs and identify and restructure those representing significant risks. Continuing the equitization process for SOEs and SOCBs would be critical in helping to improve their efficiency and governance.

42. An effective public communication strategy and increased data availability will help bolster investor confidence. While steps have been taken to improve communication and data provision, the quality and timeliness of data, especially in the fiscal, SOE, and banking sectors, need to be strengthened.

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

1

Based on IMF definition of the fiscal balance, which includes off-budget expenditures and net lending.

2

Data for 2007 show large discrepancies between the overall fiscal deficit estimated from revenue and expenditure and that from financing.

3

At end-2008, foreign investors are estimated to hold about $0.5 billion of government bonds, equivalent to 5 percent of total outstanding bonds, and about $3 billion of equities, or 30 percent of total market capitalization.

4

The minimum wage increase of 25–30 percent in January 2009 is unlikely to significantly affect inflation since most workers in the private sector are already being paid above the minimum wage level.

5

According to the authorities’ definition of the overall fiscal balance (which includes debt amortization and other items not consistent with GFS and excludes off-budget spending) and their revenue, expenditure, and GDP estimates, the fiscal deficit-to-GDP ratio will improve from 5 percent in 2008 to 4.8 percent in 2009.

6

The tax changes include introduction of the new personal income tax (PIT) with more generous personal allowances, and a reduction of the corporate income tax (CIT) rate from 28 to 25 percent.

7

Other measures include: delaying PIT payments; accelerating VAT refund procedures for exporters and lengthening the grace period on import duties for materials used in the production of exports, and speeding up customs clearance process; and reducing import tariffs on goods used as inputs in domestic production, while increasing export tariffs on natural resources and import tariffs on some domestically-produced goods.

8

Since October 2008, the SBV has reduced the base (prime) rate by 700 basis points to 7 percent. In addition, the interest rates on open market operations and the reserve requirement ratio on dong deposits have been lowered sharply.

9

Vietnam’s Civil Code stipulates that financial institutions cannot charge lending rates exceeding 1.5 times the base rate. The SBV has recently raised the lending rate cap of the People’s Credit Funds (savings and credit cooperatives for rural households) to 1.65 times the base rate and allowed negotiable interest rates for consumer and credit card loans.

10

The SBV doubled the minimum paid-in capital to 1 trillion dong by end-2008, and will increase it to 3 trillion dong by end-2010. This primarily affected smaller JSBs. Some large JSBs have strengthened capital through retained earnings and rights issuance to existing shareholders.

11

Two SOCBs have large exposure to loans classified as special mention (1–90 days overdue or first time restructured) which require a 5 percent provisioning. These loans could become NPLs, especially in an economic downturn.

12

Staff’s simple credit stress test—based on available market information for 35 banks (out of 41 banks) covering about 95 percent of the domestic banking system (excluding foreign bank branches)—suggests that most banks would remain solvent even if NPLs tripled from current levels and assuming zero profitability.

13

The existing deposit insurance scheme covers deposits up to 50 million dong (about $3,000) per person per bank, but excludes foreign currency deposits. The current limit covers about 90 percent of depositors.

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Cover IMF Staff Country Reports
Vietnam: 2008 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 2009: Issue 110
Publisher:
International Monetary Fund
ISBN:
9781451840445
ISSN:
1934-7685
Pages:
68
DOI:
https://doi.org/10.5089/9781451840445.002

Vietnam: Contribution to GDP Growth by Sector, 2006–08

(In percent)

Vietnam: Inflation Developments, 2006–09

(Year-on-year percent change)

Vietnam: Trade, 2006–09

(In billions of U.S. dollars, seasonally adjusted)

Vietnam: Current Account and Financing Sources, 2006–08

(In billions of U.S. dollars)

Vietnam: Sovereign Bond Spreads, 2008–09

(In basis points)

Vietnam: Stock Market Performance, 2008–09

(January 2, 2008=100)

Vietnam: Net Foreign Purchases of Securities, 2008–09

(In millions of U.S. dollars)

Emerging Asia: Real Effective Exchange Rates, 2006–09

(January 2006=100)

Vietnam: Contribution to GDP Growth by Expenditure, 2004–09

(In percent)

Vietnam: Balance of Payments, 2004–09

(In billions of U.S. dollars)

Vietnam: Fiscal Balance, 2004–09

(In percent of GDP)

Vietnam: Exchange Rate Developments, 2006–09 1/

Vietnam: Interest Rates, 2006–09

(In percent)

Vietnam: Credit Growth, 2006–08

(Month-on-month percent change, seasonally adjusted)

Vietnam: Real Effective Exchange Rate, 1990–2008

(In natural logarithm)

Vietnam: Banking Indicators, 2006–08

(In percent)