Vietnam: 2020 Article Iv Consultation—Press Release; Staff Report; And Statement By The Executive Director For Vietnam
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
01 Mar 2021
eISBN:
9781513570488
Language:
English
Keywords:
ISCR; CR; accommodative monetary policy stance; U.S. dollar; th authorities; State budget; fiscal policy framework; core inflation; potential GDP; nonviable firm; firm productivity dispersion; Public investment spending; Global; cost of capital
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2020 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Vietnam

Abstract

2020 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Vietnam

The Pre-Covid Landscape

1. Vietnam began 2020 following a prolonged period of high growth and ongoing structural transformation. The last three decades of market-oriented reform lifted Vietnam from one of the poorest countries in the world to lower middle-income status. Structural transformation from agriculture to a modern economy based on FDI-led manufacturing and the emphasis on “leaving no one behind” boosted living standards. In recent years, growth averaged 7 percent, buoyed by manufacturing activity and solid domestic demand. The rate of new business creation reached a six-year high in 2019. Inflation has remained close to the authorities’ 4 percent target.

Rising Living Standards: GDP per capita and Poverty

(In percent of population and PPP in international currency)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: World Bank, Vietnamese authorities and IMF staff calculations.

2. Considerable progress was made in putting public finances on a sounder footing, although the quality of fiscal consolidation could have been better. Ongoing rationalization of current spending, robust growth, and curtailment of new sovereign guarantees contained public and publicly guaranteed debt (PPG) to 43 percent of GDP in 2019, well below the 65 percent statutory limit.1 Government bond yields and borrowing costs have been on a declining trend— reflecting low inflation, high demand for lower-risk assets by banks, and limited supply of government bonds. However, public investment slowed in recent years partly due to capacity constraints. Tax revenues remain below peers, reflecting compliance issues and pervasive tax exemptions. Vietnam has broadly followed past IMF advice (Annex I).

Change in Gross Public Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: VNM DSA.

3. Strong FDI inflows and a current account surplus strengthened external buffers. Despite moderating trade flows on account of U.S.-China trade tensions, the current account surplus rose to 3.8 percent of GDP in 2019 as a result of sharply slowing imports of raw materials and intermediate goods, record tourist arrivals, and large remittance flows. The State Bank of Vietnam (SBV) took advantage of the strong external position to accumulate reserves while keeping the exchange rate mostly stable against the USD. International reserves rose to US $78.5 billion, a record high, and 96 percent of the ARA metric at end-2019.

4. The banking system was strengthened, but weaknesses persist. The banking system entered 2020 with higher profitability and liquidity than in the past, boosted by the strong economy and a shift to retail lending. Write-offs and loan recoveries, declining credit growth and improved quality of new credit, contributed to lower non-performing loans (NPLs). Capital buffers were above regulatory requirements but remained low compared to peers, especially in some of the systemically important state-owned commercial banks (SOCBs). As of December 2019, only 18 out of 43 banks (accounting for 60 percent of total banking system’s assets) met the capital standards required for Basel II adoption. While signs of a generalized asset boom were limited, leverage by listed corporates increased, and household debt was above the emerging market (EM) average.2

5. Despite these favorable outcomes and ongoing market-oriented reforms, there is still significant room to boost productivity and improve economic resilience. Pervasive economic dualism—manifest in a sizeable share of small and mid-size enterprises (SMEs) with limited financial resources and relatively low productivity, substantial, albeit declining, footprint of state-owned enterprises (SOEs), an export-led FDI sector that is highly integrated with global value chains (GVCs) with limited domestic linkages, and widespread labor informality—dampens productivity. Notwithstanding progress in recent years, structural distortions and onerous regulatory burdens hold back domestic private investment, fueling external imbalances. Reliance on administrative policy measures rather than holistic market-based policy frameworks constrains policy flexibility.

Covid-19 Impact and Policy Response

6. The economic outlook has shifted markedly since the onset of the COVID-19 crisis. As the outbreak intensified in China and elsewhere in Asia, activity slowed, reflecting Vietnam’s significant trade and tourism exposures and extensive linkages in regional supply chains. As in many other EMs, portfolio outflows increased in February-March, and the stock market plunged amid the global spike in risk aversion, but both have since partially recovered, and pressures on the exchange rate were relatively contained.

Vietnam’s Exposure to China, Japan and Korea

(In percent of total)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Haver, OECD Tiva and Vietnamese authorities.

7. Vietnam has taken decisive steps to contain COVID-19, which helped limit the health and economic fallout (Annex II). Swift introduction of containment measures, combined with aggressive contact tracing, targeted testing, and isolation of suspected cases helped contain new infections. Recorded infections and case fatality rates have been notably low on a per capita basis, with 1367 cases and 35 deaths reported as of December 7, 2020. Early and concerted efforts helped ease lockdown restrictions and contain the economic fallout and the associated policy support package relative to other countries.

COVID-19 Confirmed Cases

(New infected)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Vietnamese authorities.

Domestic Activity Rebounds

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Vietnamese Authorities, IMF Staff Calculations.

Stringency of Containment Measures

(OxCGRT stringency index 0–100, 100 is most restrictive)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Calculations based on Oxford COVID-19 Government Response Tracker (OxCGRT).Notes: ASEAN stringency index represents the max-min range of (ASEAN-VNM). Vertical lines point to the date of a major outbreak (100 cases). ASEAN vertical line is the simple average for (ASEAN-VNM).

Speed of Containment Measures and Fiscal Response

(Jan.1-Oct.15)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Calculations based on OxCGRT and Fiscal Monitor (October 2020).Notes: (i) Public health response time (PHRT) is the numbers of days to reach the country’s maximum restrictiveness (OxCGRT containment and health index) after a major outbreak (100 cases); and (ii) Fiscal response, in percent of GDP, are announced fiscal measures in response to Covid-19 since begining of the year, from the Fiscal Monitor.

8. GDP grew by 2.9 percent in 2020, the slowest pace in a decade. Economic activity plummeted in April as mobility restrictions were implemented (Figures 1–3). The slowdown was particularly acute in contact-intensive sectors such as restaurants, hotels, retail, transportation, and low-tech manufacturing (e.g., garments, footwear). Domestic activity resumed in May as businesses re-opened and retail sales picked up, but services demand remained weak. Exports contracted sharply in the second quarter, reflecting weak external demand and supply-chain disruptions, but rebounded subsequently in line with the improving external outlook. Medical and protective equipment and work-from-home-related electronics exports outperformed. Merchandise imports remained weak, reflecting low commodity prices and subdued private demand. Credit growth picked up to 12 percent (y/y) in December, from a trough of 8.8 percent (y/y) in May.

Figure 1.
Figure 1.

Vietnam: High Frequency Indicators in Wake of COVID-19

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Figure 2.
Figure 2.

Vietnam: Slowing Growth, Labor Market Stress, Moderate Inflationary Pressure

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Figure 3.
Figure 3.

Vietnam: Strong External Buffers Despite Lower Trade and Financial Flows

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

9. The growth slowdown comes with a significant hit to the labor market. A large share of the labor force has been affected by the crisis, either by the destruction of full-time jobs or cuts in wages and/or working hours. The initial employment adjustment transpired largely through rising underemployment, but the labor force also fell by 4.2 percent (y/y) in the second quarter, the first decline in 5 years, before rebounding somewhat (Figure 2, Annex III). Low-skilled workers and those working in Vietnam’s sizeable informal economy with limited social insurance buffers were initially hit hardest, but informal employment rebounded quickly as mobility restrictions were eased, serving as cushion for formal jobs.3 The number of businesses temporarily suspending operations rose by 81 percent (Q3 y/y), partly offset by a 25 percent increase in firms resuming operations, suggesting continued business dynamism (Annex IV).4

Change in Full Time Employment by Component

(Over same quarter of previous year)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: GSO and IMF staff calculations.

Informality Rate

(In percent)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Vietnam Labor Force Survey 2018; IMF staff calculations.

Social Insurance

(In percent)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Vietnam Labor Force Survey 2018; IMF staff calculations.

10. Fiscal policy focused on temporary support to firms and vulnerable households (Annex V). The bulk of the initial fiscal package of 4.1 percent of GDP comprised tax, land fees, and social insurance contribution deferrals for eligible firms, including SMEs and self-employed businesses. Existing cash transfers were temporarily expanded to cover part-time workers, self-employed and informal workers, and the poor and near-poor, although the speed of implementation, take-up, and coverage was low, reflecting capacity constraints and overly strict and cumbersome eligibility criteria. The use of below-the-line and quasi-fiscal measures was limited compared to peers.

Fiscal Packages

(In percent of GDP, as of October 2020)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Vietnamese authorities; and 2020 October Fiscal Monitor.Note: Country groups are simple averages.

Fiscal Measures in Response to COVID-19

article image

Implementation as of end-November, 2020

Revised GDP, 2020, in VND trn

11. Monetary policy was eased and temporary measures were introduced by regulators. The SBV took measures to maintain abundant liquidity in the banking system. The repo and refinancing rates, the main policy rates set by the SBV, were cut by 150 and 200 bps in total between March and October. Other measures were also deployed, including a reduction in central bank bills outstanding and cuts to deposit and lending rates caps (Annex V). The SBV swiftly introduced a legal framework to flexibly restructure existing bank loans, temporarily waive or lower interest payments, and provide temporary forbearance on the loan classification for restructured loans. A credit package of new loans by commercial banks, amounting to 3.9 percent of GDP, complemented the fiscal effort to prevent widespread corporate bankruptcies.5 These measures have been accompanied by a request to banks to refrain from paying dividends and to reduce bonuses, salaries, and electronic payment fees.

Outlook and Risks to the Recovery

12. The economy is estimated to grow by 2.9 percent in 2020, among the highest in the world. This reflects early success in containing COVID-19 and a tentative recovery in trading partners, but voluntary social distancing weighed on demand for contact-intensive services. Private investment remained subdued as firms deferred spending amid high uncertainty. Policy support only partially offset COVID-19’s adverse impact on household income, resulting in a modest recovery in private consumption. Headline inflation was at 3.2 percent (core inflation at 2.3 percent) as the inflation spike seen in early 2020 from higher food prices abated amid economic slack.

13. A robust recovery is expected in 2021 despite some economic scarring. Growth is projected to strengthen to 6.5 percent as normalization of economic activity continues, businesses recover, and private consumption and business investment rebound. Manufacturing and retail sales are expected to lead the recovery, while the travel and hospitality services will remain subdued. Net exports will continue to contribute positively to growth as external demand picks up. Economic scarring due to disruptions to domestic activity and the labor market will temporarily weigh on potential growth as labor re-allocation gradually takes place, and capital stays idle in the hardest-hit sectors. The negative output gap (1 percent) in 2020 is more than halved in 2022, and gradually closed by 2024.

14. The current account surplus is projected to narrow to 2.2 percent in 2020. Vietnam’s external position in 2019 was assessed to be substantially stronger than warranted by fundamentals and desirable policy setting (Figure 3, Annex VI).6 The declining current account surplus in 2020 (from 3.8 percent in 2019) is driven largely by collapsing tourism receipts and weaker remittances, partially offset by subdued imports and lower income payments due to reduced profits and dividend repatriation. Financial inflows are expected to decline, reflecting slowing FDI and portfolio inflows. Overall, international reserves are expected to increase to US$94.8 billion as the current and financial accounts remain in surplus (108 percent of the ARA metric at end-2020). The current account surplus is expected to increase modestly in 2021, and financial inflows strengthen as the domestic and global recovery takes hold.

15. The fiscal deficit is expected to widen. The deficit is expected to reach 5.4 percent of GDP in 2020, compared to 3.5 percent envisaged in the budget (Figure 4). This is due to declining revenues and the operation of automatic stabilizers; higher cash transfers and capital spending will boost spending. In 2021, the headline deficit is expected to narrow as priority expenditures remain in place to support the recovery, while revenues recover with improved economic activity, albeit only gradually owing to loss carry-forward provisions. The fiscal stance would thus be moderately contractionary—the cyclically adjusted primary deficit is projected to decline by 0.4 percentage points of GDP—even though other spending, including health and public investment, would increase, both relative to the 2020 budget and 2019 outcomes. Staff estimates the higher deficits to be financed mostly through domestic debt issuance. Public debt is expected to remain at around 46 percent of GDP in 2020, and to decline over the medium-term, suggesting available fiscal space (Annex VII).

Figure 4.
Figure 4.

Vietnam: Fiscal Developments and Fiscal Reforms

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Consolidated State Budgetary Operations

(In percent of GDP, unless otherwise indicated)

article image
Sources: Vietnamese authorities and IMF staff projections.Note: Estimates in 2019 include overperfomance revenues from 2018 in current expenditures.

16. The outlook is subject to uncertainties (Annex VIII). The principal risk to the outlook is a protracted recovery and economic scarring linked to weaker labor market conditions, worsening corporate balance sheets, persistent banking system weaknesses, and trade tensions. On the upside, deployment of an effective vaccine or therapy could boost confidence and growth prospects.

  • Trade policy uncertainty. In November 2020, the U.S. Department of Commerce imposed preliminary currency-based countervailing duties on imports of vehicle tires from Vietnam, while Section 301 investigations into Vietnam’s currency practices could potentially lead to broad-based trade measures or other actions. In December 2020, the U.S. Treasury designated Vietnam as a currency manipulator in its report to Congress. Treasury stated it would be commencing a process of enhanced engagement which could lead to remedial action if the underlying issue is not resolved after one-year. Together, these steps could adversely impact the bilateral trade relationship, fuel foreign investor uncertainty, and potentially impinge on monetary policy decisions by limiting exchange rate flexibility.7 On the upside, Vietnam could benefit from recently ratified free trade agreements (FTAs) and reconfiguration of global supply chains.8

  • Corporate solvency risks. A prolonged period of low growth runs the risk of fueling larger-scale corporate distress, particularly in the hardest hit services sectors that are dominated by SMEs. Even prior to the crisis, SMEs suffered from low profitability, weak liquidity buffers, and thin equity cushions (Annex IX). Larger firms were more profitable, but were also more leveraged, although their FX exposure was limited. Staff simulations suggest that 45 percent of businesses’ debt could be at risk of default, compared to 28 percent before COVID-19. Corporate distress could propagate more broadly through upstream and downstream linkages, potentially translating into wider firm closures and bankruptcies and increasing jobs losses.

  • Banking system strains. Bank profitability and capital buffers are set to worsen, due to loan restructuring, higher provisioning, and defaults (Figure 5). Staff estimates that system wide NPLs could reach over 7 percent under the baseline scenario if loans are properly classified (i.e., without forbearance), jumping from 4.6. percent in 2019.9 Asset quality concerns are particularly pronounced for lending to household businesses and corporates affected by COVID-19. Funding strains in the highly leveraged real-estate sector or a sharp correction in real-estate prices could amplify balance-sheet vulnerabilities. The impact on capital and funding positions of some large SOCBs and smaller commercial banks with already-thin buffers and large maturity mismatches could be significant.

Figure 5.
Figure 5.

Vietnam: Banking Sector Vulnerability

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Scenarios: Real GDP Level

(Index, 2019=100)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: IMF Staff Calculation.

Debt Profile by Ownership and Size

(ICR=interest coverage ratio, percent)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: 2017 Vietnam Enterprise Survey; IMF staff calculations.

Share of Employment by Financial Condition

(ICR=interest coverage ratio, percent)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Note: total of share of employment in all ICR ranges is equal 100.Sources: 2017 Vietnam Enterprise Survey; IMF staff calculations.

Authorities’ Views

17. The authorities concurred with the outlook for growth and were mostly concerned with external risks. They emphasized that strong policy actions, including effective control of local outbreaks, helped mitigate the impact of the health crisis and support the recovery. They expected the economy to grow by over 6 percent in 2021, as consumer confidence and formal employment strengthen further and private investment rebounds. Risks to the outlook were seen as mostly external, stemming from a prolonged global recession and trade tensions with the U.S. The authorities reiterated their commitment to further open up the economy and emphasized the upsides of diversifying their export markets following recently signed FTAs. They shared staff’s assessment of pockets of vulnerability in the corporate sector but saw financial risks as manageable.

18. The authorities broadly agreed with staff’s assessment of Vietnam’s external position, but cautioned against inappropriate interpretation of the results. They emphasized the high-level of uncertainty in the gap estimates and saw Vietnam’s external imbalances as driven largely by structural distortions which need to be addressed over the medium term through well-paced reforms. They stressed that Vietnam’s exchange rate policy was not intended to manipulate the currency to benefit exports, but rather to ensure price stability, while building needed reserve buffers, which remain low by regional standards.

Policy Issues

19. The policy imperative is to set the stage for a robust recovery. Corporate and labor market stresses will have to be addressed to avoid derailing the recovery. Fiscal policy should play a bigger role in the policy mix, especially given available fiscal space. Monetary policy should continue to be supportive, but the room for further effective monetary easing is likely to be limited and any potential extension of loan restructurings should be mindful of underlying banking system vulnerabilities. The policy mix will be most effective if fiscal policy focuses on supporting vulnerable households, additional liquidity flows to viable firms, liquidation of nonviable firms is expeditious, and financial stability is safeguarded.

20. Given considerable uncertainty and significant downside risks, the authorities should remain agile and proactively adjust the size and composition of policy support. Additional fiscal stimulus may be warranted if downside risks materialize, along with modest additional monetary easing. Greater two-way exchange rate flexibility should also be allowed to facilitate adjustment to a potentially challenging external environment.

21. As the recovery gets firmly underway, the emphasis should be on achieving sustained, inclusive growth and fostering resilience. The focus should pivot from broad-based liquidity support toward high quality public investment projects, from protecting jobs towards protecting workers, improving revenue mobilization, and creating conditions for resource reallocation. The recovery also presents an opportunity to build a better and greener future. This, in turn, requires modernizing policy frameworks, containing financial stability risks, and steadfastly implementing reforms to boost investment and productivity.

A. Fiscal Policy: Calibrating the Near and Medium-Term Response

Containing the Health and Economic Fallout

22. Fiscal policy can do more and better. Given continued slack in the economy and available fiscal space, the fiscal stance should remain neutral or moderately expansionary in 2021, with improvement of government spending execution as priority. This would imply somewhat greater fiscal support than currently factored into staff’s baseline projection to facilitate the recovery. Fiscal policy could switch to a gradual consolidation once the recovery is complete (see next section) and downside risks have eased.

  • Health expenditure should be topped-up as needed. Future outbreaks could test the resilience of the country’s health infrastructure (Figure 4). In this respect, higher allocation for health expenditure envisaged in the 2021 budget is welcome, but further spending may be needed to secure resources for a vaccine rollout.

  • Expand and improve the adequacy and efficiency of social protection. The coverage of existing social safety nets should be scaled-up by relaxing burdensome eligibility criteria for existing programs and extending the safety net (e.g., to families with children and the elderly). Staff’s calculations suggest that doubling the replacement income rate of some existing programs to around 60 percent (the level under formal unemployment insurance) would cost an additional 0.1 percent of GDP if introduced for a temporary 3-month period.10 Better identification of beneficiaries at the local government level should also help speed up disbursements. This is especially important given the sizeable informal sector and a pre-requisite for the success of future support if large-scale outbreaks reoccur. Recent relaxation of eligibility criteria slightly increased the uptake of concessional loans from the development bank (VPSB), but there is scope to further increase loan duration and amounts.

  • Re-consider tax deferrals and support firms. Weak uptake and profitability, especially in the hardest-hit sectors, argues against an expansion or extension of tax deferrals. Instead, temporary corporate income tax (CIT) loss-carry backwards could be introduced to improve firms’ cash flows. Temporary provisions for accelerated depreciation or investment tax credits could lower the user cost of capital and encourage firm investment. Temporary CIT reductions could be better targeted to benefit distressed but viable SMEs in priority sectors (in place of the current approach that only uses 2020 income as the basis for eligibility).

23. Policy support should also facilitate the reallocation of resources. Consideration could be given to hiring subsidies, but liquidity support should remain temporary to enable reallocation of resources towards growing sectors. Tax credits for firms and households and other active labor market policies to incentivize job training should be encouraged. Support targeted to viable sectors and affected regions would be most effective.

Supporting Longer-term Growth Prospects and Resilience

24. Mobilizing domestic revenue will be critical to rebuild fiscal buffers and meet investment needs in the post-COVID world. Vietnam’s tax-to-GDP ratio is relatively low compared with emerging market peers, calling for a credible, well-coordinated medium-term revenue strategy. This would also lessen the trade-offs between increased spending needs to support inclusive and sustainable growth and deficit reduction. The authorities’ plans to reduce the budget deficit to 3 percent of GDP over the medium-term will help replenish fiscal buffers.

  • Tax policy: A comprehensive reform of direct and indirect taxes is long overdue. Efforts should focus on rationalizing tax expenditures, broadening the value-added tax (VAT) base, raising excise duties, and adopting a unified property tax. Despite a relatively higher personal income tax (PIT) rate, tax collections lag peers owing to high informality and a limited tax base.

  • Tax administration: Envisaged improvements in tax administration, in line with IMF TA recommendations (Annex X), encompass fully operationalizing the large tax-payer unit and adopting comprehensive compliance improvement strategies for high-risk taxpayer segments (e.g., high wealth individuals) and issues (e.g., digital economy). Consideration should also be given to improving the tax agency’s organizational structure and expanding implementation of e-tax services and simplified procedures in tax registration, filing, payment and refunds.

General Government Tax Revenue

(In percent of GDP)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Calculations based on 2020 October WEO.

PIT: Revenue and Rate

(average 2010–2019)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Staff calculations based on Vietnamese authorities; IMF Internal World Revenue Longitudinal and Tax Rates Databases.

25. Spending measures are also needed to make fiscal policy more growth friendly and inclusive.

  • Increase public investment. There is room to further increase public investment spending as a share of GDP. Higher public investment spending can be achieved by utilizing savings from rationalizing current outlays (Figure 4), while improving efficiency and prioritization. Efforts should focus on closing SDG gaps in roads, electricity and water sectors that have positive externalities and can crowd-in private sector investments (IMF WP/20/31). Investing in adaptive and digital infrastructure as currently being considered could boost growth and aid with the targeting of social assistance programs and financial inclusion.

  • Strengthen social-protection systems on a permanent basis. Coverage of social protection remains lower than peers. Efforts to improve targeting and widen coverage by introducing a unique citizen identification number and cross-linking databases, are welcome. E-payments could be encouraged, leveraging the high penetration of mobile phones to better reach those without bank accounts. Enrolling workers into programs that can be activated and scaled up to provide unemployment support in emergencies would enhance automatic stabilizers and reduce implementation lags. The recently approved gradual increase in retirement age for both men and women is welcome, but further parametric reforms are needed to improve coverage and adequacy and to ensure pension system sustainability in the face of rapid aging.

Spending Needs to Achieve Selected SDGs

(additional total spending, in percent of GDP)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Baum (IMF WP 2020/31).Notes: Additional spending needs are based on current budget provisions above which spending would need to increase.

Coverage by quintile, Contributory Pensions

(Most recent available year)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: IMF FAD Social Protection & Labor – Assessment Tool (SPL-AT).

Top 10 Vulnerable Countries from Climate Risk 1/

(Ranking 1 to 10; 1 is most vulnerable)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: INFORM Global Risk Index 2020; GERMANWATCH Global Climate Risk Index 2020.1/ Natural Hazard Risk Index, by INFORM, is based on physical exposure to natural hazards (actual and relative); Global Climate Risk Index, by GERMANWATCH, is based on fatalities and economic losses from weather-related events.

26. There is scope to green the recovery. Raising the contribution of renewables and full carbon pricing of fossil fuels could facilitate a shift toward a more environmentally sustainable growth model. Recent reductions in environmental protection taxes on aviation fuels should be reversed as soon as possible. The recently revised and ambitious national targets for greenhouse gas (GHG) emissions by 2030 are welcome, but mobilizing the necessary financing remains a challenge. Recent flooding and increasing frequency of extreme weather-related events underscore the need for adaptation investments to protect livelihoods in rural areas. Investing in climate-resilient infrastructure could also generate significant growth and debt reduction benefits (Annex XI).

27. More robust fiscal policy frameworks are needed to scale up productivity-enhancing investments and safeguard fiscal sustainability.

  • Upgrade the external debt framework. Vietnam’s long-standing framework of external debt ceilings, encompassing both the public and private sector, lumps different risk profiles and potentially constrains viable infrastructure investment. Numerical ceilings should only apply to public sector FX debt and hard limits for the private sector avoided (see next section).

  • Strengthen the public financial management (PFM) frameworks. Fiscal reporting should be strengthened, including further limiting spending and revenue carryforwards (Annex X). The recent merger of some extrabudgetary funds (EBFs) into the budget is welcome and should continue.

  • Strengthen the public investment framework. Public investment management should be improved in all phases of the public investment cycle along the lines of 2018 Public Investment Management Assessment (PIMA) recommendations, to maximize the growth impacts and ensure an efficient use of public monies.

  • Adopt a prudent debt anchor. Adopting a prudent debt anchor, at 55 percent of GDP as previously proposed by staff (IMF CR 18/216), in medium-term frameworks while keeping the current statutory ceiling (which should be considered an upper bound) would help account for potential shocks, rising age-related spending costs, and other fiscal risks.

Authorities’ Views

28. The authorities stressed the importance of prudent fiscal policies, balancing fiscal sustainability considerations with the need to support growth. They agreed with the need to improve execution and coverage of policy support, pointing to the recent acceleration of public investment disbursement rates and expanded coverage of social-safety programs. They concurred that fiscal policy should be adjusted to the pace of the recovery but argued for a more cautious stance to avoid depleting policy space given the uncertain outlook. The 2021 budget envisages growth-friendly fiscal consolidation measures, including delaying adoption of the new civil-service salary scale while prioritizing public investment and health spending. They noted that the 2021–30 tax-administration strategy will help mobilize revenues over the medium term, and options for upgrading tax policy are under study. They also noted that a revised public-debt ceiling below 65 percent of GDP for 2021–25 is currently under consideration and is seen as more prudent in light of the recent GDP re-basing.

Summary of Recommended Fiscal Response

article image
Source: IMF staff.

B. Monetary and Exchange Rate Policy: Supporting the Economy While Ensuring Stability

29. The SBV has sought to balance support for the economy with its policy objective of maintaining exchange-rate stability and anchoring inflation. Since late May 2020, the short-term interbank rate has hovered around zero driven by unsterilized foreign exchange purchases amid continued inflows, more robust deposit than credit growth, and softening inflation, with the policy rates somewhat de-linked from movements in the overnight interbank rate. The transmission to long-term interest rates has been more moderate and entails a notable lag. Weak policy transmission stems from historically volatile interbank rates, reflecting the lack of an interest rate corridor, emphasis on exchange-rate stability in the policy framework, and volatile movements of government deposits that complicate liquidity management.

Interest Rates

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Vietnamese authorities.

30. Monetary policy should remain supportive given subdued inflation and a negative output gap. Given the already low interbank rates, additional measures could be considered to lower long-term borrowing costs, if needed. These include further lowering policy rates, which would help limit an increase in future interbank rates if liquidity conditions were to suddenly change and signal a commitment to maintaining accommodative conditions.11 Consideration could also be given to providing longer-term lending to commercial banks, either through a central bank relending program or a special discount window. Relaxing the lending-rate caps to priority sectors could incentivize banks to lend to riskier borrowers with promising business plans.

31. Enhancing exchange rate flexibility would facilitate external adjustment and management of domestic liquidity conditions. Foreign-exchange reserves are broadly adequate at the current juncture and FX interventions should be limited to smoothing excess volatility and helping resolve market dysfunction. Greater two-way flexibility within the current ± 3 percent band should be allowed by setting the SBV buying rate near the upper end of the FX trading band. The recent appreciation of the SBV’s buying rate is a step in the right direction. If faced with persistent large shocks, the SBV should re-center the band.

32. Over the medium term, further modernization of the monetary policy framework would strengthen the effectiveness of interest-rate policies. Deposit and lending-rate caps should be relaxed to strengthen market-based deposit and loan pricing and improve credit allocation. In tandem, aggregate and bank-by-bank credit growth ceilings on credit institutions should be gradually lifted. Ongoing IMF FPAS TA will help improve the SBV’s forecasting ability and policy analysis (Annex X). These steps, together with greater two-way exchange rate flexibility, would improve credit allocation and strengthen the transmission of monetary policy.

33. Capital account liberalization should proceed cautiously and be carefully sequenced, as recommended by recent IMF TA. The first step would be to exclude the private sector from the ceiling on external debt and improve monitoring of short and medium-term borrowing. The subsequent phase of capital-account liberalization should be tied to monetary policy modernization and a gradual increase in exchange-rate flexibility. A comprehensive macroprudential strategy supported by improved data reporting would also be essential for managing credit risks.

Authorities’ Views

34. The authorities agreed that liquidity conditions should remain accommodative in the near term. However, they remained committed to prudent monetary policy which balances support for the recovery with concerns for financial stability risks. They considered a central bank relending program necessary only in exceptional situations, and to support viable firms. They noted that monetary policy transmission to bank lending rates has strengthened in recent years but still operates with a long lag. They indicated that the market-based monetary policy system needed time to develop and that removal of credit ceilings should be done in a gradual and orderly manner. They noted that greater two-way exchange rate flexibility is desirable over time as the monetary policy framework is gradually modernized and the capital account is liberalized. However, they argued that currency stability and higher external buffers are warranted at this juncture in light of the crisis and the uncertain global economy.

C. Macro-Financial Policies: Remaining Vigilant and Managing

35. Corporate support for viable, but still vulnerable, firms should be maintained to support the recovery and gradually replaced with policies that facilitate restructuring. Any extension of existing loan-restructuring schemes should be timebound and targeted to minimize banking system strains. Mechanisms for corporate restructuring and resolution should be strengthened and simplified (see also Annex IV).12

  • Solvency support for viable firms. A case can be made for the government to intervene selectively to help viable, strategic firms facing pandemic-related difficulties, as is being considered for the national airlines. Support could take the form of equity injections, and transparently reported and monitored, with clear exit strategies. Nonviable firms should be encouraged to liquidate, so that capital can be reallocated to more efficient sectors and firms.

  • Support for SMEs. In addition to a central bank lending facility for SMEs (¶28), the Vietnam Development Bank and SME Guarantee Funds could provide complementary guarantees to support an increase in lending volumes and extending maturities, with clear backstops from the government.

  • Efficient insolvency frameworks. To enhance the survival prospects of viable businesses and streamline the liquidation process, consideration should be given to: (i) introducing a specialized SME bankruptcy regime to fast-track reorganization and liquidation; (ii) improving out-of-court restructuring frameworks, especially for SMEs; and (iii) allowing firms to initiate bankruptcy proceedings before becoming insolvent. Consideration could also be given to establishing a personal insolvency regime to address over-indebtedness of small entrepreneurs and households.

36. Close monitoring of risks in the banking sector remains crucial. Supervisors should closely review loan restructuring processes and banks’ loss estimates and assess the impact of COVID-19 on loan quality and profitability. Loan classification and provisioning rules should be gradually normalized as they run the risk of increasing moral hazard and undoing recent progress in strengthening bank transparency and governance. Supervisors should ensure that banks properly recognize both legacy and emerging NPLs after the expiration of the loan-restructuring schemes. Systemic risk monitoring should be enhanced, including deepening analysis on exposures to pandemic-affected sectors and real estate, and conducting thematic stress tests.

37. Once the crisis abates, further efforts are needed to enhance banking system resilience. The SBV should closely monitor banks’ plan and timeline for Basel II adoption as this is key to improving risk management and loss-absorbing capacity. To facilitate capital raising plans, consideration should be given to equity issuances, including raising foreign ownership limits beyond current rules (currently set at 30 percent) and reducing state-ownership of the SOCBs from the current threshold of 65 percent to 51 percent. Staff welcomes the authorities’ intent to help recapitalize SOCBs by allowing them to keep retained earnings.

38. Over the medium-term, closing key regulatory and supervisory gaps would enhance financial resilience and foster financial deepening. Consideration should be given to broadening macroprudential tools, such as introducing a countercyclical-capital buffer or capital-conservation buffer to weather adverse shocks and setting limits on the loan-to-value (LTV) and debt-service-to-income (DSTI) ratios. Capital market deepening will require ensuring market transparency, integrity and consumer protection through timely disclosure and infrastructure (e.g., establishing a credit rating agency). Fintech can enhance financial inclusion, and regulatory sandboxes could help promote innovation, but the authorities will need to remain mindful of risks accumulating outside the traditional financial sector.13

Authorities’ Views

39. The authorities agreed that support measures should be time-bound and targeted and financial stability safeguarded. They noted that loan restructuring and regulatory forbearance will be gradually phased out and carefully calibrated based on a thorough assessment of corporate sector needs. The authorities also agreed on the importance of monitoring the financial system and viewed that more provisioning supported by reduced dividend payouts and improved bank business models would help banks dispose of expected higher NPLs. They acknowledged the importance of improving monitoring and supervision of the rapidly expanding corporate bond and real estate sectors, and emphasized efforts to strengthen regulation on consumer lending, concentration risks, and bank exposures prior to the pandemic. They noted that Basel II adoption remains a key priority, with the timeline for adoption extended to early 2023. The authorities also highlighted the importance of Fintech as a trend that has been accelerated by the pandemic and saw the need to balance between regulation to prevent risk and promotion of innovation.

D. Macro-Structural Policies: Reducing Dualism and Lifting Productivity

40. More decisive reforms are needed to make the most of Vietnam’s considerable potential in the post-pandemic “new normal”. This will require tackling the sources of pervasive economic dualism that hold back investment and productivity growth and fuel external imbalances (Annex V). A range of distortions also give rise to misallocation of resources. Staff analysis suggests that removing all distortions to the level found in Korea, for instance, could increase total factor productivity (TFP) by more than 40 percent.14

Firm Productivity Dispersion, by Country

(More dispersion = more misallocation)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Source: ORBIS and IMF staff calculations.

41. Priority should be given to improving the business environment and ensuring a level playing field (Figure 6). Reforms geared towards simplifying and reducing the regulatory burden faced by domestic private firms, improving access to land and financial resources (see IMF 19/235), particularly for SMEs, and reducing corruption could spur firm profitability, investment, and growth. Easing entry and exit costs for formal firms would allow for higher formalization of new and young firms, reduce informality, and allow for a faster reallocation of resources from exiting companies, increasing productivity (Annex IV). Continued SOE reforms, including improving governance, would help increase competition and facilitate a more efficient allocation of resources.

Figure 6.
Figure 6.

Vietnam: Productivity Gap and Resource Misallocation

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

42. Reducing labor skill-mismatches and increasing human capital and technology access would also boost labor productivity. A sizable fraction of Vietnam’s labor force reports a skill mismatch in their jobs, reflecting existing frictions in the labor market and gaps in educational and vocational training. Labor market duality has also hindered human capital accumulation, as informal workers receive inadequate training, which impedes reallocation of workers toward productive jobs.15 The new Labor Code, which now covers workers previously employed informally by registered firms, will also help reduce labor market frictions and lower informality.16 Closing information gaps, reducing market fragmentation, and strengthening labor-market governance (e.g., increased coordination and data sharing between agencies) would help reduce skill mismatches. Efforts to strengthen the link between education, training, and skill demand, and improving access to digital infrastructure will also allow workers to reap the benefits of the structural and digital transformation wrought by the pandemic (see Annex III and IV).

Informality by Education Level

(2018, In percent)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Sources: Vietnam Labor Force Survey 2018; IMF staff calculations.

Skill Mismatch

(2018, In percent)

Citation: IMF Staff Country Reports 2021, 042; 10.5089/9781513570488.002.A002

Note: Anwers to a question of "Does the curenty job match with your learning/training".Sources: Vietnam Labor Force Survey; IMF staff calculations.

43. Reforms in these areas would also help Vietnam reap greater economic benefits from global-value-chain (GVC) participation. The pandemic has revealed the risks of supply chain disruptions and potential changes in the GVC landscape, underscoring the importance of upgrading the country’s participation in GVCs and developing a dense network of domestic suppliers. Vietnam would be better placed to benefit from post-pandemic shifts through wide-ranging structural reforms.17

Authorities’ Views

44. The authorities agreed that further structural reforms could boost productivity and stressed advances in streamlining and simplifying administrative procedures. They noted that higher public investment will catalyze private investment and play an important role in supporting employment. They saw the new Labor Code as an important first step in tackling labor informality in registered firms. The authorities noted that the eventual rollout of a unique-ID system will improve the efficiency of support programs, including for informal workers. They underscored their commitment to reforming Vietnam’s economic institutions, strengthening the business environment, and skills development in their 2021–2025 national development strategy. They view digitalization as an opportunity to modernize Vietnam’s economic system. Priority will also be given to high-tech and green projects in their FDI strategy and to improve domestic spillovers from GVC participation, particularly for SMEs.

Other Issues

45. Data frameworks. Data provision is broadly adequate for surveillance, but further improvement is necessary to upgrade to standards consistent with other emerging markets. Priority areas include improving the quality, coverage, and timeliness of fiscal, monetary, and credit reporting and external statistics. Expanding coverage of real estate markets statistics, corporate bond issuances and other credit exposures would help monitor vulnerabilities and proactively manage financial sector risks. Strengthening inter-agency coordination and data sharing is critical to address data coverage and reporting gaps.

46. Governance and anti-corruption. Efforts to improve governance and strengthen the anti-corruption framework are underway, but significant room for improvement remains. As noted in a forthcoming report by the Government Inspectorate of Vietnam, corruption remains a serious and complex challenge.18 At the same time, significant steps have been taken to improve governance by investigating and prosecuting serious corruption cases in both the public and private sectors, strengthening implementation of the 2018 Law on Anti-Corruption, and introducing a National Public Sector Service Portal (e-government). Vietnam published its first National Risk Assessment on Money Laundering and Terrorist Financing in 2019. The ongoing Mutual Evaluation of Vietnam on AML/CFT, once concluded, will further inform the prioritization of policies and measures to strengthen the AML/CFT framework.

Staff Appraisal

47. The authorities’ response to COVID-19 has been commendable. The pandemic disrupted a prolonged period of high growth and impressive improvements in living standards. However, early and decisive efforts on the health and economic policy fronts have contained the fallout from the crisis, and a strong recovery is in train. The build-up of fiscal, external, and financial buffers prior to the pandemic has underpinned Vietnam’s resilience to the shock.

48. Uncertainty remains large. Widespread availability of effective vaccines and therapies could boost confidence and accelerate the recovery relative to the baseline forecast. However, uncertainty around the outlook remains high: labor market conditions are still weak; corporate balance sheets have worsened since the onset of the crisis; banking system weaknesses persist; and the economy is heavily reliant on external trade and vulnerable to trade tensions and a protracted global recession. The imposition of countervailing duties and the ongoing investigation into Vietnam’s currency practices could constrain otherwise desirable monetary policy decisions and depress confidence and investment. A prolonged period of low growth runs the risk of stoking larger-scale corporate distress, labor market disruption, and banking system strains.

49. Macro policies should remain supportive in 2021 and adjusted flexibly to the pace of the recovery. A neutral or moderately expansionary fiscal stance would help avoid derailing the recovery, prevent job losses from becoming permanent, and support vulnerable households, with improved execution and better targeting as priority. Given muted inflation, monetary policy should remain accommodative. Greater exchange rate flexibility within the current band would facilitate external adjustment and better management of domestic liquidity conditions.

50. Mobilizing revenues is critical to rebuild fiscal buffers and support durable, inclusive, and green growth. A gradual fiscal adjustment should start once the recovery is cemented, with policy efforts centered on revenue mobilization. This will also create space to scale up priority social and infrastructure spending to support growth and boost climate resilience. Continued efforts to enhance revenue collections and upgrade fiscal policy frameworks will help safeguard fiscal sustainability.

51. Financial system resilience should be bolstered. Corporate support for viable firms should be gradually phased out and loan classification rules normalized. Private debt restructuring frameworks should be enhanced to reduce economic costs associated with any capital reallocation. Continued strong supervision together with timely efforts to address problem loans and strengthen regulatory and supervisory frameworks will help address financial system risks. Banks’ capital positions need to be further strengthened over the medium term and Basel II requirements adopted by early 2023 to buttress the sector’s resilience.

52. Achieving a lasting balance in the external position will require steadfast reform efforts. The external position in 2019 was substantially stronger than warranted by fundamentals and desirable policies, reflecting underlying distortions. Removing structural impediments for investment and enhancing the social safety net to discourage excessive household savings should help reduce external imbalances. Modernization of the monetary policy framework to strengthen the transmission of conventional interest rate policies and continued efforts to allow greater two-way exchange rate flexibility will also attenuate the need for reserve accumulation. Imposition of countervailing duties on Vietnam would be counterproductive for reducing external imbalances as this could potentially impinge on desirable monetary policy decisions and discourage beneficial exchange rate flexibility.19

53. There is significant scope to boost productivity and enhance resilience of the economy. Continued efforts to improve the business climate, such as streamlining administrative and tax procedures and reducing the footprint of the state, are welcome. Priority should be given to ensuring a level playing field, particularly for SMEs, strengthening anti-corruption efforts, alleviating labor skill mismatches, and tackling informality. Renewed efforts are needed to address data gaps and improve data quality.

54. It is proposed that the next Article IV consultation with Vietnam take place on the standard 12-month cycle.

Table 1.

Vietnam: Selected Economic Indicators, 2016–21 1/

article image
Sources: Vietnamese authorities; and IMF staff estimates and projections.

GDP was revised upwards by 25.4 percent on average over 2010–17 owing to better measurement and coverage of formal businesses.

Follows the format of the Government Finance Statistics Manual 2001 . Large EBFs are outside the state budget but inside the general government (revenue amounting to 6–7 percent of GDP).

Excludes net lending of Vietnam Development Bank and revenue and expenditure of Vietnam Social Security.

Incorporates a projection for negative errors and omissions going forward (i.e. unrecorded imports and short-term capital outlfows).

Excludes government deposits.

Table 2.

Vietnam: Balance of Payments, 2016–2021

(In billions of U.S. dollars, unless otherwise indicated)

article image
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Incorporates a projection for negative errors and omissions going forward (i.e. unrecorded imports and US dollar currency holdings by residents outside the formal financial sector).

Excludes government deposits.

Uses interbank exchange rate. 3

Table 3.

Vietnam: Medium-Term Projections, 2016–2025

article image
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Follows the format of the Government Finance Statistics Manual 2001. Large EBFs are outside the state budget but inside the general government (revenue amounting to 6–7 percent of GDP).

Excludes net lending of Vietnam Development Bank and revenue and expenditure of Vietnam Social Security.

Table 4a.

Vietnam: Consolidated State Budgetary Operations, 2016–2021 1/

(In trillions of dong)

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

Government Finance Statistics 2001 presentation. The baseline projections include assumptions of lower trade-related tax revenue due to international trade agreements, gradual improvements in tax collection, and current plans for SOE equitization/divestment. Figures consolidate central and provincial government accounts, but exclude net lending of Vietnam Development Bank and revenue and exenditure of Vietnam Social Security and other extra-budgetary funds.

Wages are staff estimates.

Table 4b.

Vietnam: Consolidated State Budgetary Operations, 2016–2021 1/

(In percent of GDP, unless otherwise indicated)

article image
Sources: Vietnamese authorities; and IMF staff estimates and projections.

Government Finance Statistics 2001 presentation. The baseline projections include assumptions of lower trade-related tax revenue due to international trade agreements, gradual improvements in tax collection, and current plans for SOE equitization/divestment. Figures consolidate central and provincial government accounts, but exclude net lending of Vietnam Development Bank and revenue and exenditure of Vietnam Social Security and other extra-budgetary funds.

Wages are staff estimates.