Vietnam Consultative Group Meeting, Statement by the Representative of the International Monetary Fund
December 10, 2007
Assistant Director, Asia and Pacific Department
Hanoi, December 6-7, 2007
1. It is my pleasure to represent the IMF at this Consultative Group Meeting. At the outset, I would like to take this opportunity to commend the authorities for carefully implemented economic reforms and prudent macroeconomic management—a key to Vietnam's impressive record of economic growth and poverty reduction. Vietnam is one of the fastest growing and most dynamic economies in Asia. With its accession to the World Trade Organization, Vietnam has entered a new phase of development characterized by accelerated integration with the global economy. As in previous meetings, my statement will focus on recent macroeconomic developments, the economic outlook, and main policy challenges.
Recent Macroeconomic Developments and Outlook
2. Vietnam's economic performance continues to be strong. Economic growth remains robust and is expected to exceed 8 percent in 2007, driven by buoyant private consumption and investment. On the external side, a pick up in imports has widened the current account deficit, but the deficit has been more than financed by large capital inflows. Gross international reserves increased by $9½ billion in the first nine months of 2007 to reach about $21 billion.
3. However, increasing inflation and sharply rising asset prices have become an increasing concern. Inflation rose to over 9 percent (y/y) in October 2007. Although the increase was mainly due to higher food and commodity prices largely reflecting supply factors and global market conditions, the underlying inflation trend is well above the average of emerging markets in the region. On asset prices, the steps taken by the authorities appear to have reined in the emerging bubble in the stock market, but property prices in large cities are reportedly rising sharply.
4. Fiscal expansion and rapid credit growth appear to have added to inflation pressures. The budget deficit, as defined by the IMF, was lower than the budget plan in the first nine months of 2007, mainly due to higher-than-anticipated revenue. However, the fiscal stance has still been somewhat expansionary, with the deficit estimated to increase this year. An increase in liquidity in the early part of 2007, resulting from significant foreign exchange intervention by the State Bank of Vietnam (SBV), has fueled rapid credit growth, which reached 40 percent (y/y) in August 2007.
5. Nevertheless, Vietnam has good prospects, with further integration into the global economy bringing greater development opportunities. Over the medium term, economic growth is projected to be sustained at about 8 percent a year, underpinned by strong domestic demand and high export growth. Vietnam is expected to reach middle-income country status as envisaged under the 2006-10 Socio-Economic Development Plan. The external position is expected to remain strong, benefiting from potential gains of the WTO accession.
6. Vietnam needs to address a number of challenges to sustain high growth and further reduce poverty as it becomes progressively more integrated into the global economy. These challenges include maintaining macroeconomic and financial sector stability and steadfastly implementing structural reforms, which will help strengthen Vietnam's resilience to adverse shocks. The importance of policy initiatives to address these challenges has been underscored by the recent global financial turmoil, which so far has not significantly affected Vietnam. Let me elaborate on our views on key policy issues.
7. First, tightening monetary conditions. While welcoming the authorities' steps to tighten monetary conditions in recent months, the stance of monetary policy has remained accommodative, with real interbank rates remaining negative. We would encourage the authorities to rein in credit growth by tightening monetary conditions and enhancing prudential oversight of banks, especially of the joint stock banks that have extended credit at a particularly high pace.
8. Second, increasing exchange rate flexibility. The dong/U.S. dollar rate has remained broadly stable. The continuation of this policy in the face of persistent large capital inflows would require a return to significant foreign exchange intervention that would in turn put pressure on the SBV's monetary operations. We would encourage the authorities to allow the dong to be more responsive to pressures on the exchange rate In the short run, this would not only help reduce inflation pressures, but also ease the need for foreign exchange intervention and sterilization. In the longer run, greater exchange rate flexibility would create an incentive to manage exchange rate risks effectively, deepen further financial markets, and help enhance Vietnam's resilience to external shocks.
9. Third, implementing a prudent fiscal policy. While recognizing the substantial needs for infrastructure development, a more restrained fiscal stance would be desirable in the context of strong economic growth and increasing inflation pressures. Pursuing an expansionary fiscal policy could exacerbate inflation and weaken prospects for sustained high growth. To enhance fiscal sustainability over the medium term, we would emphasize the need to bolster non-oil revenues, as oil revenue is expected to decline over time. In this context, planned tax reforms should be carefully designed and tax administration further strengthened. Steps would also need to be taken to improve expenditure efficiency, including phasing out oil subsidies while putting in place social safety nets. We would also encourage the authorities to continue their prudent external borrowing, in particular not to fund state-owned enterprise projects through the issuance of new sovereign bonds. These measures, together with saving oil revenue windfalls, would create room for counter-cyclical fiscal policy, when needed, without threatening long-term fiscal and debt sustainability.
10. Fourth, accelerating banking sector reform. We very much welcome the establishment of a comprehensive road map for banking sector reform. Timely implementation of this plan would help develop the banking sector and safeguard its stability. The planned equitization of state-owned commercial banks and a strengthening of their commercial orientation are important steps in this process. We would encourage the authorities, in particular, to put in place a sound regulatory and supervisory framework supported by a good data system. More generally, we would continue to stress the importance of transforming the SBV into a modern central bank that has the capacity and authority to carry out monetary policy and supervise bank and other financial institutions in an emerging market setting.
11. Finally, expanding the role of the private sector. The private sector, which now accounts for more than 60 percent of GDP, has been the engine for Vietnam's rapid economic growth and job creation. We welcome the government's strong commitment to foster private sector participation in all economic sectors, especially in key industrial sectors, and look forward to the completion of the equitization of most state-owned enterprises by 2010. In this regard, we would encourage the authorities to be open to greater participation by foreign strategic investors. Improving the business environment and governance, and strengthening human capital are also crucial to further develop the dynamic private sector.
12. With the government's strong commitment to economic reform, we are confident that Vietnam will be able to successfully meet these policy challenges. The IMF will continue to support Vietnam's economic development through close policy dialogue with the authorities and to provide technical assistance in collaboration with donors and other international financial institutions.