Consultative Group Meeting for Vietnam, Statement by Mr. Shogo Ishii, Assistant Director, Asia and Pacific Department, IMF
December 4, 2008Hanoi, December 4-5, 2008
Statement by Mr. Shogo Ishii
Assistant Director, Asia and Pacific Department
1. Let me first say what a pleasure it is to represent the IMF at this Consultative Group Meeting. The theme of this meeting, Stabilizing the Economy and Maintaining its Growth Potential, is particularly appropriate given the extraordinary developments in the global economy, and I would like to thank the government for the opportunity to discuss these important matters with you. I have been asked in this opening session to provide an overview of the global economic outlook and the challenges that it poses for Vietnam.
2. Before I start, I would like to re-emphasize a point that we have made on a number of occasions. Despite the economic turbulence this year and a difficult year ahead, the medium-term outlook for Vietnam remains favorable, provided that the government sustains the momentum of economic reforms that have brought so much success this decade. However, Vietnam will first have to navigate through some significant short-term challenges stemming from domestic vulnerabilities that have been compounded by the global turmoil. I will focus on these challenges today.
Global Economic Developments
3. Let me start with our latest assessment of global economic developments. As you all know, global economic prospects have deteriorated significantly in recent months. In our latest projections, world output is projected to expand by only 2¼ percent in 2009, down by some ¾ percentage point relative to the projections in the October World Economic Outlook. Output in advanced economies is projected to contract in 2009, the first such decline in the postwar period. For emerging economies, growth is expected to slow appreciably. The weakening growth outlook is also depressing commodity prices. Oil prices have declined by over 50 percent since their peak, and other commodity prices have also fallen sharply. While this has reduced inflation pressures, it will lower growth prospects in commodity-exporting economies such as Vietnam.
Vietnam's Economic Outlook
4. The near-term outlook is challenging, and these challenges are compounded by the fact that the authorities will simultaneously have to address a large current account deficit and weaknesses in the banking and corporate sectors—especially in state-owned enterprises (SOEs). Our latest projections reflect these challenges:
• We expect real GDP growth to moderate to 5 percent in 2009, from 6¼ in 2008.
• Headline inflation will fall sharply to single digits by end-2009 mainly due to lower commodity prices, although core inflation (excluding raw food and energy items) may fall more gradually, as expected large wage increases feed through the system.
• The external current account deficit is projected to decline, with lower import growth more than offsetting a slowdown in exports and remittances. However, it will remain large at 9 percent of GDP in 2009 (12 percent in 2008) and this, together with relatively low international reserves (three months of imports), remains a source of vulnerability.
5. Moreover, the outlook is subject to a number of downside risks. First, being a small open economy, a deeper global downturn—especially in advanced economies which account for the bulk of Vietnam's total exports and remittances—will have a material impact on Vietnam. Second, tighter global financial conditions would reduce foreign direct investment and other capital inflows, which are needed to finance a large current account deficit. While Vietnam's low levels of short-term external debt and foreign investors' holdings of domestic securities provide some protection, adverse shifts in confidence, especially among domestic investors, could put pressures on reserves and the exchange rate. Lastly, slower economic activity could heighten vulnerabilities in domestic companies and the banking system.
Meeting the Challenges
6. The immediate priority is to navigate the economy safely through the near-term difficulties, and ensure macroeconomic and financial stability amid the severe global downturn. The emphasis must be placed on safeguarding the economic progress Vietnam has made over the past decade.
7. The first challenge, which the government has recognized, is to set a strategy for 2009. This requires caution in setting economic objectives for 2009, especially for growth and investment, as well as a recognition that these objectives may need to be adjusted as events evolve. The frequent revisions of the IMF's global economic forecasts demonstrate how difficult it is to chart an economic course in the current global environment.
8. The second challenge is to design appropriate macroeconomic policies, which should be guided by the following considerations:
9. Balancing risks. While the balance of risks has shifted from inflation to growth, the government will need to proceed cautiously in easing macroeconomic policies. Unlike other countries in the region, Vietnam's relatively fragile external position places a constraint on the government's ability to pursue expansionary monetary and fiscal policies. Striking an appropriate balance between growth and external risks will require skillful macroeconomic management. More concretely:
• The State Bank of Vietnam (SBV) will need to be vigilant in further easing monetary policy, weighing growth and stability objectives carefully. Due recognition is needed at the political level of the delicate course that the SBV will have to navigate. The recent depreciation pressure on the dong is a testament to how finely balanced policies will have to be.
• The recent widening of the trading band is welcome, and we would continue to support further moves toward a more flexible exchange rate regime, as conditions permit.
• Fiscal policy will need to be restrained, with the available space within the expenditure envelope geared toward funding critical infrastructure needs and providing support for vulnerable groups. This will require a shift of resources away from inefficient capital projects, including for SOEs. In the event economic prospects deteriorate more severely than expected, some additional increase in social spending could be considered.
10. Safeguarding institutions. It will be important to have in place a framework to address promptly any vulnerabilities in the banking and corporate sectors that may emerge as a result of the economic slowdown. While we are encouraged by the SBV's reports that risks in the banking system have so far been contained, there are signs of strain emanating from deteriorating asset quality, and these could intensify in the period ahead. Close monitoring of large SOEs is also important to identify and address problems that might pose significant fiscal and banking risks.
11. Improving data quality and communication. The ability to craft appropriate policies rests in large part on the quality of information available to policymakers. While the steps taken by the SBV to improve the quality and timeliness of monetary and reserve data are encouraging, significant problems remain in other areas, particularly data on fiscal, SOE, and banking operations. These need to be addressed urgently, and the IMF stands ready to assist the authorities in areas within our expertise, such as fiscal and banking statistics. In addition, it will be important for the government to present policy initiatives in a more coordinated and comprehensive manner, which is critical to enhancing investor confidence.
12. Accelerating structural reforms. I have focused on the near-term macroeconomic challenges, but I would like to conclude by emphasizing the importance of the broader structural reform agenda, especially in the area of the SOE and banking sectors where the reform momentum has slowed over the past year, and the agenda to modernize key institutions such as the SBV and the Ministry of Finance. Maintaining the momentum of these reforms is important not only for sustaining Vietnam's impressive progress toward becoming a full-fledged emerging economy, but also for bolstering investor confidence particularly needed while the economy goes through this difficult period.
13. Let me thank you once again for this opportunity to participate in these discussions. On behalf of the IMF, let me reiterate our continued commitment to providing Vietnam with the best possible policy advice and support at this difficult juncture.