Consultative Group Meeting for VietnamHanoi, December 3–4, 2009
Statement by Mr. Shogo Ishii, Assistant Director, Asia and Pacific Department
1. It is my pleasure to represent the IMF again at this annual Consultative Group (CG) Meeting. When we met this time last year, the global economy was entering the deepest recession since the Great Depression. Fortunately, the global economy is now growing again, but the recovery is expected to be sluggish and remains dependent on policy support. On the domestic front, the authorities are tackling a number of emerging risks to macroeconomic stability. These are testing times for policymakers, and I welcome the opportunity to discuss these challenges today.
2. I will focus my remarks today on recent economic developments in Vietnam and how we see the near-term outlook. However, before I start, I would like to welcome the theme of this year’s Vietnam Development Report, Modern Institutions, as it is a timely reminder of the continuing importance of the medium-term reform agenda. The government’s next 10-year strategy will set ambitious objectives—not least joining the Premier Division of Asian economies by the end of the next decade—which will require accelerated progress in modernizing the economy and its institutions.
Recent Economic Developments
3. Vietnam is weathering the global crisis better than many other countries. After a sharp slowdown in the first quarter, economic activity picked up in the second and third quarters, and we now project real GDP growth at 5¼ percent in 2009, which would be among the highest in the region this year. While the resilience of the private sector appears to have been the major driving force, the government’s stimulus program also played a role, as the combination of monetary policy easing and a sizable fiscal package has boosted domestic demand, underpinning a recovery in industrial production and maintaining robust retail sales.
4. However, the stimulus program has come with a cost, as risks to macroeconomic stability—which had been brought under control in late 2008—are once again rising. The most immediate issue is the pressure on the balance of payments. The easing of monetary and fiscal policy under the stimulus program has boosted imports, contributing to a return of significant trade deficits ($3½ billion in the third quarter). Moreover, residents have shifted their portfolios toward gold and other foreign currency assets. As a result, the dong has been under depreciation pressure this year, with parallel market exchange rates recently trading up to 10 percent outside of the official band. As the authorities have defended the dong, gross international reserves have fallen to below 2½ months of imports. Access to foreign exchange has been difficult, imposing costs on enterprises and adversely affecting investor sentiment toward Vietnam more generally.
Economic Outlook for Vietnam
5. The near-term outlook is likely to remain challenging for Vietnam. The global recovery will support the domestic economy, but uncertainty about its strength suggests some risks to the outlook for Vietnam, especially exports, private remittances, and foreign direct investment (FDI).
6. Our latest projections for 2010 reflect these challenges:
• We expect growth to rise to 6 percent, on the back of a gradual recovery in exports and FDI.
• Inflation is likely to rise to double digits from around 7 percent in 2009, as the recent sharp increase in credit growth and higher commodity prices feed into domestic prices.
• The outlook for the balance of payments is the most challenging. Our projections assume that the government is able to narrow the current account deficit to 7½ percent of GDP from an estimated 8¾ percent in 2009 and to reverse the shift in resident portfolios toward foreign currency assets. If FDI and official development assistance flows remain firm, this would allow a modest recovery of gross international reserves in 2010.
7. As I mentioned, there are downside risks to this outlook associated with the uncertainty surrounding the global economic recovery. However, the greater risk lies with the re-emergence of macroeconomic instability similar to that encountered in 2008, constraining the scope for maintaining stimulus programs. One of the key lessons from that period was that timely policy adjustments help avoid the need for more aggressive and potentially disruptive policy actions later.
Addressing Macroeconomic Risks
8. The immediate priority is to address the emerging risks to macroeconomic stability without disrupting economic activity and restore normal business conditions, so that Vietnam is well placed to take advantage of the global economic recovery. In our view, this implies the following policy actions.
9. Tightening monetary policy and restoring orderly conditions in the foreign exchange market. We welcome the latest steps taken by the State Bank of Vietnam (SBV) to address the risks to macroeconomic stability. The increase in policy interest rates was appropriate and, combined with the adjustment in the exchange rate, was a necessary step toward restoring a functioning, liquid foreign exchange market. We also welcome the decision to phase out the short-term interest subsidy scheme on schedule at end-December 2009, which will facilitate monetary management. Going forward, it will be important that the SBV remain vigilant about economic developments and be given greater authority to adjust monetary and exchange rate policy as needed in a timely manner. In addition, the cap on lending rates should be removed. A clear signal on this front, combined with a sound fiscal framework, will help boost the credibility of monetary policy and restore confidence in the dong.
10. Developing a fiscal consolidation plan. Our preliminary estimates suggest that the overall fiscal deficit as defined by the IMF (including off-budget expenditures and net lending) could widen from an estimated 4½ percent of GDP in 2008 to about 9 percent of GDP in 2009. While this fiscal impetus has helped contain the growth slowdown, some fiscal consolidation will be required in 2010 in light of available financing and the need to ensure medium-term debt sustainability. In this regard, we welcome the recently approved 2010 budget plan, which we estimate will reduce the overall fiscal deficit by about 2 percentage points of GDP to around 6½ percent of GDP. However, fiscal policy should be implemented flexibly, and a further tightening of the deficit may be needed if external pressures continue to intensify.
Safeguarding the Financial System
11. Vietnamese banks have come through the global crisis relatively well so far, thanks to strong profits and capital-raising efforts in recent years, and limited exposure to global financial markets. Nevertheless, the absence of reliable information on the banking system in Vietnam remains a serious concern, especially as the capital base of some large banks remains weak and profit margins are being squeezed by the combination of a lending rate cap and increasing deposit rates. Moreover, the strength of banks’ loan portfolios and liquidity positions may be tested if liquidity conditions tighten and economic conditions weaken again. Therefore, we very much welcome the authorities’ willingness to participate in a financial sector assessment program (FSAP), which will provide a clearer picture of the strengths and weaknesses of the banking system. This would help guide ongoing efforts to reform the regulatory regime, and enhance the confidence of rating agencies and other outside observers.
12. I would like to emphasize the importance of maintaining the momentum of structural reforms in the next ten-year strategy and five-year plan. As I noted at the beginning of my statement, achieving these ambitious objectives will require a comprehensive effort to modernize the infrastructure of the economy, as well as how it is managed. This is inevitable, given the rapid pace at which the private sector is developing in Vietnam. In this context, we would encourage the authorities to use pending banking and budget legislations to modernize the framework for monetary and fiscal management and develop the institutions Vietnam needs to manage a 21st century economy.
13. Finally, managing a market economy smoothly and effectively hinges in large part on the quality of information available to policymakers, and the ability to communicate those policies effectively to the public. While we have been encouraged by the steps taken by the SBV to improve the quality and timeliness of monetary and reserve data, there remain significant shortcomings in other areas, particularly with regard to data on fiscal, state-owned enterprise, and banking operations. Similarly, while progress has been made, improving the government’s communication strategy by regularly presenting clear assessments of the economic situation and policy direction would greatly help the authorities to manage market expectations and prevent disorderly adjustments in economic conditions.
14. Let me thank you once again for the 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.