Vietnam -- Informal Mid-year Consultative Group Meeting
June 8, 2010Kien Giang, June 9-10, 2010
Statement by IMF Staff Representative
1. Let me first thank the Government for inviting us again to this mid-year Consultative Group Meeting. This is certainly a timely opportunity to take stock of Vietnam’s recovery from the global economic crisis and to discuss the challenges that lie ahead. In my remarks today, I will focus first on the short-term outlook and how to sustain Vietnam’s recovery from the global crisis. I will then turn briefly to the longer term challenge addressed in the next Socio Economic Development Strategy (SEDS), namely how best to sustain Vietnam’s rapid pace of development in the decade to 2020.
Outlook: a sustained recovery but still fragile macroeconomic conditions
2. When we met in Hanoi last December, we had expressed a concern that reemerging macroeconomic imbalances might pose a risk to Vietnam’s economic recovery. I am pleased to say that the steps the Government took subsequently to shift policy from growth stimulus to stability have been successful in restoring more stable economic conditions.
3. A tighter monetary policy, supported by the end of the subsidized loan scheme, has reined in credit growth, and with fiscal policy also more restrained, the trade deficit narrowed in the first quarter of 2010. More recently the upward trend in headline inflation has also slowed, with inflation dipping to 9.0 percent in May. This stabilization was achieved with GDP growth sustaining a respectable 5¾ percent in the first quarter. Sentiment towards the dong has been buoyed by these favorable trends. The exchange rate has appreciated back inside the official band, and reserves, which had been under pressure, have picked up by around $1 billion so far in the second quarter and now rest at around 7 weeks of imports.
4. If these favorable conditions are sustained, the government’s objectives for 2010 appear within reach. We project real GDP growth at 6½ percent, supported by a continued recovery in private investment, consumption, and non-oil export growth. We expect inflation to rise above the government’s target of 8 percent, but provided that food and fuel prices stabilize, it should peak in the region of 10 percent this year. The balance of payments in 2010 is more delicately poised. With exports rebounding, along with the global recovery, the external current account balance (excluding gold) is projected to narrow to 9.9 percent of GDP from 10.4 percent in 2009. At this level, it should be largely covered by foreign direct investment and official capital inflows. The outlook for short-term capital flows is more uncertain, but provided confidence in the dong is sustained, this source of pressure on the dong in 2009, should also ease, allowing a modest build up of reserves in 2010.
5. However, the current favorable conditions are still fragile, and confidence that recent macroeconomic stability will be sustained remains weak. Thus, while there is some upside potential, if the authorities take steps to consolidate stability, the main risk to the short-term outlook is that a premature easing of policies now will lead to a further round of disruptions in the foreign exchange and interbank money markets later this year. This would impede the recovery in the short term and impair the rebuilding of confidence in the macroeconomic environment in Vietnam that is needed to sustain rapid growth over the longer term. Much of the current uncertainty over the short-term outlook stems from mixed signals over the direction monetary and fiscal policy in the immediate period ahead.
Short-term policy agenda: consolidate macroeconomic stability to sustain the recovery
6. The primary challenge is to consolidate recent gains in macroeconomic stability. This will require a steady course in monetary policy and clear communication from the State Bank of Vietnam (SBV) that monetary conditions will not be eased further until inflation is on a downward trajectory, sentiment towards the dong is firmly established, and external reserves are rebuilt to more comfortable levels. A realignment of monetary policy rates, to ease the steep upward slope of the yield curve, as well as greater flexibility in the use of those policy rates going forward is also desirable, as it would bring much needed stability and predictability to the conduct of monetary policy in Vietnam.
7. Fiscal policy needs to support the consolidation of macroeconomic stability. While there is still some ambiguity, the latest data suggest that the overall fiscal deficit, as defined by the IMF1, rose to 9 percent of GDP in 2009. While understandable given the context, such a large deficit is clearly not sustainable. We therefore welcome the intention to reduce the deficit this year. A reduction in the deficit to around 6 percent of GDP appears achievable, if budget expenditure remains close to the estimates presented in the 2010 Plan,2 but there remains considerable uncertainty about whether the planned reduction in investment expenditure in 2010—some 4 percent of GDP relative to 2009—will be achieved. In the current global environment, such uncertainty about the fiscal stance is undesirable, and we would urge the government to commit to sticking to its expenditure plans for 2010 to provide reassurance that fiscal policy is on a sustainable path.
8. Safeguarding the financial system remains vital to the future stability of the economy. This has become an increasing challenge in view of the rapid expansion of the banking system in recent years. Over the past 5 years private sector credit has doubled to 120 percent of GDP, increasing in real terms by 150 percent. Upgrading the regulatory and supervisory framework takes on added urgency in such a context. Priorities include developing financial soundness indicators, to identify potential risks, and bringing banking regulations, especially those related to the grading and provisioning of loans, up to international standards. Raising capital adequacy standards further, to ensure banks have adequate capital to manage the risks on their balance sheets may also be needed. In this context, we welcome the Government’s interest in a joint IMF-World Bank Financial Sector Assessment Program (FSAP).
Structural Reforms: laying the foundations for a modern emerging market economy.
9. As we have said on many occasions in the past, we remain bullish on the long-term potential of Vietnam’s economy. The challenge facing the authorities and its development partners is how to realize that potential and sustain the remarkable progress that Vietnam has made over the last two decades. We agree with the draft SEDS that this will require a shift in strategy to create an environment conducive to the development of higher value added activities: in essence, a shift from a low income to a modern emerging market economy.
10. As we noted in December, this transition will require a comprehensive effort to modernize the infrastructure of the economy and how it is managed. Let me touch briefly on some of the priority issues that will need to be addressed:
• Upgrading the institutional architecture. This is a prerequisite for an emerging market economy whose competitiveness will rest increasingly on the efficiency with which it is managed. At the macro-level, we are following with keen interest the debates surrounding the State Bank of Vietnam Law, which will hopefully grant the SBV greater operational authority to conduct monetary policy in an efficient and predictable manner, and reforms to modernize fiscal management to be contained in the new Budget Law. As noted above upgrading supervision is becoming increasingly important as the financial system develops. Similar institutional reforms will likely be necessary at the micro level, for example in the legal system, dispute settlement mechanisms, and broader administrative reforms.
• Financing Vietnam’s infrastructure needs. Developing a modern emerging market economy will require substantial investment in physical infrastructure and human capital. The challenge will be to fund these investments in a fiscally sustainable manner. This will require disciplined prioritization of public investment projects and furthering ongoing efforts to mobilize revenues and concessional development assistance. Reinvigorating the equitization program, to shift state resources to higher productivity use, and exploiting private-public partnerships, where these would lower the public debt burden, would also be important. Our baseline scenario is that Vietnam’s debt burden will remain at sustainable levels, but this hinges on Vietnam maintaining relatively high rates of growth and reducing its budget deficit to the historically prudent levels it maintained before the global crisis.
• Modernizing the role of the state in the economy. Recalibrating the role of the state to suit the needs of a modern emerging market economy will be one of the challenges that Vietnam will face in the coming decade. At one level, this involves consideration of the best allocation of scarce state resources: whether they should be invested in public goods (infrastructure, education, health) or in large state-owned economic groups. As important is the governance of such large state conglomerates. A robust governance structure that preserves a level playing field for the private sector—in terms of access to markets, finance, and productive assets, such as land—will be essential if Vietnam is to sustain a rapid pace of development.
• Addressing Corruption. We very much welcome the strong stance taken by the SEDS on the need to tackle corruption. Achieving Vietnam’s goals over the next decade will require a highly disciplined public policy across a wide spectrum of reform activities. As many countries have found to their cost, one of the most pernicious aspects of corruption is that it can dilute and distract the single-minded focus needed to sustain rapid development and gain promotion to the upper divisions in the global economic league.
11. Lastly, Mr. Chairman, can I address an issue close to my heart. As we have said before, managing a market economy smoothly and effectively hinges on the quality of information available to policy makers and their advisors both inside and outside of the government. This is essential for policy analysis and the effective communication of policies to the public. We have been much impressed by the honest effort of statistics officers at both the GSO and other agencies. However, their endeavors need greater political and financial support if Vietnam is to develop the system of statistics needed for a 21st century economy.
With these remarks, let me thank you once again for the opportunity to participate in these discussions, and on behalf of the IMF let me reiterate our continued to support to Vietnam on the road ahead.
1 Includes off-budget expenditure, on-lending, and the interest subsidy scheme, but excludes the operations of the Vietnam Development Bank.
2 The 2010 Budget Plan implies an overall fiscal deficit (IMF definition) of 7.6 percent of GDP, but the revenue projections in the Plan appear overly conservative.