Vietnam – Consultative Group Meeting for VietnamHanoi, December 7–8, 2010
Statement by Mr. Masato Miyazaki
Division Chief, Asia and Pacific Department
1. Your Excellencies, ambassadors, distinguished participants, ladies and gentlemen. It is my great pleasure to represent the IMF at this annual Consultative Group (CG) Meeting at this critical juncture.
2. Vietnam has avoided fallouts from the global crisis, thanks to the substantial and effective stimulus measures adopted by the government. This year, real GDP growth has accelerated to over 7 percent in the third quarter, supported by strengthening exports and robust domestic demand, and will likely exceed our projection of 6½ percent for the year as a whole. FDI and remittance inflows also remained robust, which together with ODA more than finances the current account deficit. On the other hand, however, there still remain challenges that the government needs to tackle head-on. It is, therefore, timely that we get together here today to discuss how Vietnam can and should meet the challenges, and thereby lay foundations to a long-term sustainable growth that will be justified by the vast potential of this great country.
Recent Economic Developments and Policies to Address Macroeconomic Risks
3. Recent indicators point to immediate policy challenges for Vietnam:
• Headline inflation has picked up again since September, exceeding 1 percent on a monthly basis, and will likely move into double digits this year on a year-on-year basis. Higher food prices have contributed, but high domestic demand as well as the depreciation of the dong are playing a significant role.
• Credit growth is expected to exceed this year’s target of 25 percent, which in itself is too high for the economy.
• The trade deficit widened to US$1.3 billion in November and the projected current account deficit (excluding gold) at just under 7 percent of GDP remains very large. Similarly, although international reserves have stabilized this year, they remain low at 1.8 months of prospective imports as of end-September.
• The dong exchange rate has been under constant depreciation pressures since the summer, despite the 2.1 percent devaluation in August and a 100 basis point increase in the policy rates in November. Recently the parallel market exchange rates are around 10 percent outside the official band.
4. As discussed in our latest staff report for the Article IV consultation, we believe that instability in the macroeconomic conditions owes much to the erosion of market confidence in the direction of macroeconomic policies. It is true that the government deserves praise for having avoided major crises in the difficult environment during the past few years, but it must equally show resolve and sustained commitment to maintaining macroeconomic stability and tackling elevated macroeconomic risks. Indeed, despite official statements to the contrary, the government’s policy actions often give an impression that it values short-term growth over the stability needed to sustain growth over the longer term. Moreover, delayed policy adjustments could necessitate “last minute” draconian measures, which could lead to an increase in volatility and risk in the economy.
5. Therefore, we believe that the immediate priority is to address the emerging risks to macroeconomic stability through a set of convincing policy responses: all government agencies and bodies need to cooperate toward this objective. By doing so, market confidence in the authorities’ commitment can be re-established and Vietnam can build policy buffers that may cushion the adverse shocks in the future. In our view, the following policy actions should be promoted.
6. A further tightening of monetary policy is required to restore orderly conditions in the foreign exchange market and contain inflationary pressures. We commend the authorities for the shift in monetary policy announced in November. It was a welcome first step in the right direction, but the policy rates are still too low to counter strong market expectations for dong depreciation and higher inflation. We believe the government should pursue a coherent package of tightening measures that should include a further rise in the policy rates and greater fiscal consolidation. In the medium term, a stable foreign exchange market can only be achieved if monetary policy is reoriented toward achieving an inflation rate closer to the ASEAN average of 3–4 percent. To be credible, such an inflation objective would have to be underpinned by significantly lower credit growth targets than in recent years. Once the credibility in monetary policy is re-established, it might be beneficial for Vietnam to move toward a more flexible exchange rate regime.
7. Implementing a fiscal consolidation plan with a view to lowering the public debt-to-GDP ratio is essential to raise confidence and create fiscal space, against the backdrop of concerns over explicit and implicit contingent liabilities. With most stimulus measures having expired by end-2009, a reduction in the overall budget deficit from just under 9 percent of GDP in 2009 to around 5½ percent of GDP1 in 2010 is within reach provided the government keeps a tight rein on spending. A further reduction in the deficit to under 5 percent of GDP in 2011, and to around 3 percent of GDP by 2015, appears achievable if the process of expenditure consolidation is sustained. This would help ensure the debt-to-GDP ratio stays below 50 percent of GDP. For this purpose, it is critical to pursue further steps to realize efficiency gains in investment spending, while boosting its quality.
8. Further reforms are needed to safeguard a financial system that is robust, efficient, and market-based. Although Vietnamese banks were shielded from the banking crisis in advanced economies, they have their own home-grown concerns. For instance, surges in credit in 2007 and 2009, of over 30 percent of GDP, could have resulted in a deterioration of the quality of their assets, including loans to Vinashin and other large-scale state and non-state borrowers. A sharp increase in the net foreign open position of the banking system in the past few months, as well as increased reliance on offshore funding, poses another concern. The soundness of smaller banks needs to be carefully monitored in the more competitive climate. We therefore welcome the recent strengthening of prudential regulations, including an increase in the minimum capital adequacy ratio and minimum capital requirement. To identify areas for further reform and a concrete timeline, we encourage the authorities to participate in a joint IMF-World Bank Financial Sector Assessment Program (FSAP), which has already been conducted to a number of regional economies.
Move Further Toward the Market Economy
9. Vietnam’s transition to the market economy in the past 20 years has been truly remarkable. We remain optimistic that this progress can be sustained. Restoring and sustaining stable macroeconomic conditions is clearly a prerequisite. On the other hand, we believe that the government’s continued efforts in liberalizing the economy and shrinking the size of the public sector is also critical to sustain a high growth in the long run. As the economy is driven more by market principles, the government needs to adapt by changing its style of policy conduct. This implies a shift away from directives and controls toward indirect instruments of economic management. Communication is an integral part of policy management in a market driven economy, as is reliable and timely economic data including basic data on fiscal and monetary policy developments, international reserves, and the banking and corporate sectors, especially SOEs.
10. I would like to conclude my statement by thanking the authorities once again for the opportunity to participate in this meeting. On behalf of the IMF, let me reiterate our continued commitment to providing Vietnam with our sincere advice and support in the future. Thank you.
1 Based on IMF definition.