Vietnam--Consultative Group Meeting
December 6, 2011Hanoi, December 6, 2011
Statement by Mr. Sanjay Kalra
1. Excellencies, ambassadors, distinguished participants, ladies and gentlemen. It is my great pleasure to represent the IMF at this annual Consultative Group Meeting. Once again, Vietnam is at a critical juncture. The government’s stabilization and reform package has begun to be implemented, and significant gains have been made. But even so, the fight is not won yet. In both the short and the medium term, difficult challenges need to be tackled. Let me outline how we at the IMF view the situation, and what policies we think are needed.
2. Resolution 11 is being implemented and largely sustained. In its wake, monetary policy was tightened, investment and the fiscal deficit were reduced, and first steps to safeguard the financial system taken. We commend the government for its efforts. But the economy is only half-way there: confidence remains fragile, and external, fiscal and financial buffers remain low. More needs to be done to bring the economy to a degree of stability comparable to regional peers.
3. The economy is beginning to stabilize. Output growth slowed to 5¾ percent y/y in the third quarter and is expected to remain below 6 percent in the year as a whole. Inflation peaked in August but, at 19¾ percent y/y in November, remains by far the highest in the region. Investment, by the state and by state-owned enterprises, has been curtailed, and the fiscal deficit is set to decline to 3½ percent of GDP (IMF definition) in 2011, from 6¼ percent last year. The current account has narrowed sharply. International reserves were built during the summer, but have declined again in an effort to contain renewed pressures on the exchange rate. At the same time, weaknesses in the financial system, the seeds of which were laid in the years of rapid credit growth, have come to the fore, and the State Bank of Vietnam (SBV) and state-owned commercial banks (SOCBs) have stepped in with liquidity support to protect small and weak banks.
4. At the same time, the global economic outlook is darkening. The Eurozone crisis and low growth in the United States are set to lower global growth and increase financial market volatility. Emerging markets in the region, and especially China, have some room to cushion the impact of these developments, but Vietnam has very little—it has used up its ammunition in combating the impact of the 2008 crisis.
5. Against this background, the authorities need to move rapidly and decisively to ensure financial sector soundness while re-establishing macroeconomic stability. Failure to do so, or even loosening policies now, would jeopardize the gains already made. In this context, I would like to discuss three key issues.
• Monetary and exchange rate policies need to focus on building confidence in the dong, lower inflation expectations, and rebuild reserves. Let me emphasize that confidence is a long-term goal: it is hard to gain, a constant challenge to maintain, and easy to lose. In this regard, the tightening of monetary policy during the second quarter was welcome. But the reduction of the repo rate in July and repeated calls for lower lending rates cast doubt on the government’s resolve to sustain tight policies. In addition, continued reliance on administrative measures did not help buttress market confidence, even if they work for a short while. We recognize that the operation of the monetary policy transmission mechanism is hampered by several factors, including the roles of SOCBs and state-owned enterprises (SOEs), and dollarization both inside and outside the financial system. Nonetheless, building lasting confidence ultimately needs to rely on price-based policy instruments. In the immediate future, if pressures on the dong exchange rate increase, the authorities should consider raising interest rates again.
• Fiscal policy should support monetary policy more in reducing inflation. While the saving of much of the higher-than-budgeted revenue this year is welcome, a further significant reduction of the deficit in 2012 is needed to support a slowdown in demand and hence faster inflation reduction. Such a policy would also serve to reduce public debt and thereby build fiscal cushions for possible needs in the—perhaps near—future. For the medium term, efforts to strengthen non-oil revenue and reprioritize and streamline public investments in line with economic returns need to be sustained and greater control over provincial expenditures established. This would reduce deficits further while also creating fiscal space to maintain social safety nets and implement needed investments. These efforts, and ambitious targets for medium-term fiscal consolidation, should be spelled out in a clear deficit reduction plan.
• Vulnerabilities in the financial sector need to be addressed without delay. As nonperforming loans rise and liquidity stress has intensified at some small banks, due in part to tightened monetary policy, a transparent framework for financial sector consolidation and re-capitalization (both quantitatively and qualitatively) is urgently needed. Liquidity support to these banks, whether by the SBV or SOCBs, or administrative controls such as deposit rate caps can at best only be a temporary solution, as they do not solve underlying governance and performance problems. In this regard, we welcome efforts underway to prepare bank-by-bank plans to deal with weaknesses and consolidate the sector, but it is important that they be implemented rapidly. More broadly, it is important that regulation and supervision are tightened, and supervisory agencies receive full and unequivocal political backing.
6. Beyond the immediate demands for macroeconomic stabilization, there is a broader need to set the economy on a new track to support continued strong growth in the future. This is already reflected in Resolution 11 and subsequent statements by the authorities. While there is an array of structural reforms in need of attention—and we wholeheartedly support the broader reform agenda envisaged by the government—it is on SOEs that I would like to comment here.
7. Reform of SOEs is crucial to reduce risks to the economy and for longer-term growth. SOEs have become a burden on the economy. They use up a large share of the now-scarce credit to the economy, invest in many cases inefficiently, and their debts cast a shadow over the financial system and over market confidence, as evidenced by the cases of Vinashin and Electricity of Vietnam. Therefore, we welcome the steps already undertaken to reduce inefficient investments, and plans for SOEs to divest from noncore activities. Moreover, management, oversight and transparency need to be strengthened to improve performance in a sustainable way. Such reforms, if done right, would improve resource allocation and meet the economy’s investment needs more efficiently, while also reducing risks to the financial sector as well as public finances.
8. As Vietnam transitions toward a middle-income market economy, policy instruments need to be adapted, and more and better information needs to be provided. As I mentioned earlier, to the extent that market forces play a greater role in the economy (and they must, if efficiency is to be raised), the effectiveness of administrative controls decreases, and price-based instruments need to be relied upon more. Such instruments are also conducive to building confidence, especially but not only in the conduct of monetary policy. Likewise, the dissemination of accurate quantitative and qualitative information to the public, is important for markets to appreciate and interpret the government’s policy actions. This would reduce risk, enhance confidence and support the broader goal of developing Vietnam’s economy.
9. We have great confidence in the Vietnamese economy. Its development to date has been nothing but remarkable, and its potential to continue to deliver rising living standards for the Vietnamese people in the future is high. But to realize this potential, the decisions made now and in the coming years will be critical.
With these remarks, I would like to thank the authorities once again for the opportunity to participate in this meeting and for fruitful discussions. On behalf of the IMF I would also like to reiterate our continued support for Vietnam on the road ahead. Thank you.