## cr17190

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### Underlying growth momentum
- Real GDP rose by 6.2 percent in 2016, 0.5 percentage point lower than in 2015, reflecting the impact of drought and salinization on agriculture and lower oil production.
- Weakness in the oil sector continued in the first quarter of 2017, leading to a slowdown in real GDP growth to 5.1 percent (y/y).
- Growth underpinned by strong manufacturing activity and FDI, robust domestic demand, and a rebound in agricultural production.

### Inflation and real estate
- Headline inflation increased throughout 2016, reaching 5.2 percent (y/y) in January 2017 and moderating to 4.7 percent (y/y) in March 2017 on falling food prices and base effects in health care prices.
- Core inflation excluding administered prices has remained stable below 2 percent (y/y); core inflation declined to 1.6 percent y/y in March 2017 from 1.9 percent y/y in December 2016.
- Real estate: prices are increasing at a moderate pace, partly owing to strong supply growth; land prices have risen rapidly in some areas.

### Credit, monetary signals, and financial markets
- Credit growth remained high at 18.8 percent in 2016, in line with the SBV’s credit growth target (18–20 percent (y/y) for 2016); private banks expanded credit slightly faster than state-owned banks.
- Credit to consumers (including mortgages) rose strongly from a low base and accounts for about 12 percent of total loans.
- For 2017, the SBV indicates credit growth between 15 and 17 percent (y/y); staff recommends reducing credit growth targets to below 15 percent and phasing out administrative targets.
- Macroprudential action: tightening of risk weights for lending to real estate became effective in January 2017 (risk weight for real estate (excluding mortgages and construction loans) raised from 150 percent to 250 percent).
- Ho Chi Minh stock exchange index has gained close to 30 percent over the last year.
- Local-currency government bond yields are about 100 basis points lower across the curve compared to a year ago and EMBIG spreads have tightened 110 basis points.
- The government issued 30-year bonds for the first time in 2016.
- Domestic investors have been driving increases in equity and bond markets, with limited net portfolio inflows over the last year.

### External sector, reserves, and exchange rate
- Current account (CA) surplus rebounded to 4.1 percent of GDP in 2016; trade surplus grew to 7 percent of GDP.
- FDI boomed to 6.3 percent of GDP, predominantly in manufacturing.
- Reserve accumulation reached US$ 10 billion (5 percent of GDP) until November (2016), more than making up the reserve losses of 2015; reserves now stand at about US $38 billion (70 percent of the ARA metric).
- After pressure on the dong in November, the SBV tightened liquidity, allowed limited depreciation, and intervened (US$ 1.1 billion).
- Staff judges the CA gap to be 6.2 percent of GDP and the REER has appreciated by 30 percent since 2010; the CA gap translates into an REER undervaluation of about 10 percent (Appendix III).

### Outlook and projections
- Economy projected to expand by 6.3 percent in 2017.
- Headline inflation projected to stabilize at around 5 percent as administered prices continue to be adjusted.
- Current account surplus expected to decline somewhat, reflecting a pick-up in imports.
- Over the medium-term, growth projected to settle around potential of 6.2 percent, assuming a continued gradual pace of structural reforms.
- Staff note: higher long-term growth would require more forceful reforms to level the playing field, deepen competition and recapitalize the banks at a faster pace.

### Box — Demographic transition (summary)
- Median age: 26.
- Working-age population share peaked in 2013.
- Population growth rate projected to fall close to zero by 2050.
- Share of population age 65 and older will increase much faster in Vietnam than in most advanced economies, although from low levels.
- Historical contribution: growing labor force added about 1.7 percentage points to annual average growth.
- Projected contribution of labor for 2020 to 2050: about 0.3 percentage points per year, and turn negative toward the end of the period.
- Under current policies, age related public expenditures (primarily pensions) are projected to increase by 8 percentage points of GDP by 2050, more than double the current level.
- Existing pensions system: defined benefit pay as you go system covering public sector workers and workers in formal private sector jobs; characterized as unsustainable because of generous benefits and low retirement ages.

### Risks — External, Domestic, and Upside
- Overall: Downside risks dominate. Room for policy maneuver is limited by thin buffers, limited exchange rate flexibility, and relatively high level of PPG debt.
- External risks highlighted:
  - Heightened risk aversion toward emerging markets or further U.S. dollar strength could lead to capital outflows and exchange rate pressure.
  - Rising protectionism and the failure of TPP could affect FDI and reduce SOE reform momentum.
  - Slower global growth or a sharp slowdown in China could undermine exports.
  - Persistently low energy prices would reduce revenues but are positive for the external balance.
- Domestic risks highlighted:
  - Banking sector risks due to slow progress in recapitalization and resolving legacy NPLs and continued high credit growth.
  - High PPG debt limits scope to address banking sector vulnerabilities and SOE reform costs, and to meet large investment needs.
  - With monetary policy still relying on exchange rate stability, rising inflation could interact with pressures on the exchange rate and capital outflows.
  - Stalling SOE reforms would undermine private sector development and could affect investor sentiment.
- Upside risks:
  - Successful implementation of faster SOE and banking reforms, fiscal consolidation, and modernization of the monetary framework could raise growth potential and resilience.
  - Consumption goods exports to China have grown rapidly and would benefit from faster rebalancing in China.
  - Rapid implementation of the Vietnam–EU free trade agreement and other bilateral trade agreements offers upside to exports and FDI.

### Authorities’ views (summarized)
- Authorities broadly shared staff’s assessment; viewed 2017 growth of around 6.3 percent as realistic.
- Believed inflation could be maintained below 4 percent with careful phasing of administered price increases.
- Emphasized need for faster SOE and bank reform implementation to boost growth potential and shift toward a less resource-intensive growth model.
- Agreed on the need to build resilience through high-quality, growth-friendly fiscal consolidation and reform, modernization of the monetary framework, and greater exchange rate flexibility.
- Noted the external assessment and agreed with the need to strengthen investment through structural reforms.

### Strengthening resilience and upgrading the growth model — Fiscal consolidation (A)
- Fiscal context and targets:
  - Budget deficit has remained above 6 percent of GDP since 2012.
  - Public debt has risen by 10 percent of GDP since 2013 and is approaching the statutory limit of 65 percent of GDP.
  - Authorities aim to lower the deficit to below 3.5 percent of GDP (GFS 2001 basis) by 2020, from 6.6 percent in 2016 and a budgeted 4.7 percent in 2017.
- 2017 tighter deficit target measures:
  - Revenues budgeted to increase relative to 2016 as tax and customs administration improves; no new taxes or tax increases planned, although a recurrent property tax is being studied.
  - Budget includes close to 2 percentage points of GDP in cuts to social and capital expenditure.
  - Higher equitization receipts (1.2 percent of GDP) are budgeted and new budget guarantees further limited.
- Staff recommendations (selected):
  - Revenue-side: broaden and diversify revenue bases, including higher environmental protection taxes, a property tax, unifying VAT rates, and higher excise taxes; consider taxing land transactions and capture revenues from state land sales; review tax expenditures (especially incentives).
  - Expenditure-side: ensure equality of opportunity when allowing private entry in education and health; expand health insurance aiming for universal coverage; review adequacy and funding of social security; undertake civil service reform to rationalize public sector headcount; protect capital expenditure and raise its efficiency; undertake a Public Investment Management Assessment (PIMA); carefully design greater private participation in infrastructure and limit contingent liabilities; authorize public funds (1 percent of GDP) for bank recapitalization.
  - Deficit financing: transparent use of equitization proceeds is welcome, but they are one-time and should not substitute for durable tax and expenditure reforms.
- Expected payoffs if implemented:
  - PPG debt on a sustained downward trajectory while protecting important social and capital expenditure.
  - Faster bank and SOE reforms and a more conducive business environment could boost GDP growth to 7 percent in the long run.
  - Recapitalization of state-owned commercial banks would be manageable, strengthen financial sector resilience, and improve capital allocation.

### Medium-term fiscal consolidation scenario (selected fiscal figures, 2017–20)
- Already in the baseline: 1.5- 2.5 (percent of GDP)
- Current expenditure growth restraint (cuts in social expenditure, civil service attrition): 1.0-2.0
- Rationalizing capital spending: 0.5
- Potential revenue measures: 0.8- 2.5
- Environmental tax rate (+30 percent): 0.3
- Eliminating the lower VAT rate of 5 percent: 0.3-0.5
- Excise tax (+10 percent): 0.2
- Property tax: up to 1.5

### Monetary framework, stance, and modernization
- Nominal anchor: tightly managed exchange rate of the dong to the U.S. dollar; numerical macro targets for 2017: inflation (2017: about 4 percent) and growth (2017: 6.7 percent).
- Policy instruments: open market operations (OMOs), foreign exchange intervention, and credit growth targets.
- Current stance: monetary conditions remain accommodative; interbank interest rates are close to the repo rate which is about zero in real terms.
- Recent exchange rate moves: the dong has been allowed to depreciate by 1.9 percent since November 2016.
- Reserves: Reserves stand at only 70 percent of the IMF’s metric and should be accumulated opportunistically over the medium term (staff view).
- Modernization roadmap (three phases):
  - Phase one: build human capital and institutional capacity at the SBV.
  - Phase two: increase exchange rate flexibility, start using a short-term interest rate as an operational target, move toward a regime that gradually resembles inflation targeting; introduce regulations for FX intervention to support transition.
  - Phase three: abandon the FX corridor and intervene only to counter excessive volatility.

### Banking system risks, NPLs, and capital
- Progress on legacy NPLs:
  - SOCBs have reduced their impaired loan ratio from 13.7 percent in June 2015 to 5.7 percent in December 2016.
  - Private banks’ impaired loans decreased slightly to 10.9 percent of total loans.
  - Staff’s more broadly defined impaired assets ratio is estimated at 8.4 percent (Dec 2016).
- System profitability and capital metrics:
  - System-wide return on assets is estimated at 0.6 percent and return on equity is estimated at 7.5 percent.
  - Reported CAR is 9.9 percent for SOCBs and 11.8 percent for private domestic banks; full adoption of Basel II scheduled for 2020 will reduce CARs by 200 to 400 bps.
- Staff recommendations:
  - Faster NPL recognition and resolution.
  - Recapitalization by existing shareholders; for SOCBs, measures may include restricting dividends and injecting proceeds from further SOCB divestments.
  - Resolution of non-viable banks; avoid merging SBV-taken-over weak banks into SOCBs.
  - Phase out credit targets and strengthen market-based credit allocation.
  - Introduce international accounting standards and strengthen AML/CFT framework.
- VAMC strengthening: raise VAMC capital, give right to receive ownership of land user rights and assets attached to land, improve valuation and securitization methodologies, legal protection, and licensing to trade NPLs and collateral.
- Deposit insurance and resolution: develop legal framework for bank resolution and strengthen deposit insurance; caution against using deposit insurance funds to support small banks.
- Credit growth and sectoral allocation risks:
  - Credit-to-GDP ratio increased by 23.5 percent in the last two years.
  - 2017 credit target is 15–17 percent; if achieved, staff warns this would widen the credit gap and leave credit-to-GDP at levels signaling growing financial stability risk.
  - Concern over credit intensity of growth and substantial credit directed to real estate-related sectors and SOEs.
- Macroprudential measures: consider loan-to-value (LTV) ceilings and closely monitor SOE leverage and budget constraints.

### Structural reforms for productivity and modern sustainable economy
- Narrowing state perimeter and SOE reform:
  - New legal framework reduces state involvement, identifies strategic SOEs to remain state-owned, prohibits SOE investment in non-core areas, strengthens SOE governance and identifies 10 large healthy SOEs for accelerated privatization.
  - Staff recommendations include selling, restructuring, or resolving weakest SOEs; ensuring equitization maintains due process and transparency; separating government ownership from SOE management and regulatory functions; consider transferring state ownership to a centralized holding company; strengthen active labor market policies.
- Raising productivity in the domestic non-FDI sector:
  - TFP growth has declined by about 1.5 percentage points since the mid-2000s.
  - Large potential productivity gains from reallocation of labor: almost half the workforce in agriculture and three quarters employed at the household level.
  - Recommendations: product market reforms to reduce regulatory barriers to entry, support domestic private manufacturing and integration with FDI sector, address SME constraints, improve business registration and customs procedures, strengthen anti-corruption measures, and raise productivity in agriculture by moving into higher quality production and processing.

### Environmental and resource sustainability
- Environmental vulnerabilities:
  - About 44 percent of the labor force employed in agriculture and fisheries where environmental risks are elevated and productivity remains low.
  - Sustainability threatened by water, air and ground pollution; high vulnerability of the low-lying Mekong Delta to climate change and extreme weather; unsustainable agriculture leading to soil salinization.
- Government strategy and commitments:
  - Climate change core to medium-term strategy; authorities ratified the Paris Agreement and committed to reducing greenhouse gas emissions by 8 to 25 percent by 2030 relative to baseline.
  - Noted developments: renewable energy production, energy efficiency regulation, public transportation and forest recovery.
- Staff recommendations:
  - Expand environmentally friendly tax reform by increasing the environmental tax.
  - Gradually raise energy prices to fully price externalities associated with fossil fuels.
  - Use additional revenue to finance climate change mitigation and adaptation plans and as general revenue.
- Conclusion: environmental and resource sustainability issues are macro-critical; enactment of environmentally friendly tax reform and energy pricing is promising.

### External debt, external financing needs, and vulnerabilities
- External debt levels and projections:
  - External debt: "48.9 percent of GDP in 2017."
  - Baseline projection: external debt would increase to "53.8 percent of GDP by 2022."
  - Table 1 external debt path (percent of GDP): 2012: "37.5"; 2013: "37.1"; 2014: "38.0"; 2015: "42.0"; 2016: "46.9"; 2017: "48.9"; 2018: "50.5"; 2019: "51.6"; 2020: "52.6"; 2021: "53.5"; 2022: "53.8".
- Gross external financing need:
  - In billions USD: 2017: "12.3"; 2018: "14.6"; 2019: "17.0"; 2020: "18.6"; 2021: "20.7"; 2022: "23.0".
  - As percent of GDP: 2017: "5.7"; 2018: "6.3"; 2019: "6.7"; 2020: "6.8"; 2021: "7.0"; 2022: "7.1".
- External debt vulnerabilities and stress tests:
  - Vietnam’s external debt is vulnerable to real depreciation and current-account shocks while growth and interest rate shocks have only limited impact on external debt dynamics.
  - Real depreciation shock example: one-time real depreciation of "30 percent" occurs in 2015 (figure footnote).
  - Combined shock scenarios show materially higher peak external debt ratios (figure references).
- External position assessment (Appendix III):
  - Staff judges the external position to be substantially stronger than warranted by fundamentals; CA gap "6.2 percent of GDP" and exchange rate undervaluation "undervalued by 10.3 percent."
  - Policy recommendations: raise private investment through structural reforms; protect public investment while raising its efficiency and lowering the budget deficit; strengthen social insurance and safety nets; modernize the monetary framework with greater two-way exchange rate flexibility.

### Key macro aggregates and projections (selected table excerpts)
- Real GDP growth (percent change): 2012: 5.2; 2013: 5.4; 2014: 6.0; 2015: 6.7; 2016: 6.2; 2017: 6.3; 2018: 6.3.
- CPI (period average): 2012: 9.1; 2013: 6.6; 2014: 4.1; 2015: 0.6; 2016: 2.7; 2017: 4.9; 2018: 4.8.
- Current account balance (billions USD, Table 2): 2016: 8.2; 2017: 5.9; 2018: 4.7.
- Gross international reserves (billions USD, Table 2): 2016: 36.7; 2017: 42.2; 2018: 48.6.
- Total external debt (billions USD, Table 2): 2016: 94.5; 2017: 105.4; 2018: 117.4.
- Public and publicly guaranteed debt (percent of GDP, Table 1): 2016: 62.4; 2017: 63.3; 2018: 64.3.

### Data provision, statistical issues, and technical assistance priorities
- Shortcomings identified in data for surveillance: financial sector, national accounts (QNA), government finance, and external sector statistics.
- Priorities for remedial actions:
  - Provision of detailed sectoral credit data.
  - Development of real estate price indices.
  - Improving quarterly national accounts statistics and balance of payments statistics.
- Recent and planned Fund TA:
  - Early 2017: FAD TA on upgrading tax administration organization; MCM TA on modernizing the monetary policy framework.
  - December 2016: STA TA to improve quarterly National Accounts statistics.
  - STA TA on FDI data quality, development of IIP, and external debt.

### Social and development indicators (selected)
- Poverty and social progress:
  - Significant reduction in extreme poverty; MDG achievements include reductions in extreme poverty, hunger, near-universal primary enrollment, and reductions in child and maternal mortality.
  - Access to improved water source: 98 percent in 2015.
- Labor market and inequality:
  - Charts and tables indicate remaining disparities for ethnic minorities and persistent distributional considerations (figures referenced).

### Institutional and international cooperation
- IMF relations: Membership joined September 21, 1956; Article VIII. Quota: 1,153.10 (SDR million).
- Technical and financial cooperation highlighted with World Bank and ADB; ADB Trade Finance Program supported substantial trade (67.6 percent of TFP-supported trade cofinanced by private sector).

*Source: IMF staff summary of cr17190*

### 5.      The economy’s underlying momentum remains strong, aided by sound economic

### 5.      The economy’s underlying momentum remains strong, aided by sound economic

### Underlying growth momentum
- Real GDP rose by 6.2 percent in 2016, 0.5 percentage point lower than in 2015, reflecting the impact of drought and salinization on agriculture and lower oil production.
- Weakness in the oil sector continued in the first quarter of 2017, leading to a slowdown in real GDP growth to 5.1 percent (y/y).
- Underpinned by strong manufacturing activity and FDI, robust domestic demand, and a rebound in agricultural production.

### Inflation and real estate
- Headline inflation increased throughout 2016, reaching 5.2 percent (y/y) in January 2017.
- Headline inflation moderated to 4.7 percent (y/y) in March 2017 on falling food prices and base effects in health care prices.
- Core inflation excluding administered prices has remained stable below 2 percent (y/y).
- Real estate prices are increasing at a moderate pace, partly owing to strong supply growth, but land prices have risen rapidly in some areas.

### Credit, monetary signals, and financial markets
- Credit growth remained high at 18.8 percent in 2016, in line with the State Bank of Vietnam’s (SBV) credit growth target (18–20 percent (y/y) for 2016).
- Private banks expanded credit at a slightly faster pace than state-owned banks.
- Credit to consumers (including mortgages) rose strongly from a low base and accounts for about 12 percent of total loans.
- For 2017, the SBV indicates credit growth between 15 and 17 percent (y/y).
- A tightening of risk weights for lending to real estate became effective in January 2017, aimed at moderating the pace of credit expansion in this sector.
- The Ho Chi Minh stock exchange index has gained close to 30 percent over the last year.
- Local-currency government bond yields are about 100 basis points lower across the curve compared to a year ago and EMBIG spreads have tightened 110 basis points.
- The government issued 30-year bonds for the first time in 2016.
- Domestic investors have been driving the increase in equity and bond markets, with limited net portfolio inflows over the last year.

### External sector, reserves, and exchange rate
- The current account (CA) surplus rebounded to 4.1 percent of GDP in 2016.
- Trade surplus grew to 7 percent of GDP.
- FDI, predominantly in manufacturing, boomed to 6.3 percent of GDP.
- Reserve accumulation reached US$ 10 billion (5 percent of GDP) until November, more than making up the reserve losses of 2015.
- After pressure on the dong in November, the SBV tightened liquidity, allowed limited depreciation, and intervened (US$ 1.1 billion).
- Reserves now stand at about US $38 billion (70 percent of the ARA metric).
- Staff judges the CA gap to be 6.2 percent of GDP.
- The REER has appreciated by 30 percent since 2010 and the CA gap translates into an REER undervaluation of about 10 percent (Appendix III).

### Outlook and projections
- The economy is projected to expand by 6.3 percent in 2017.
- Headline inflation is projected to stabilize at around 5 percent as administered prices continue to be adjusted.
- The current account surplus should decline somewhat, reflecting a pick-up in imports.
- Over the medium-term, growth is projected to settle around its potential rate of 6.2 percent, assuming a continued gradual pace of structural reforms.
- Higher long-term growth would require more forceful reforms to level the playing field, deepen competition and recapitalize the banks at a faster pace.

### Box 1 — Vietnam’s Demographic Transition (summary)
- Median age: 26.
- Working-age population share peaked in 2013.
- Population growth rate is projected to fall close to zero by 2050.
- Share of population age 65 and older will increase much faster in Vietnam than in most advanced economies, although from low levels.
- Historical contribution: growing labor force added about 1.7 percentage points to annual average growth.
- Projected contribution of labor for 2020 to 2050: about 0.3 percentage points per year, and turn negative toward the end of the period.
- Under current policies, age related public expenditures (primarily pensions) are projected to increase by 8 percentage points of GDP by 2050, more than double the current level.
- Existing pensions system: defined benefit pay as you go system covering public sector workers and workers in formal private sector jobs; characterized as unsustainable because of generous benefits and low retirement ages.

### Risks (Downside, Domestic, and Upside)
- Overall: Downside risks dominate. Room for policy maneuver is limited by thin buffers, limited exchange rate flexibility, and relatively high level of PPG debt.
- External risks:
  - Heightened risk aversion toward emerging markets or further U.S. dollar strength could lead to capital outflows and exchange rate pressure.
  - Rising protectionism and the failure of TPP could affect FDI and reduce SOE reform momentum.
  - Slower global growth or a sharp slowdown in China could undermine exports.
  - Persistently low energy prices would reduce revenues but are positive for the external balance.
- Domestic risks:
  - Banking sector risks due to slow progress in recapitalization and resolving legacy NPLs and continued high credit growth.
  - High PPG debt limits scope to address banking sector vulnerabilities and SOE reform costs, and to meet large investment needs.
  - With monetary policy still relying on exchange rate stability, rising inflation could interact with pressures on the exchange rate and capital outflows.
  - Stalling SOE reforms would undermine private sector development and could affect investor sentiment.
- Upside risks:
  - Successful implementation of faster SOE and banking reforms, fiscal consolidation, and modernization of the monetary framework could raise growth potential and resilience.
  - Consumption goods exports to China have grown rapidly and would benefit from faster rebalancing in China.
  - Rapid implementation of the Vietnam–EU free trade agreement and other bilateral trade agreements offers upside to exports and FDI.

### Authorities’ views
- Authorities broadly shared staff’s assessment.
- They viewed 2017 growth of around 6.3 percent as realistic.
- They believed inflation could be maintained below 4 percent with careful phasing of administered price increases.
- Emphasized need for faster SOE and bank reform implementation to boost growth potential and shift toward a less resource-intensive growth model.
- Agreed on the need to build resilience through high-quality, growth-friendly fiscal consolidation and reform, modernization of the monetary framework, and greater exchange rate flexibility.
- Noted the external assessment and agreed with the need to strengthen investment through structural reforms.

### Strengthening resilience and upgrading the growth model — Fiscal consolidation (A)
- Budget context and targets:
  - Budget deficit has remained above 6 percent of GDP since 2012.
  - Public debt has risen by 10 percent of GDP since 2013 and is approaching the statutory limit of 65 percent of GDP.
  - Authorities aim to lower the deficit to below 3.5 percent of GDP (GFS 2001 basis) by 2020, from 6.6 percent in 2016 and a budgeted 4.7 percent in 2017.
- Revenue and expenditure measures:
  - Strengthening of tax administration and new domestic taxes (under consideration).
  - Private sector entry into education and health care liberalized and administered prices gradually rising.
  - Public social and capital expenditures being cut; central control over provincial spending tightened; better coordination of fragmented infrastructure spending.
  - Budget will benefit from substantial proceeds from equitization (privatization) of SOEs.
- 2016 fiscal outcomes:
  - Domestic revenue was buoyant, partially offsetting weaker oil- and trade-related revenues.
  - 0.7 percent of GDP in equitization proceeds was transferred to the budget.
  - Government lengthened maturity of the domestic debt stock.
- 2017 tighter deficit target:
  - Revenues budgeted to increase relative to 2016 as tax and customs administration improves.
  - No new taxes or tax increases planned, although a recurrent property tax is being studied.
  - Budget includes close to 2 percentage points of GDP in cuts to social and capital expenditure.
  - Higher equitization receipts (1.2 percent of GDP) are budgeted and new budget guarantees further limited.
- Staff recommendations for higher-quality consolidation (selected points):
  - Revenue-side: broaden and diversify revenue bases, including higher environmental protection taxes, a property tax, unifying VAT rates, and higher excise taxes; consider taxing land transactions and better capturing revenues from state land sales; review tax expenditures (especially incentives).
  - Expenditure-side: ensure equality of opportunity when allowing private entry in education and health; expand health insurance aiming for universal coverage; review adequacy and funding of social security; undertake civil service reform to rationalize public sector headcount; protect capital expenditure and raise its efficiency; undertake a Public Investment Management Assessment (PIMA); carefully design greater private participation in infrastructure and limit contingent liabilities; authorize public funds (1 percent of GDP) for bank recapitalization.
  - Deficit financing: transparent use of equitization proceeds is welcome, but they are one-time and should not substitute for durable tax and expenditure reforms.
- Expected payoffs if implemented:
  - PPG debt on a sustained downward trajectory while protecting important social and capital expenditure.
  - Faster bank and SOE reforms and a more conducive business environment could boost GDP growth to 7 percent in the long run.
  - Recapitalization of state-owned commercial banks would be manageable, strengthen financial sector resilience, and improve capital allocation.

### Text Table 1 — Medium-Term Fiscal Consolidation Scenario, 2017–20 (selected entries)
- Already in the baseline: 1.5- 2.5 (percent of GDP)
- Current expenditure growth restraint (cuts in social expenditure, civil service attrition): 1.0-2.0
- Rationalizing capital spending: 0.5
- Potential revenue measures: 0.8- 2.5
- Environmental tax rate (+30 percent): 0.3
- Eliminating the lower VAT rate of 5 percent: 0.3-0.5
- Excise tax (+10 percent): 0.2
- Property tax: up to 1.5

*Source: IMF staff summary of cr17190*

### 20.      The SBV pursues multiple objectives. The tightly managed exchange rate of the dong

### The SBV pursues multiple objectives. The tightly managed exchange rate of the dong

### Monetary framework, stance, and modernization
- Nominal anchor: tightly managed exchange rate of the dong to the U.S. dollar.
- Numerical macro targets for 2017: inflation (2017: about 4 percent) and growth (2017: 6.7 percent).
- Policy instruments: open market operations (OMOs), foreign exchange intervention, and credit growth targets.
- Current stance and recent developments:
  - Monetary conditions remain accommodative.
  - Headline inflation has risen due to administered price increases; core inflation remains low.
  - Core inflation declined to 1.6 percent y/y in March 2017 from 1.9 percent y/y in December 2016.
  - Interbank interest rates are close to the repo rate which is about zero in real terms.
  - The dong has been allowed to depreciate by 1.9 percent since November 2016.
- Risks to price stability highlighted:
  - Rapid credit expansion, low real interest rates, a closing output gap, and global reflation.
  - Higher U.S. interest rates could put pressure on the currency and drive inflation higher because of relatively strong exchange rate pass-through.
- Monetary policy recommendations:
  - Keep interbank interest rates above the repo rate.
  - Reduce credit growth targets to below 15 percent.
  - Carefully phase administered price increases and closely monitor their diffusion.
  - Preemptively hike the policy rate and tighten liquidity if the inflation outlook deteriorates or administered price increases diffuse more broadly.
  - Phase out administrative measures (credit growth targets and remaining deposit rate ceilings) as monetary operations are strengthened.
- Reserves and medium-term guidance:
  - Reserves stand at only 70 percent of the IMF’s metric and should be accumulated opportunistically over the medium term.
- Modernization of the monetary framework (three phases, with multi-year Fund TA):
  - Phase one: build human capital and institutional capacity at the SBV (training in forward-looking monetary models, changes to monetary and FX operations, market infrastructure, banking regulation, communications).
  - Phase two: increase exchange rate flexibility, start using a short-term interest rate as an operational target, move toward a regime that gradually resembles inflation targeting; introduce regulations for FX intervention to support transition.
  - Phase three: abandon the FX corridor and intervene only to counter excessive volatility.

### Banking system risks, NPLs, and capital
- Progress on legacy NPLs:
  - SOCBs have reduced their impaired loan ratio from 13.7 percent in June 2015 to 5.7 percent in December 2016.
  - Private banks’ impaired loans decreased slightly to 10.9 percent of total loans.
  - Progress has been uneven across banks; a few private banks account for a significant share of impaired loans; three weak banks have been taken over by the SBV.
- System profitability and capital metrics:
  - System-wide return on assets is estimated at 0.6 percent and return on equity is estimated at 7.5 percent.
  - Reported capital adequacy ratio (CAR) is 9.9 percent for SOCBs and 11.8 percent for private domestic banks.
  - Reported CARs reflect the reported NPL ratio of 2.46 percent, whereas staff’s more broadly defined impaired assets ratio is estimated at 8.4 percent.
  - Full adoption of Basel II scheduled for 2020 will reduce CARs by 200 to 400 bps.
- Staff’s recommended banking reforms and measures:
  - Faster NPL recognition.
  - Recapitalization by existing shareholders; for SOCBs, recapitalization may include restricting dividends and injecting proceeds from further SOCB divestments by the state.
  - Resolution of non-viable banks; avoid merging the three weak SBV-taken-over banks into SOCBs as that would weaken SOCB capital.
  - Phase out credit targets and strengthen market-based credit allocation.
  - Introduce international accounting standards to improve transparency.
  - Strengthen AML/CFT framework in line with international standards and implement it effectively, commensurate with Vietnam’s risks.
- Strengthening the VAMC:
  - Staff welcomed proposals to raise VAMC capital and give it the right to receive ownership of land user rights and assets attached to land to allow seizure of collateral.
  - VAMC needs ability to recognize losses and pass them to participating banks, stronger staffing, valuation and securitization methodologies, legal protection for employees, and more licenses to trade NPLs and collateral.
- Deposit insurance and resolution framework:
  - Develop legal framework for bank resolution and strengthen deposit insurance.
  - Caution: using deposit insurance funds to support small banks could undermine limited deposit insurance funds.
- Credit growth and sectoral allocation risks:
  - Credit-to-GDP ratio increased by 23.5 percent in the last two years.
  - 2017 credit target is 15–17 percent; if achieved, this would widen the credit gap and leave the credit-to-GDP ratio at levels signaling growing financial stability risk.
  - Concern over credit intensity of growth and productivity of new credit; substantial credit directed to real estate-related sectors and SOEs.
  - Staff recommended reducing administrative credit growth targets to below 15 percent and phasing them out to achieve market-based capital allocation.
- Macroprudential measures:
  - Tightening of risk weights: risk weight for real estate (excluding mortgages and construction loans) raised from 150 percent to 250 percent in January 2017.
  - Consideration could be given to loan-to-value (LTV) ceilings.
  - SOE leverage should be closely monitored and budget constraints hardened.
- Authorities’ stance and actions:
  - Authorities emphasize SBV’s primary objective is price stability and plan to maintain current policy settings given stable core inflation.
  - They will phase administered price increases to keep inflation around 4 percent.
  - View credit targets as appropriate to support growth and consistent with price and financial stability.
  - Plan to modernize the monetary system with inflation as the anchor and greater exchange rate flexibility and welcome Fund TA.
  - Agree on the need for faster NPL resolution and stronger bank capital buffers; considering restricting SOCB dividends and reaching out to foreign strategic investors.
  - Preparing comprehensive legal measures to accelerate NPL resolution and significant increase in VAMC capital.
  - Tightening of risk weights on lending to real estate has already reduced risky lending; further macro-prudential measures will be taken if needed.

### Data provision and surveillance gaps
- Mission identified shortcomings in data provision for surveillance purposes.
- Priorities for remedial actions:
  - Provision of detailed sectoral credit data.
  - Development of real estate price indices.
  - Improving quarterly national accounts statistics and balance of payments statistics.

### Structural reforms for productivity and a modern sustainable economy
- Narrowing the perimeter of the state and SOE reform:
  - New legal framework reduces state involvement, identifies strategic SOEs to remain state-owned, and prohibits SOE investment in non-core areas.
  - Strengthens SOE governance and identifies 10 large healthy SOEs for accelerated privatization.
  - Staff recommendations:
    - Implement legal changes firmly and extend them to majority state-owned companies.
    - Sell, restructure, or resolve weakest SOEs to generate fiscal resources for priority spending and boost productivity.
    - Ensure equitization maintains due process and transparency.
    - Separate government ownership from SOE management and from regulatory functions; consider transferring state ownership from provinces and ministries to a centralized holding company or state agency.
    - Strengthen active labor market policies to support redundant workers during SOE reforms.
- Raising productivity in the domestic non-FDI sector:
  - Total factor productivity (TFP) growth has declined by about 1.5 percentage points since the mid-2000s.
  - Large potential productivity gains from reallocation of labor: almost half the workforce in agriculture and three quarters employed at the household level.
  - Recommendations:
    - Product market reforms to reduce regulatory barriers to entry (example: electricity sector).
    - Support development of domestic private manufacturing and integration with the FDI sector.
    - Address SME constraints: regulatory and legal environment, corruption risks, competition from SOEs.
    - Improve business registration, tax payment processes, and customs procedures, including capacity building at the provincial level.
    - Strengthen anti-corruption measures (detection/prevention controls, for AML purposes, sanctions, asset recovery, asset declaration systems).
    - Raise productivity in agriculture by moving into higher quality production and developing processing activities to retain more value added.

*Source: IMF staff estimates and mission discussion material in the cited IMF chapter.*

### 39.      Environmental and resource

### 39.      Environmental and resource

### Environmental risks and vulnerabilities
- About 44 percent of the labor force continues to be employed in agriculture and fisheries, where environmental risks are elevated and productivity remains low despite ongoing reforms.
- Sustainability of growth is threatened by:
  - water, air and ground pollution;
  - high vulnerability of the low-lying Mekong Delta to climate change and extreme weather;
  - unsustainable agriculture leading, inter alia, to soil salinization.
- Natural resource depletion is documented over the period 1995–2014 (chart referenced).

### Government strategy and commitments
- Climate change is at the core of the government’s medium-term strategy.
- The authorities ratified the Paris Agreement on Climate and detailed a Support Program to Respond to Climate Change that commits Vietnam to reducing greenhouse gas emissions by 8 to 25 percent by 2030 relative to baseline.
- Developments noted as welcome: renewable energy production, energy efficiency regulation, public transportation and forest recovery.
- Authorities reiterated commitment to ambitious structural reforms to:
  - transform Vietnam into a modern sustainable economy;
  - raise productivity, move up the quality ladder and adopt a resource-lean growth model before aging sets in after 2030;
  - progress on the legal framework for SOEs, accelerate equitization, governance and other reforms;
  - make the private sector the main engine of growth and improve the business environment by addressing credit access, land, tax and other legacy issues;
  - strengthen environmental due diligence in industrial project approval and consider raising environmental taxes.
- Authorities noted expected redundancies from SOE reforms are limited and employment insurance and retraining programs are in place.

### Staff recommendations on environment and pricing externalities
- Staff welcomes the emphasis on the environment and sustainability.
- Policy recommendations:
  - Expand the government's environmentally friendly tax reform strategy by increasing the environmental tax.
  - Gradually raise energy prices to fully price externalities associated with fossil fuels.
  - Use additional revenue to finance climate change mitigation and adaptation plans and as general revenue.

### Staff appraisal — macro and reform context (high-level highlights)
- Growth remains solid, driven by robust domestic demand and exports; core inflation is low.
- External position is strong and fiscal consolidation is under way, but:
  - fiscal space is limited;
  - banks need more capital and reserve buffers are thin;
  - urgency of reforms to create more policy space.
- Fiscal consolidation is appropriate in size and should be accompanied by ambitious, wide-ranging fiscal reforms to broaden and diversify revenue bases, reduce exemptions and incentives, and improve revenue administration.
- Monetary policy should remain on hold but be alert for early signs of pass-through to higher core inflation; a rate hike would be appropriate if the inflation outlook deteriorates.
- Over time, SBV should shift focus toward price stability as the nominal anchor and move toward an inflation targeting-like regime with greater exchange rate flexibility; international reserve coverage should be strengthened through opportunistic, gradual, two-sided intervention.
- External position is substantially stronger than warranted by fundamentals; policies should aim to gradually reduce the external imbalance via strengthened domestic demand, reforms to raise domestic investment and foster a lower saving rate, and increased exchange rate flexibility.
- Bank reforms: progress on impaired asset resolution noted, but system-wide impaired assets remain elevated; priorities include legal framework for early intervention and resolution, strengthening the VAMC, recapitalizing banks by shareholders and restricting dividends if needed, and strengthening deposit insurance. Credit growth targets should be lowered and phased out; sectoral credit allocation needs close monitoring and additional macroprudential measures considered if needed.
- Structural reforms needed to build a sustainable modern economy before aging: separate SOE ownership from management and regulatory functions; streamline business regulations and administrative procedures; enhance anti-corruption efforts (including use of AML tools); reduce credit misallocation to support SME growth and formalization; improve vocational and tertiary education outcomes; simplify and strengthen the legal system.

### Conclusions on sustainability
- Environmental and resource sustainability issues are macro-critical: Vietnam is vulnerable to natural disasters and climate change and emissions are on the rise.
- Staff commends ratification of the Paris Agreement and embedding climate change and SDG implementation in policy agenda.
- Enactment of environmentally friendly tax reform and energy pricing is promising; higher environmental taxes and better pricing of externalities in the energy sector would promote a greener, more resilient economy.

*Source: IMF Country Report excerpt.*

### 51.      It is recommended that the next Article IV Consultation take place on the standard 12-

### It is recommended that the next Article IV Consultation take place on the standard 12-month cycle.

### Poverty Reduction and Inequality
- Extreme poverty in Vietnam fell dramatically; poverty headcount ratio at $3.10 a day (2011 PPP, percent of population) for listed countries shows Vietnam among lower rates compared to several peers (chart context).
- Income distribution and growth incidence:
  - Growth incidence curves cover 1993–2014 and 2010–14 (annualized growth rate of per capita income for every percentile of income distribution).
  - Income share held by the poorest 10% and richest 10% shown (chart context).
- Headcount poverty rate at national poverty line (in percent of population) by location:
  - Vietnam overall, Urban, Rural, Ethnic minorities (charts indicate ethnic minorities remain with higher poverty).
- Wage premia for Female and Ethnic minority reported by year (in percent) for 2011–2014 (chart context).
- Net GINI Index shown for 1990 and 2014 (chart context).
- Sources: Vietnamese authorities; World Bank; and IMF staff estimates.

### Growth, Inflation, and Macroeconomic Policy Stance
- Real GDP growth:
  - Historical and projection entries: 2012–2018 table reports Real GDP (percent change): 2012: 5.2; 2013: 5.4; 2014: 6.0; 2015: 6.7; 2016: 6.2; 2017: 6.3; 2018: 6.3 (Table 1).
- Inflation:
  - CPI (period average): 2012: 9.1; 2013: 6.6; 2014: 4.1; 2015: 0.6; 2016: 2.7; 2017: 4.9; 2018: 4.8 (Table 1).
  - CPI (end of period): 2012: 6.8; 2013: 6.0; 2014: 1.8; 2015: 0.6; 2016: 4.7; 2017: 5.0; 2018: 4.5 (Table 1).
  - Core inflation (end of period) shown in table: 2012: 5.8; 2013: 4.6; 2014: 2.7; 2015: 1.7; 2016: 1.9 (Table 1).
- Output gap and inflation dynamics:
  - Output gap closing and headline inflation accelerated while core inflation remained low (figure context).
  - Administered price increases for health services identified as main driver of higher headline inflation (figure context).
- Fiscal stance:
  - Fiscal policy has been expansionary since 2012 (figure caption).
  - Revenue and expenditure stance chart shown in percent of GDP (figure context).
- Credit and liquidity:
  - High credit targets and ample liquidity enabled rapid credit growth, particularly in real estate-related activities (figure caption).
  - Contribution to credit growth and to GDP growth by economic activities provided (figure context).
- Sources: Vietnamese authorities; Bloomberg LP; and IMF staff estimates.

### Trade, FDI, Balance of Payments, and Reserves
- Trade and FDI:
  - Exports picked up in the second half of 2016, especially electronics (figure caption).
  - Imports accelerated toward end-2016, particularly investment goods and intermediate inputs, which account for more than half of imports (figure caption).
  - FDI remains strong and concentrated in manufacturing (figure caption).
- Balance of payments:
  - The balance of payments strengthened in 2016, but pressures on the exchange rate emerged toward the end of the year (figure caption).
  - Table 2: Current account balance (in billions of U.S. dollars): 2012: 9.3; 2013: 7.7; 2014: 9.1; 2015: -0.1; 2016: 8.2; 2017: 5.9; 2018: 4.7.
  - Trade balance (Table 2): 2012: 8.7; 2013: 8.7; 2014: 12.1; 2015: 7.4; 2016: 14.0; 2017: 14.0; 2018: 14.5.
  - Exports f.o.b. (Table 2, in billions USD): 2012: 114.5; 2013: 132.0; 2014: 150.2; 2015: 162.0; 2016: 176.6; 2017: 193.9; 2018: 213.6.
  - Imports f.o.b. (Table 2, in billions USD): 2012: 105.8; 2013: 123.3; 2014: 138.1; 2015: 154.6; 2016: 162.6; 2017: 179.9; 2018: 199.1.
- Reserves and exchange rate:
  - Gross international reserves (Table 2): 2012: 25.4; 2013: 26.0; 2014: 34.3; 2015: 28.4; 2016: 36.7; 2017: 42.2; 2018: 48.6 (in billions of U.S. dollars).
  - Reserves coverage in months of prospective GNFS imports (Table 2): 2012: 2.2; 2013: 2.0; 2014: 2.4; 2015: 1.9; 2016: 2.2; 2017: 2.3; 2018: 2.4.
  - Exchange rate charts depict parallel rate and official rate dynamics; an upward movement indicates an appreciation of the dong (figure note).
- External debt:
  - Total external debt (Table 2, in billions USD): 2012: 58.3; 2013: 63.3; 2014: 70.6; 2015: 80.4; 2016: 94.5; 2017: 105.4; 2018: 117.4.
  - External debt in percent of GDP (Table 2): 2012: 37.4; 2013: 37.3; 2014: 38.3; 2015: 43.1; 2016: 47.8; 2017: 49.5; 2018: 51.0.
- Sources: Vietnamese authorities; Bloomberg LP; IMF, DOTS; IMF, WEO; and IMF staff estimates.

### Financial Conditions and Banking Sector
- Asset markets and spreads:
  - Stock market outperformed regional bourses (index base Jan 2012=100; data as of Apr 12th, 2017).
  - Sovereign spreads declined in line with regional EMs; sovereign bond spreads and credit default swaps shown (figure context).
- Government and bank funding costs:
  - Government financing costs decreased in 2016 (figure caption).
  - Bank funding costs low for most of 2016 but increased recently as the State Bank of Vietnam tightened liquidity to support the currency (figure caption).
  - Domestic bond yield curve (percent per annum) and interest rate series provided as of Apr 12th, 2017.
- Credit, deposits, and asset quality:
  - Credit growth remained high, supported by strong deposit growth (figure caption).
  - Credit growth (year-on-year percent change) series by recipient (To SOEs, To non-SOEs) shown; includes state banks Vietcombank, Incombank, BARD and BIDV in definition.
  - Credit/deposit ratio and NPL ratio charts:
    - Credit/deposit ratio and NPL (RHS) time series shown (figure context).
  - Financial Soundness Indicators (Table 7):
    - Regulatory Capital to Risk-Weighted Assets (percent): 2010: 11.3; 2011: 12.9; 2012: 11.8; 2013: 13.4; 2014: 11.8; 2015: 12.8; 2016: 12.8.
    - Regulatory Tier 1 Capital to Risk-Weighted Assets (percent): 2010: 10.4; 2011: 11.9; 2012: 12.9; 2013: 12.1; 2014: 10.6; 2015: 10.1; 2016: n.a.
    - Non-performing Loans to Total Gross Loans (percent) 2/: 2010: 2.1; 2011: 2.8; 2012: 3.4; 2013: 3.1; 2014: 2.9; 2015: 2.3; 2016: 2.5.
    - Return on Assets (percent): 2010: 1.6; 2011: 1.5; 2012: 0.8; 2013: 0.5; 2014: 0.3; 2015: 0.4; 2016: 0.6 (annualized YTD until 2016/Q3).
    - Staff estimate of more broadly defined NPL ratios, including NPLs sold to VAMC and loans previously restructured under Decision 780, was about 8.4 percent of total loans as of Decem ber 2016 (Table 7 note).
- Monetary aggregates and dollarization (Table 4):
  - Net foreign assets (in trillions dong, end-period): 2012: 548; 2013: 613; 2014: 826; 2015: 836; 2016: 960; 2017: 1,188; 2018: 1,417.
  - Total liquidity (M2, in trillions dong): 2012: 3,703; 2013: 4,401; 2014: 5,179; 2015: 6,020; 2016: 7,126; 2017: 8,416; 2018: 9,884.
  - Credit to the economy (in trillions dong): 2012: 3,078; 2013: 3,470; 2014: 3,950; 2015: 4,693; 2016: 5,575; 2017: 6,530; 2018: 7,634.
  - Foreign currency deposits/total deposits (percent): 2012: 14.6; 2013: 14.1; 2014: 12.4; 2015: 12.3; 2016: 9.9.
  - Foreign currency loans/total loans (percent): 2012: 17.5; 2013: 13.3; 2014: 12.4; 2015: 9.1; 2016: 8.0.
- Sources: Vietnamese authorities; Bloomberg LP; SBV; and IMF staff estimates and projections.

### Fiscal Developments, Public Debt, and Budgetary Operations
- Revenue and expenditure trends:
  - Fiscal revenue has been in long-term decline, in contrast to regional trends (figure caption).
  - Since 2013, weakness in oil, CIT, and trade revenues was offset by higher VAT, environmental tax, and non-tax revenues (figure caption).
  - Capital spending has been restrained (figure caption).
- Key fiscal aggregates (Table 1 and Table 3):
  - Revenue and grants (percent of GDP): 2012: 22.6; 2013: 23.1; 2014: 22.2; 2015: 23.7; 2016: 23.2; 2017: 23.2; 2018: 23.1 (Table 1).
  - Expenditure (percent of GDP): 2012: 29.5; 2013: 30.5; 2014: 28.5; 2015: 30.0; 2016: 29.8; 2017: 29.0; 2018: 28.9 (Table 1).
  - Net lending (+)/borrowing (-) (percent of GDP): 2012: -6.9; 2013: -7.4; 2014: -6.3; 2015: -6.2; 2016: -6.6; 2017: -5.8; 2018: -5.8 (Table 1).
  - Public and publicly guaranteed debt (end of period, percent of GDP): 2012: 47.9; 2013: 51.8; 2014: 55.1; 2015: 58.3; 2016: 62.4; 2017: 63.3; 2018: 64.3 (Table 1).
- Fiscal deficits and public debt:
  - Fiscal deficits have remained high, leading to rising public debt (figure caption).
  - Table 3 provides detailed budgetary operations in trn dong and percent of GDP for 2012–18 (selected items reflected above).
- Memorandum and projection items:
  - Primary balance (percent of GDP, Table 3 memo): 2012: -5.6; 2013: -5.9; 2014: -4.6; 2015: -4.2; 2016: -4.4; 2017: -2.8; 2018: -3.8 (Table 3 memo; note variation across lines).
- Sources: Vietnamese authorities; and IMF staff estimates and projections.

### Key Economic Indicators and Medium-Term Projections
- Table 5 medium-term projections (2019–2022 highlights):
  - Real GDP (percent change): 2019: 6.3; 2020: 6.2; 2021: 6.2; 2022: 6.2.
  - CPI (period average): 2019: 4.8; 2020: 4.3; 2021: 4.0; 2022: 4.0.
  - Gross international official reserves (in billions USD): 2019: 54.7; 2020: 62.6; 2021: 70.7; 2022: 76.8.
  - Total external debt (in billions USD): 2019: 130.3; 2020: 144.2; 2021: 159.0; 2022: 173.2.
  - Public and publicly guaranteed debt (end of period, percent of GDP): 2019: 64.3; 2020: 64.7; 2021: 65.0; 2022: 65.3.
  - Nominal GDP (in billions of U.S. dollars) projections: 2019: 252.5; 2020: 274.1; 2021: 297.3; 2022: 322.0.
- Table 1 and Table 2 provide annual historical and projection series for 2012–18 for output, prices, general government finances, money and credit, balance of payments, reserves, and external debt.

### Social and Development Indicators
- Millennium Development Goals (Table 6) progress summary:
  - Goal 1 Target 1: Reduce extreme poverty by half between 1990 and 2015 — Poverty reduced by three-quarters between 1990 and 2008 — Achieved.
  - Target 2 (Reduce hunger by half between 1990 and 2015) — Proportion below minimum consumption reduced by more than three-quarters between 1993 and 2012 — Achieved.
  - Goal 2 (Universal primary schooling by 2015) — Net enrollment ratio in primary education at 98.1 enrollees per 100 children — Achieved.
  - Goal 3 (Promote gender equality) — Ratio of girls to boys in primary education 0.99 in 2014 — Achieved.
  - Goal 4 (Reduce child mortality) — Under-five mortality reduced by 60 percent between 1990 and 2015 (from 51 to 22 deaths per 1,000) — Nearly achieved.
  - Goal 5 (Improve maternal health) — Maternal mortality fell from 233 per 100,000 births in 1999 to 54 in 2015 — Achieved.
  - Goal 6 Target 7 (Halt HIV/AIDS spread) — Infection rate on upward trend; 0.5 per year per 100 people aged 15-49 in 2015 — Partially achieved.
  - Goal 6 Target 8 (Reverse TB incidence) — Cases reduced by 45 percent in 2015 — Achieved.
  - Goal 7 Target 9 (Environmental sustainability) — Forest cover up but loss in closed-canopy forest and biodiversity — Partially achieved.
  - Goal 7 Target 10 (Access to water and sanitation) — 98 percent with access to improved water source in 2015; sanitation access greatly enhanced — Achieved.
- Sources: United Nations Development Program, General Statistics Office of Vietnam, and the World Bank.

*Source: Vietnamese authorities; and IMF staff estimates and projections (cr17190).*

### Appendix I. Risk Assessment Matrix

### Appendix I. Risk Assessment Matrix

### External Risks
- Significant further strengthening of the US dollar and/or higher rates  
  - Likelihood: H  
  - Impact: M: Capital outflows pressure exchange rate and reserves, confidence declines  
  - Policies to Minimize Impact:
    - Tighten monetary policy and allow exchange rate flexibility, with judicious currency intervention to avoid excessive volatility.
    - Modernize monetary framework using inflation as a nominal anchor.
    - Accelerate fiscal consolidation, and structural reforms to support confidence and FDI.

- Significant China slowdown and its spillovers / Structurally weak growth in key advanced and emerging economies  
  - Likelihood: L/M  
  - Impact: H/M: Weaker export growth, FDI, and remittances  
  - Policies to Minimize Impact:
    - Allow greater exchange rate flexibility, move toward using inflation as a nominal anchor.
    - Accelerate financial sector, SOE, and structural reforms to improve productivity, FDI, and domestic activity.

- Lower energy prices  
  - Likelihood: L  
  - Impact: L: Improved current account balance; lower fiscal revenues  
  - Policies to Minimize Impact:
    - Allow exchange rate flexibility.
    - Strengthen revenue: broaden base, reduce exemptions, strengthen administration, introduce a property tax.

- Retreat from cross border integration  
  - Likelihood: H  
  - Impact: H: Weaker export growth, FDI, and remittances; supply chains could be interrupted; failure of TPP may also reduce the SOE reform momentum  
  - Policies to Minimize Impact:
    - Rapid implementation of FTAs with the EU, Eurasian Economic Union, and Korea.
    - Deepen regional trade integration.
    - Strengthen competitiveness through accelerated SOE, structural, and banking reforms.

### Domestic Risks
- Inadequate fiscal consolidation  
  - Likelihood: H  
  - Impact: M: Higher interest rates, exchange rate pressures, weaker confidence, crowding out  
  - Policies to Minimize Impact:
    - Broaden revenue base, reduce exemptions, strengthen administration, introduce a property tax, curtail non-essential spending, civil service reform.
    - Use SOE equitization receipts to help finance the budget, but this should not substitute for structural consolidation.

- Banking-sector NPLs are exacerbated, high credit growth creates new risks  
  - Likelihood: M  
  - Impact: H: Adverse macro-financial feedback loop  
  - Policies to Minimize Impact:
    - Accelerate NPL resolution and recapitalization of systemically important banks, resolve small unviable banks, strengthen safety nets.
    - Reduce credit growth targets and phase out over the medium-term.

- Accelerating, persistent inflation  
  - Likelihood: L  
  - Impact: H: Interaction with pressures on the exchange rate and capital outflows  
  - Policies to Minimize Impact:
    - Tighten monetary policy and allow exchange rate appreciation.
    - Carefully phase in further increases in administered prices.
    - Prioritize modernization of the monetary framework to anchor on inflation stability.

### RAM Methodology and Risk Definitions
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline:
  - “low” is meant to indicate a probability below 10 percent,
  - “medium” a probability between 10 and 30 percent,
  - “high” a probability between 30 and 50 percent.
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.
- Non-mutually exclusive risks may interact and materialize jointly.

*Source: Appendix I. Risk Assessment Matrix (RAM).*

### 48.9 percent of GDP in 2017 on the back of growing private external borrowing. Gross external

### cr17190 - 48.9 percent of GDP in 2017 on the back of growing private external borrowing. Gross external

### External debt level and projections
- External debt: "48.9 percent of GDP in 2017 on the back of growing private external borrowing."
- Baseline projection: "external debt would increase to 53.8 percent of GDP by 2022."
- Gross external financing is projected at "5.7 percent of GDP."
- Table 1 baseline external debt path (in percent of GDP): 2012: "37.5"; 2013: "37.1"; 2014: "38.0"; 2015: "42.0"; 2016: "46.9"; 2017: "48.9"; 2018: "50.5"; 2019: "51.6"; 2020: "52.6"; 2021: "53.5"; 2022: "53.8".
- Change in external debt (Table 1): 2012: "0.3"; 2013: "-0.3"; 2014: "0.8"; 2015: "4.1"; 2016: "4.9"; 2017: "2.0"; 2018: "1.5"; 2019: "1.2"; 2020: "1.0"; 2021: "0.9"; 2022: "0.3".
- Debt-stabilizing non-interest current account (Table 1): "-6.3" (percent of GDP).

### Drivers and identified external-debt creating flows
- Identified external debt-creating flows (Table 1, sum of components): 2012: "-15.6"; 2013: "-11.9"; 2014: "-12.3"; 2015: "-6.6"; 2016: "-11.9"; 2017: "-11.0"; 2018: "-10.1"; 2019: "-9.3"; 2020: "-8.8"; 2021: "-8.2"; 2022: "-7.7" (all in percent of GDP).
- Current account deficit, excluding interest payments (Table 1): 2012: "-7.0"; 2013: "-5.3"; 2014: "-5.6"; 2015: "-0.9"; 2016: "-5.0"; 2017: "-4.2"; 2018: "-3.6"; 2019: "-3.1"; 2020: "-3.0"; 2021: "-2.7"; 2022: "-2.4" (percent of GDP).
- Net non-debt creating capital inflows (negative) (Table 1): 2012: "-4.6"; 2013: "-4.1"; 2014: "-4.3"; 2015: "-5.6"; 2016: "-5.8"; 2017: "-5.5"; 2018: "-5.3"; 2019: "-4.9"; 2020: "-4.6"; 2021: "-4.3"; 2022: "-4.1" (percent of GDP).
- Automatic debt dynamics contribution (Table 1): 2012: "-4.0"; 2013: "-2.5"; 2014: "-2.3"; 2015: "-0.1"; 2016: "-1.2"; 2017: "-1.3"; 2018: "-1.3"; 2019: "-1.2"; 2020: "-1.2"; 2021: "-1.1"; 2022: "-1.1" (percent of GDP).
  - Contribution from nominal interest rate: 2012: "1.0"; 2013: "0.7"; 2014: "0.7"; 2015: "1.0"; 2016: "0.9"; 2017: "1.5"; 2018: "1.6"; 2019: "1.7"; 2020: "1.8"; 2021: "1.9"; 2022: "1.9" (percent of GDP).
  - Contribution from real GDP growth: 2012: "-1.7"; 2013: "-1.9"; 2014: "-2.0"; 2015: "-2.5"; 2016: "-2.5"; 2017: "-2.8"; 2018: "-2.9"; 2019: "-2.9"; 2020: "-2.9"; 2021: "-3.0"; 2022: "-3.1" (percent of GDP).
  - Contribution from price and exchange rate changes: 2012: "-3.3"; 2013: "-1.4"; 2014: "-1.0"; 2015: "1.4"; 2016: "0.4"; 2017: "..." (table shows continuation but elided in source).
- Residual, including changes in gross foreign assets (Table 1): 2012: "15.9"; 2013: "11.6"; 2014: "13.1"; 2015: "10.7"; 2016: "16.8"; 2017: "13.0"; 2018: "11.7"; 2019: "10.4"; 2020: "9.8"; 2021: "9.0"; 2022: "8.0" (percent of GDP).

### External financing needs and ratios
- Gross external financing need (Table 1, in billions of US dollars): 2012: "1.3"; 2013: "6.4"; 2014: "5.5"; 2015: "17.1"; 2016: "9.1"; 2017: "12.3"; 2018: "14.6"; 2019: "17.0"; 2020: "18.6"; 2021: "20.7"; 2022: "23.0".
- Gross external financing need (Table 1, in percent of GDP): 2012: "0.9"; 2013: "3.7"; 2014: "3.0"; 2015: "8.9"; 2016: "4.5"; 2017: "5.7"; 2018: "6.3"; 2019: "6.7"; 2020: "6.8"; 2021: "7.0"; 2022: "7.1".
- External debt-to-exports ratio (Table 1): 2012: "46.9"; 2013: "44.4"; 2014: "43.8"; 2015: "46.4"; 2016: "50.0"; 2017: "50.8"; 2018: "51.4"; 2019: "51.7"; 2020: "51.9"; 2021: "51.8"; 2022: "51.0" (percent).

### Vulnerabilities and stress-test findings
- Statement: "Vietnam’s external debt is vulnerable to real depreciation and current-account shocks while growth and interest rate shocks have only limited impact on the external debt dynamics."
- Bound/test scenarios (Figure 6 highlights):
  - Real depreciation shock: one-time real depreciation of "30 percent" occurs in 2015 (noted in figure footnotes).
  - Combined shock results shown (Figure 6): combined shock peak external debt in scenarios indicated (example boxes: "Combined shock 62", "30 % depreciation 80" — presented in figure context).
- Heat-map risk assessment (Figure 4):
  - Market perception metrics: "EMBIG 209 bp" (as presented in heat-map; EMBIG defined as average over last 3 months, 13-Jan-17 through 13-Apr-17).
  - External Financing Requirement benchmarks: lower and upper early warnings at "5 and 15 percent of GDP".
  - Public Debt in Foreign Currency benchmarks: lower and upper at "20 and 60 percent".
  - Public Debt Held by Non-Residents benchmarks: "15 and 45 percent".

### Public sector debt dynamics (DSA baseline and scenarios)
- Nominal gross public debt (Figure 1, in percent of GDP): 2015: "45.9"; 2016: "58.3"; 2017: "62.4"; 2018: "63.3"; 2019: "64.3"; 2020: "64.7"; 2021: "65.0"; 2022: "65.3"; 2022 final value shown also as "65.4" in the row (table presents both 65.3 and 65.4 in different cells).
- Public gross financing needs (Figure 1, in percent of GDP): 2015: "9.1"; 2016: "8.7"; 2017: "9.8"; 2018: "8.7"; 2019: "8.9"; 2020: "8.5"; 2021: "8.4"; 2022: "8.6"; additional row shows "8.6" and "8.6" in projections.
- Primary deficit and flows (Figure 1):
  - Primary deficit (identified flows): 2015 change in gross public sector debt "2.1"; 2016: "3.1"; 2017: "4.2"; 2018: "0.8"; 2019: "1.1"; 2020: "0.4"; 2021: "0.3"; 2022: "0.3"; cumulative "3.0".
  - Primary (noninterest) revenue and grants (percent of GDP): 2015: "25.1"; 2016: "23.7"; 2017: "23.2"; 2018: "23.2"; 2019: "23.1"; 2020: "23.1"; 2021: "23.1"; 2022: "23.0"; cumulative "138.7".
  - Primary (noninterest) expenditure (percent of GDP): 2015: "27.6"; 2016: "28.0"; 2017: "27.6"; 2018: "26.8"; 2019: "26.6"; 2020: "26.0"; 2021: "25.6"; 2022: "25.4"; cumulative "155.5".
- Underlying macro assumptions (Figure 2 and Table 1):
  - Real GDP growth baseline: "6.3" (2017) then "6.3", "6.2", "6.2", "6.2", "6.2" for 2018–2022.
  - Inflation (GDP deflator): "3.7" (2017) then "3.9", "4.0", "4.0", "4.0", "4.0".
  - Primary Balance baseline: "-3.6" (2017), then "-3.5", "-2.9", "-2.6", "-2.4", "-2.0".
  - Effective interest rate baseline: "4.4" (2017), then "4.6", "4.8", "4.8", "4.9", "5.0".
  - Nominal GDP growth (Figure 1): 2015: "17.8"; 2016: "6.5"; 2017: "7.4"; 2018: "10.3"; 2019: "10.5"; 2020–2022: "10.4" (each year shown).
  - Ratings shown in Figure 1: Moody’s "B1/Ba2"; S&P's "BB-/BB"; Fitch "BB-/BB-".

### External position assessment and policy recommendations (Appendix III)
- External position: "The external position is substantially stronger than warranted by fundamentals and desirable policies."
- Current account (CA) gap: "6.2 percent of GDP."
- Exchange rate undervaluation: "undervalued by 10.3 percent."
- Policy recommendations to address the CA gap:
  - "Structural reforms to strengthen private investment and to enhance social insurance and safety nets."
  - "Fiscal consolidation that protects capital spending."
  - "Modernization of the monetary framework with greater two-way exchange rate flexibility."
- Dual current-account dynamics described:
  - FDI manufacturing sector: "large trade surplus (15 percent of GDP)." Dominated by electronics multinationals and apparel producers integrated in Asian supply chains.
  - Domestic non-FDI sector: "runs a CA deficit of 8 percent of GDP."
  - Productivity: domestic sector productivity "is low (20 percent that of the FDI sector)."
  - Investment trends: "Excluding the FDI sector, investment has fallen by 10 percentage points, to 20 percent of GDP, in the last decade."
- Saving and reserves:
  - Saving: "Saving has remained at about 30 percent of GDP."
  - Reserve coverage: "Reserve coverage stands at 70 percent of the adequacy metric" (sentence truncated in source after "GIR by US$").

### Key macroeconomic baseline assumptions and historical averages (Table 1 excerpts)
- Nominal GDP (US dollars, projections): 2012: "155.6"; 2013: "170.6"; 2014: "185.9"; 2015: "191.5"; 2016: "201.3"; 2017: "215.4"; 2018: "232.7"; 2019: "252.5"; 2020: "274.1"; 2021: "297.3"; 2022: "322.0"; 2023 (if shown) "348.8" appears in table.
- Real GDP growth (historical/average and baseline): historical average "5.2" to "6.7" shown; baseline projected "6.3" (repeated across projection years).
- GDP deflator (change in domestic currency): historical series includes "10.9", "4.8", "3.7", "-0.2", "1.1", "9.2" and baseline projection "3.7", "3.9", "4.0", "4.0", "4.0".
- Nominal external interest rate (in percent): historical values "3.1", "2.2", "2.1", "2.6", "2.2", "2.8"; baseline projections "3.3", "3.5", "3.6", "3.7", "3.9", "3.9", "3.9".
- Growth of exports G&S (US dollar terms, in percent): historical and baseline show values including "17.6", "15.0", "12.9", "7.5", "9.0", "16.1" and projected growth rates around "9.9" to "10.7".
- Growth of imports G&S (US dollar terms, in percent): historical and baseline values such as "7.0", "17.3", "11.3", "12.2", "5.3", "15.0" and projected growth rates around "10.6" to "11.0".

*Source: IMF staff (as presented in the supplied content).*

### 8.3 billion in 2016.

### 8.3 billion in 2016.

### Reserve adequacy and external buffers
- Reserves at end-2016 cover "around 2.2 months of imports of goods and services".
- Reserves remain well under the regional emerging market countries’ average of nine months.
- Vietnam: Reserve Adequacy Metric, 2000Q1–2016Q3 shown as percent of reserve metric (chart referenced in source).

### External position and current account assessment
- Staff judges Vietnam’s external position to be substantially stronger than warranted by fundamentals and desirable policies.
- EBA-lite current account (CA) results:
  - 2016 Current Account: 4.1%
  - Current Account Norm (EBA-lite CA approach): -3.4%
  - Current Account Gap (EBA-lite): 7.5%
  - ln(REER) Actual: 4.85
  - ln(REER) Norm: 4.53
  - REER gap (EBA-lite): -12.4%
- Cross-country panel regression (investment–saving linkage) results:
  - Current Account Norm (regression): -2.1%
  - Current Account Gap (regression): 6.2%
  - o/w Policy Gap (both approaches): -2.9%
  - EBA-lite semi-elasticity of the CA used: -0.6
  - REER gap (based on CA regression and semi-elasticity): -10.3%
- Equilibrium REER approach:
  - Points to a substantial overvaluation, but model fit is poor.
  - Staff’s judgment relies on the adjusted results of the CA regression rather than the REER approach.
- Overall conclusion on external strength:
  - There is evidence of substantial current account strength of some 6.2 percent of GDP.
  - This reflects the dual structure of the economy and insufficient social safety nets.

### Structural interpretation and model caveats
- The EBA-lite model limitations noted:
  - Vietnam is not included in the EBA sample; the analysis uses the EBA-lite tool.
  - EBA-lite does not account for the FDI sector having relatively few links to the domestic economy.
  - EBA-lite does not account for rapid aging.
- The alternative cross-country panel regression:
  - Links the 2011–16 average Investment and Saving in 164 countries.
  - Includes a dummy variable for the 26 Asian developing and emerging economies (WEO classification).
  - Implicitly takes into account activities of the FDI sector and aging.
  - Modifies the approach taken in the prior year, which used a sample of 11 countries.

### Policy recommendations for external adjustment and domestic balance
- Raise private investment through structural reforms.
- Protect public investment while raising its efficiency and lowering the budget deficit.
- Strengthen social insurance and safety nets to reduce incentives for precautionary savings.
- Modernize the monetary framework with greater two-way exchange rate flexibility to:
  - Facilitate nominal appreciation.
  - Reduce the need to accumulate reserves.

### Exchange arrangement and monetary operations
- Exchange Arrangement classification: de facto stabilized (de jure managed floating).
- SBV (State Bank of Vietnam) measures noted:
  - Gradual increase in exchange-rate flexibility.
  - August 2015: widened the VND/USD trading band to +/-3 percent from +/-1 percent and devalued the central parity by one percent.
  - January 2016: announced the VND/USD rate would be adjusted daily based on:
    - (i) the previous day’s weighted average dong/USD exchange rate;
    - (ii) a weighted average of movements in dong exchange rates vis-à-vis seven other important trading partners’ currencies; and
    - (iii) domestic macroeconomic conditions.

### IMF relations, financials, and technical assistance (as of dates in source)
- Membership: Joined September 21, 1956; Article VIII.
- Quota and holdings (SDR Million / Percent of Quota):
  - Quota: 1,153.10 / 100.00
  - Fund holdings of currency: 1,153.10 / 100.00
  - Reserve position in Fund: 0.01 / 0.00
- SDR Department:
  - Net cumulative allocation: 314.79 / 100.00
  - Holdings: 267.95 / 85.12
- Outstanding Purchases and Loans: None.
- Latest Financial Arrangements (amounts in millions of SDRs):
  - ECF 04/13/2001–04/12/2004: Amount Approved 290.00; Amount Drawn 124.20
  - ECF 11/11/1994–11/10/1997: Amount Approved 362.40; Amount Drawn 241.60
  - Stand-By 10/06/1993–11/11/1994: Amount Approved 145.00; Amount Drawn 108.80
- Projected Payments to Fund (in millions of SDRs; Charges/interest):
  - 2017: 0.15
  - 2018: 0.2
  - 2019: 0.2
  - 2020: 0.2
  - 2021: 0.2
  - Total (by year shown): 0.15; 0.2; 0.2; 0.2; 0.2
- Technical Assistance (TA) highlights:
  - Early 2017: TA from FAD on upgrading the tax administration organization.
  - Early 2017: TA from MCM on modernizing the monetary policy framework.
  - December 2016: STA provided TA to improve quarterly National Accounts statistics.
  - Past TA areas: statistics (government finance, external sector, price, and national accounts), reserve management, debt management, bank resolution, stress testing the banking sector, and monetary operations and liquidity management.
  - Resident Representative: Mr. Jonathan Dunn (Vietnam and Lao P.D.R.), based in Hanoi.

### Relations and collaboration with the World Bank Group and ADB (programmatic highlights)
- World Bank Group Partnership Framework:
  - New Country Partnership Framework FY2018–22 under preparation; presentation to the Board on May 30th, 2017 (as noted in source).
  - CPF priorities aligned with SEDP 2016–20: enable inclusive growth and private sector participation; invest in people and knowledge; ensure environmental sustainability and resilience; governance cross-cutting.
- World Bank program scale and portfolio (as of March 31, 2017):
  - New IDA Allocation under regular IDA17: US$3.74 billion.
  - New commitments: US$586 million IDA SUF and US$222 million in IBRD during same period.
  - Portfolio: 47 IDA/IBRD operations and two stand-alone GEF, one MT; total net commitments US$9.46 billion.
  - IFC cumulative committed investments in Vietnam during FY14–16: US$2.2 billion (of which US$143 million is in long-term financing).
- World Bank lending FY16–17 (selected totals from table):
  - 2016 Total: IBRD US$494; IDA US$1,800
  - 2017 Total: IBRD US$246; IDA US$1,854
- ADB relations and support (as of April 30, 2017):
  - ADB CPS 2016–2020 supports job creation and competitiveness; inclusive infrastructure and services; environmental sustainability and climate change response.
  - Projected ADF allocation for 2017–2018: US$950.65 million.
  - OCR approved lending in 2016: US$368.7 million.
  - From October 1993–December 31, 2016: ADB provided 173 sovereign loans totaling US$15.18 billion, 315 technical assistance grant projects US$291.3 million, and 37 grant projects US$323.1 million.
  - ADB nonsovereign financing to date: US$280 million in seven private sector transactions; outstanding balances and commitments as of December 31, 2015: US$233.01 million (2.8 percent of ADB’s total nonsovereign portfolio).
  - ADB Trade Finance Program (TFP) in Vietnam: supported over US$6.5 billion in trade across 4,303 transactions since 2009; in 2015 supported US$2.5 billion in trade through over 1,900 transactions.

*Source: IMF staff estimates and Vietnam staff report informational annex as provided in the source content.*

### 67.6 percent of the trade supported through the TFP was cofinanced by the private sector. Vietnam

### cr17190 - 67.6 percent of the trade supported through the TFP was cofinanced by the private sector. Vietnam

### ADB Cofinancing and Coordination
- 67.6 percent of the trade supported through the TFP was cofinanced by the private sector.
- Vietnam receives substantial support under the Greater Mekong Sub-region initiatives (Cambodia, China, Lao P.D.R., Myanmar, Thailand, and Vietnam).
- ADB coordinates closely with Vietnam’s development partners to improve effectiveness, efficiency, and impact of lending and non-lending programs.
- ADB works with civil society organizations and the private sector in Vietnam to mobilize financial resources and expertise.
- ADB is an active member of the Six Banks Initiative: ADB, Agence Française de Développement (AFD), KfW, Japan International Cooperation Agency, Export Import Bank of Korea, and the World Bank.
- Co-financing operations allow financing partners, governments or their agencies, multilateral financing institutions, and commercial organizations to participate in financing ADB projects via official loans and grants, and commercial financing such as B loans, risk transfer arrangements, parallel loans, and co-financing for transactions under ADB’s TFP.
- As of December 31, 2015:
  - Cumulative direct value-added (DVA) official cofinancing for Vietnam: US$4.3 billion for 54 investment projects and US$106.5 million for 87 technical assistance projects.
  - Cumulative DVA commercial cofinancing for Vietnam: US$4.4 billion for two investment projects.
- ADB and IMF staffs coordinate through ad hoc information exchange on policy matters.

### Lending (Approved Amount) and Disbursement, 1993–2016 (high-level observations)
- Table source: Asian Development Bank.
- Approved amount and disbursement figures reported annually for Ordinary Capital Resources and Asian Development Fund; total approved and total disbursement shown for 1993–2016.
- Selected annual approved totals and disbursements (as presented):
  - 1993: Total approved 262; Disbursement 0
  - 1994: Total approved 140; Disbursement 3
  - 1995: Total approved 233; Disbursement 48
  - 1996: Total approved 303; Disbursement 29
  - 1997: Total approved 360; Disbursement 149
  - 1998: Total approved 284; Disbursement 128
  - 1999: Ordinary Capital Resources 40; Asian Development Fund 180; Total approved 220; Disbursement 191
  - 2000: Total approved 189; Disbursement 219
  - 2001: Total approved 243; Disbursement 176
  - 2002: Total approved 234; Disbursement 232
  - 2003: Total approved 179; Disbursement 233
  - 2004: Ordinary Capital Resources 120; Asian Development Fund 176; Total approved 296; Disbursement 182
  - 2005: Ordinary Capital Resources 360; Asian Development Fund 218; Total approved 578; Disbursement 224
  - 2006: Total approved 308; Disbursement 184
  - 2007: Ordinary Capital Resources 924; Asian Development Fund 515; Total approved 1,439; Disbursement 230
  - 2008: Ordinary Capital Resources 606; Asian Development Fund 159; Total approved 765; Disbursement 265
  - 2009: Ordinary Capital Resources 1,403; Asian Development Fund 523; Total approved 1,926; Disbursement 1,093
  - 2010: Ordinary Capital Resources 510; Asian Development Fund 580; Total approved 1,090; Disbursement 407
  - 2011: Ordinary Capital Resources 722; Asian Development Fund 365; Total approved 1,086; Disbursement 792
  - 2012: Ordinary Capital Resources 822; Asian Development Fund 463; Total approved 1,285; Disbursement 623
  - 2013: Ordinary Capital Resources 410; Asian Development Fund 365; Total approved 775; Disbursement 1,226
  - 2014: Ordinary Capital Resources 740; Asian Development Fund 409; Total approved 1,149; Disbursement 1,228
  - 2015: Ordinary Capital Resources 738; Asian Development Fund 290; Total approved 1,027; Disbursement 899
  - 2016: Ordinary Capital Resources 368.7; Asian Development Fund 403.8; Total approved 772.5; Disbursement 838
- Note: 1/ Includes loan components of regional projects in Viet Nam. 2/ Excludes a guarantee of $325 million for EVN (Loan No. 2604, approved on 12/11/09).

### Technical Assistance by Sector, December 2016 (Table 2)
- Table source: Asian Development Bank.
- Aggregate totals:
  - Number of Projects: 315.0
  - In millions of U.S. Dollars: 291.3
  - In percentage of Total: 100.00
- Sector breakdown (Number of Projects / In millions of U.S. Dollars / In percentage of Total):
  - Agriculture and Natural Resources: 57.0 / 50.2 / 17.23
  - Education: 22.0 / 14.5 / 5.00
  - Energy: 41.0 / 34.3 / 11.79
  - Finance: 37.0 / 22.0 / 7.56
  - Health and Social Protection: 16.0 / 8.9 / 3.06
  - Industry and Trade: 8.0 / 12.6 / 4.32
  - Multi-sector: 2.0 / 3.2 / 1.10
  - Public Sector Management: 67.0 / 44.6 / 15.28
  - Transport and ICT: 36.0 / 67.1 / 23.01
  - Water and Other Municipal Infrastructure and Services: 29.0 / 33.9 / 11.63

### Loan by Sector, December 2016 (Table 3)
- Table source: Asian Development Bank.
- Total: 173 loans; 15,186.6 million of U.S. Dollars; 100 percent of total.
- Sector breakdown (Number of Loans / In Million of U.S. Dollars / In Percentage of Total):
  - Agriculture and Natural Resources: 33.0 / 1,765.7 / 11.63
  - Education: 17.0 / 913.0 / 6.01
  - Energy: 14 / 2,578.7 / 16.98
  - Finance: 14 / 762 / 5.02
  - Health and Social Protection: 9 / 423.2 / 2.79
  - Industry and Trade: 6 / 159.5 / 1.05
  - Multisector: 7 / 280.0 / 1.84
  - Public Sector Management: 19 / 1,779.1 / 11.71
  - Transport and ICT: 36 / 4,854.1 / 31.96
  - Water and Other Municipal Infrastructure and Services: 18 / 1,671.3 / 11.01

### Grants by Sector, December 2016 (Table 4)
- Table source: Asian Development Bank.
- Total: 37.0 grants; 323.1 million of U.S. Dollars; 100.0 percent of total.
- Sector breakdown (Number of Grants / In Million of U.S. Dollars / In Percentage of Total):
  - Agriculture and Natural Resources: 13 / 62.2 / 19.24
  - Education: 2.0 / 2.8 / 0.87
  - Energy: 1.0 / 3.0 / 0.93
  - Finance: 1.0 / 1.5 / 0.46
  - Health and Social Protection: 9.0 / 58.6 / 18.14
  - Multi-sector: 3.0 / 15.0 / 4.64
  - Transport and ICT: 4.0 / 172.0 / 53.24
  - Water and Other Municipal Infrastructure and Services: 4.0 / 8.0 / 2.48

### Statistical Issues (As of May 1, 2017)
- Assessment: Data provision has some shortcomings, but is broadly adequate for surveillance. Most affected areas: financial sector, national accounts, government finance, and external sector statistics.
- National accounts:
  - GSO provides quarterly (cumulative) and annual GDP by type and expenditure (current and constant prices), monthly and annual external trade, industrial output, retail sales, and prices.
  - December 2016 STA TA mission recommended GSO prioritize improving Quarterly National Accounts (QNA) statistics.
  - Current practice: GSO produces cumulative QNA estimates for first three quarters; fourth quarter estimate is a residual. Recommendation: compile discrete and independent quarterly GDP using consistent data sources and methods.
  - Data collection practices and coordination need strengthening; compilation of national and provincial estimates should be centralized at GSO.
  - GSO updated the base year from 1994 to 2010.
- Prices statistics:
  - CPI methodology broadly in line with international standards.
  - Notional inclusion only of owner-occupied and rental housing.
  - Need to adopt a geometric mean of price relatives at lower level of aggregation instead of arithmetic mean.
  - Trade price indices compiled but not used in national accounts.
  - GSO has a work program with Fund TA to improve consumer, producer and trade price indices and to develop construction and services price indices; GSO signaled interest in compiling residential property prices.
- Government finance statistics:
  - Government operations data reflect consolidated state budget (central, provincial, district, commune).
  - Data exclude quasi fiscal activities of the central bank and SOEs, and extra-budgetary funds (Social Security Fund, Enterprise Restructuring Fund, Development Assistance Fund, Export Support Fund, local development funds, Sinking Fund), for which data are not regularly compiled/disseminated.
  - Compilation is on a cash basis for final annual data; provisional data compilation varies by source.
  - Government financing data, particularly domestic bank financing, cannot be reconciled between fiscal and monetary accounts.
  - World Bank and IMF recommended improving coverage and aligning definitions with GFSM 2001.
  - Authorities expect to provide GFSM 2001 consistent data from 2018.
- Monetary statistics:
  - SBV reports monetary data for central bank and other depository corporations to IMF STA monthly using old report forms with limited information.
  - STA recommended SBV develop a reporting scheme with comprehensive breakdown by counterparties and currency.
- External sector statistics:
  - Balance of payments statistics rely on limited source data, creating gaps across current, capital, and financial accounts.
  - From 2013, authorities report BoP in BPM6 format, but timeliness remains an issue.
  - Recent STA TA via TAOLAM focused on improving FDI data quality, development of international investment position (IIP), and external debt.
  - Remaining recommendations:
    - Resources insufficient for effective implementation of an International Transaction Reporting System.
    - FDI survey should be conducted annually and incorporated.
    - Further improvements needed in treatment of goods for processing in line with BPM6, remittances estimates, and study on unrecorded trade in gold.
    - Need to address significant errors and omissions in the balance of payments possibly related to household foreign exchange cash holdings.
    - Distinguish international reserves transactions from valuation changes.
    - Improve timeliness and dissemination format of external sector statistics, including IIP.
- Financial sector statistics:
  - Availability of financial sector data is very limited; quality requires substantial improvement, even for key FSIs.
  - Recommendation: FSIs should be published quarterly (instead of semi-annual).
- Data Standards and Quality:
  - Vietnam participated in GDDS in September 2003; superseded by e-GDDS in 2015.
  - STA mission in April 2016 assisted Vietnam to develop a National Summary Data Page (NSDP) for e-GDDS implementation.
  - Mission recommended adopting a strategy to progress through e-GDDS thresholds toward SDDS.
  - No data ROSC available.
- Reporting to STA:
  - Currently no government finance statistics reported for publication in IMF’s Government Finance Statistics Yearbook (GFSY) or International Financial Statistics (IFS).
  - Annual GFS data through 2004 (excluding extra-budgetary and social security funds), based on 1986 GFS format, have been reported for GFSY.
  - No sub-annual fiscal data reported for IFS since 2001.

### Authorities’ Statement (Statement by Juda Agung, Executive Director for Vietnam and Phong Tien Pham, Advisor to the Executive Director; June 7, 2017)
- Acknowledgement: Authorities thanked the IMF mission for candid and constructive policy discussions focused on economic development since the 2016 Article IV Consultation, near-term outlook, and policies to sustain high long-term growth and resilience.
- Policy stance:
  - Authorities committed to preserving macroeconomic stability and further improving the business environment in line with the socio-economic development agenda for 2017.
  - Committed to fiscal prudence, prudent monetary management, financial stability, further reform of SOEs while maintaining confidence in the banking system.
- Recent economic developments and outlook:
  - Real GDP growth of 6.2 percent in 2016, supported by strong external position, robust domestic demand, and rebound in agricultural and fishery production.
  - Q1 2017 growth moderated to 5.1 percent due primarily to lower mining production and slowdown in electronic manufacturing activity.
  - Authorities committed to achieving the 2017 growth target of 6.7 percent.
  - Headline inflation moderated to 4.7 percent (yoy) in the first four months of 2017 after rising throughout 2016; core inflation for the first four months of 2017 remained stable at 1.6 percent (yoy).
  - Current account shifted from a surplus of 4.1 percent of GDP in 2016 to a declining position driven by rising imports in Q1 2017.
- Risks and reforms:
  - Downside risks in 2017 from domestic and external fronts: planned hikes in health care and educational prices could raise inflation; weaker-than-expected GDP in first four months of 2017; downward trends in industrial, mining and construction sectors; external risks include protectionism, international economic fragmentation, slower external demand, and global financial volatility.
  - Authorities undertaking reforms to reduce the role of the state, accelerate equitization and legal reform in SOE and financial sectors, strengthen public finances, and consider modernizing the monetary framework.
  - Successful implementation of reforms expected to raise productivity, mitigate risks, facilitate sustained and higher long-run growth, and increase resilience to shocks.

*IMF staff compilation of Vietnam country material as presented in the supplied content.*

### 7. The authorities remain committed to fiscal consolidation and view it as a crucial element

### 7. The authorities remain committed to fiscal consolidation and view it as a crucial element

### Fiscal consolidation: objectives, measures, and risks
- Current target budget deficit: 3.5 percent of GDP.
- Authorities' intention: lower the deficit to 3 percent of GDP by 2020.
- Target for public debt: around 64.8% of GDP at end 2017.
- Measures under consideration:
  - Improvement in tax administration.
  - Prioritization in social and capital expenditures.
  - Rationalizing exemptions and incentives.
  - Broadening the tax base.
  - Further strengthening revenue administration.
  - Raising cost recovery and increasing private participation in education and health sectors.
  - Making capital expenditure more efficient while avoiding introduction of new policies that would lead to an increase in public expenditure in 2017.
- Authorities appreciate staff's technical assistance proposal to support strengthening tax administration.
- Risks to consolidation:
  - Slippage due to prolonged implementation of SOE equitization.
  - Delayed improvement of tax administration.

### Monetary and exchange rate policy
- Authorities view the current monetary stance as appropriate to support economic activity and steer inflation.
- Near-term policy: maintain the current policy stance, given that higher headline inflation reflects non-monetary factors.
- Exchange rate developments and policy response:
  - Global financial uncertainties and a stronger US dollar, coupled with higher trade deficit, led to currency speculation and volatility in 2016 and early 2017.
  - Authorities have gradually shifted toward anchoring monetary policy on inflation stability with the Dong average depreciation of 1.1 1.2% while allowing greater exchange rate flexibility.
  - Authorities take positive note of staff recommendation to further modernize the monetary policy framework to strengthen policy effectiveness and boost resilience.
- Credit and prudential stance:
  - By the end of 2016, credit growth reached 18.2 percent (y/y) with the GDP growth of 6.2 percent.
  - 2017 credit growth target: 16-18 percent.
  - Authorities tightened prudential ratios and risk weights for real estate loans.
  - Credit is being channeled to productive sectors based on individual banks’ health.

### External balance
- Recent decline in the current account indicates the imbalance in 2016 was temporary in nature.
- Recent trade deficit makes further reserves accumulation more challenging.
- Authorities are undertaking a transition to a new growth model in which exports, currently at 90% of GDP, will be more in line with the long run equilibrium.

### Banking sector: NPLs, restructuring, and regulatory measures
- Total NPL stock of the banking system, including loans sold to the Vietnam Asset Management Company (VAMC): 5.8 percent as of December 31, 2016.
- Authorities agree with staff on need for faster NPL resolution and bank restructuring.
- Proposed and implemented measures:
  - Strengthening the role of the VAMC in NPL resolution.
  - Facilitating participation in NPL resolution of both domestic and foreign investors.
  - Reinforcing collateral disposal to recover NPLs.
  - Proposing a Resolution of the National Assembly for recognition and resolution of both current and potential NPLs, including procedures for NPL resolution and collaterals disposal, and rights and duties of related parties.
  - Strengthening the legal framework for banking sector operations and restructuring.
  - Recapitalization of banks through retained earnings and outreach to foreign strategic investors.
  - Addressing asset quality issues, improving governance through strengthening bank management capacity, and increased transparency in banking sector operations.
- Authorities anticipate these measures will strengthen the banking sector and improve regulatory and supervisory effectiveness.

### Structural reforms and SOE restructuring
- Authorities continue to deepen and accelerate structural reforms to support a productivity-led growth model.
- Challenges identified: over-reliance on capital, natural resources and low-skilled labor, and macroeconomic stimulus.
- Economic restructuring plan period: 2016 – 2020.
  - Objectives: enhance banking system stability, build deeper capital markets, improve efficiency of the SOE sector, strengthen public investment, and enable a more productive and dynamic private sector.
- SOE sector reform:
  - Restructuring plan for 2016– 2020 issued.
  - Specific solutions include mandatory divestment from five sensitive business sectors (banking, security, insurance, investment funds and real estate), development of financial markets, application of market discipline and international norms.
  - Plan assigns concrete roles and tasks to each stakeholder for implementation.
  - Plan aims to achieve “dual” targets: improving efficiency and competitiveness of SOEs and resolving legacy weaknesses.
- Private sector support:
  - Authorities consider the private sector a main driver of growth and have implemented actions to support private enterprises, especially small and medium size enterprises.
  - Each government agency assigned specific time-bound tasks to support private enterprises, improve credit access at reasonable interest rates, and reduce frequency of examinations.
- Public investment management:
  - New Public Investment Law strengthened institutional and procedural framework for capital spending, including enhanced medium term investment planning and strengthened systems for project appraisal and selection.
  - The first Medium Term Investment Plan (MTIP) has been prepared and deliberated by the National Assembly; it sets out the investment program for the coming five years.

### Environment and resource sustainability
- Authorities note staff’s commendation on progress addressing environmental and resource sustainability issues.
- Vietnam’s vulnerabilities cited: particularly susceptible to climate change and natural disasters.
- Authorities actions:
  - Ratification of the Paris Agreement on Climate Change.
  - Setting up necessary institutional arrangements.
  - Initiating action plans toward a more sustainable and environment friendly growth model.

### Conclusion and international cooperation
- Authorities will continue implementing the reform agenda to take full advantage of growth prospects, while recognizing sustainable results will take time.
- Policy priorities emphasized:
  - Fiscal prudence.
  - Well-grounded monetary management and financial stability.
  - Improved competitiveness of SOEs.
  - Confidence in the banking system.
- Reforms to be paced appropriately to achieve desired outcomes while minimizing unintended consequences.
- Authorities express appreciation to the Fund for policy advice and technical support and look forward to continued cooperation.

*cr17190 - 7. The authorities remain committed to fiscal consolidation and view it as a crucial element*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17190.pdf_