## 1. Preparing for the Digital Economy ## Source details **Canonical URL:** [1. Preparing for the Digital Economy](https://www.imf.org/-/media/files/publications/cr/2019/1vnmea2019002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1vnmea2019002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1vnmea2019002.pdf.json) --- ### Context and background - Rapid, inclusive growth averaged 6.6 percent per annum during 2014–18 and reached a 10-year high of 7.1 percent in 2018. - Reforms since 1986 (doi moi) and recent fiscal and financial consolidation underpin the expansion. - Vietnam faces twin transitions: from plan to market and from farms to factories and services, and must upgrade its growth model to exploit rapid digital innovation. - Vietnam has a narrow 20-year window before rapid aging sets. ### Recent developments and outlook - Growth and drivers: - Growth remained resilient into 2019 Q1 at about 7 percent (6.8 percent relative to 2018 Q1). - Key drivers: growth in incomes and consumption, strong trade, tourism and remittances; manufacturing surged and direct investment inflows remained strong. - Trade and inflation: - Trade surplus widened in 2018; export growth slowed in 2019 Q1 due to slower smartphone exports. - Inflation: headline averaged 3.5 percent and core averaged 1.5 percent in 2018. Inflation reached 2.9 percent in April (year-on-year); core inflation at 1.9 percent. - Outlook (staff projections): - Growth is expected to soften in 2019 to 6.5 percent. - Headline inflation projected at 3.6 percent and core inflation at 2.1 percent. - Medium-term growth expected to slow to 6.5 percent per annum, and inflation likely to remain close to the 4 percent target. ### External sector and reserves - External assessment and reserves: - External position in 2018 assessed as substantially stronger than fundamentals: Current Account (CA) gap reached 6.4 percent of GDP and exchange rate undervaluation 8.4 percent. - International reserves rose to U.S.$ 65 billion, 24 percent of GDP and 76 percent of the ARA metric at end-April 2019. - Trade tensions: - Quantitative models suggest a small positive overall impact on Vietnam (- 0.3– 0.8 percent change in exports) from US–China trade tensions due to trade diversion offset by lower exports to China of intermediates and capital goods. - Potential larger effects from investment shifts as firms move facilities to Vietnam in response to rising costs in China. ### Risks (overview) - Downside risks have risen; external risks from slower partner growth and trade policy uncertainty dominate. - Domestic vulnerabilities: banking sector fragilities persist despite ongoing recapitalization; bottlenecks related to the anti-corruption campaign could delay investment. - Upside risks: FTAs could yield productivity gains; growth could surprise on the upside if trade diversion and investment relocation continue. ### Authorities’ views - Broad agreement with staff’s assessment; committed to macrofinancial stability. - Authorities view their 2019 growth target (6.6–6.8 percent) as achievable. - Authorities note SBV intervention is bidirectional and that 2018 Dong depreciation was less than other countries. - Authorities are revising FDI strategy to ensure greater linkages with domestic industry. ### Policy issues and staff position (summary) - Fiscal: government commitment to fiscal adjustment welcome; improve quality of adjustment and enact specific measures for timely implementation. - Financial: credit tightening and development of capital markets are positive; build modern market infrastructure and macroprudential tools. - Contingency guidance: - Use fiscal space if downside risks materialize. - If growth surprises on the upside, accelerate fiscal consolidation and recalibrate policy levers. - Banking: move to Basel II and recapitalization of SOCBs should not be delayed. - Governance: addressing governance and corruption is an opportunity to strengthen the rule of law. ### Fiscal policy: recent trends and projections - Debt and deficits: - State budget deficit stabilized at about 4.6 percent of GDP in 2017–18 (GFS measure), down from 5.5 percent in 2014–2016. - Including VSS surplus and other EBFs, the general government (GG) deficit averages 2.7 percent of GDP in 2017–18. - PPG debt declined to 55.6 percent of GDP at end-2018, down 4 points of GDP from its 2016 peak. - Authorities’ plans and staff baseline: - State budget deficit projected to decline to 4.2 percent in 2020 (2.6 percent with EBFs). - Under staff baseline, PPG debt projected to fall to 53.2 percent of GDP by 2020 and 49.3 percent in 2024. ### Fiscal policy recommendations (staff) - Continue tackling PPG debt and improve the quality of fiscal adjustment. - Enact specific fiscal measures to ensure timely implementation of deficit targets. - Preserve strong revenue mobilization (24 percent of GDP at the state budget level, 31 percent with EBFs) amid declining ODA, oil and trade revenues. - Consider lowering the statutory PPG debt ceiling from 65 to 50 percent of GDP in 2024 to create fiscal space for public investment and fiscal risks from SOEs, banking contingent liabilities, aging and climate change. ### Revenue-side reforms recommended - Recent increases in environmental and excises are welcome, but more fundamental tax reform is needed to: - Broaden tax bases. - Reduce informality incentives. - Mitigate declines in ODA, oil and trade revenues. - Staff encourages a broad tax policy review including VAT (domestic VAT collections have weakened); excises; CIT; tax incentives and transfer pricing; property tax and current transaction and stamp duties (very low). - Speed up establishment of property and land registries. ### Expenditure-side priorities and social spending - Public sector: - Reduction in public employee numbers and increase of base salaries are welcome; further rationalization of the public sector wage bill is possible. - Conduct in-depth analysis of staffing needs for the next 5-year plan. - SDG and infrastructure gaps: - SDG costing exercise points to gaps of 7 percent of GDP annually in public and private spending, of which 1 percent in health and the rest in roads, water and electricity. - Raise level and efficiency of infrastructure investment; consider private funding via PPPs. - Maintain access to tertiary education while addressing skills mismatches via university and vocational links to industry. ### Pensions and aging - Under current policies VSS outlays will overtake revenues in the 2030s. - Proposed reforms under discussion include raising retirement ages from 60 to 62 for men, and 55 to 60 for women, and tightening eligibility and base calculation criteria. - Staff advises swift implementation, monitoring and adjustments to address unfunded pension liabilities, while protecting vulnerable groups. - Integrate VSS and other EBFs in the macro-fiscal framework. ### Health insurance and health spending - Public health care coverage expanded to 88.5 percent in 2018; per capita health spending rising. - Health care spending rose from 7.9 percent of the budget in 1995 to 14.2 percent in 2014; the Health Insurance Fund has swung into deficit. - VSS plans to strengthen cost controls, consolidate collections and raise co-payments—these steps are welcome. - Additional measures: enhance referral system; increase competition in pharmaceuticals; create electronic patient records; address high out-of-pocket spending; consider more pre-funding of health care costs and improving collections and reducing informality. ### Fiscal systems, reporting and debt management - Fiscal accounting and reporting suffer from partial coverage and long lags; GFSM representations of the entire general government should be introduced as standard in 2021–30. - Operational recommendations: - Limit spending carry-forward and eliminate revenue carry-forward; require EBFs to provide detailed quarterly reports. - Budget documents should include medium-term debt sustainability analyses and fiscal risk statements; TA in fiscal reporting is a priority. - Treasury bonds issued at minimum 5-year maturity prevent active cash management and slow money market development; issuance of T-bills recommended. - To reduce high government cash balances, cash held at commercial banks should be swept into the SBV daily. --- ### Box 1 — Vietnam: Preparing for the Digital Economy ### Embracing the digital revolution - New digital technologies are spreading fast in Vietnam, aided by the fast-growing wireless internet, including in fintech, mobility, and other aspects of the sharing economy. - International technology companies have set up operations in the country, providing proof that Vietnam’s economy has the potential to become even more diversified, complex and move up the quality ladder. - In fintech, business developments are concentrated in electronic payments. - The authorities have designated NAPAS (National Payment Corporation of Vietnam) to become the single hub for processing payments, which may pose private businesses at legal risks. - Staff understands that the authorities are considering applying a new foreign ownership limit to payment servicers. ### Opportunities and challenges of digitalization - The digital economy will continue to expand in coming years, spurred by 5G, a growing Internet of Things and blockchain. - It will produce an explosion of data and techniques, including artificial intelligence systems, to harvest it and create new businesses. - Vietnam’s large internet and digital-savvy population is well placed to exploit the opportunities embedded in the new technologies. - Policy recommendations: - Universities and polytechnics should work more closely with the business community and the government to upgrade curricula and ensure graduates have STEM and other skills demanded by big tech. - Regulatory regime should be flexible, balancing experimentation with consumer protection. - Streamline procedures for obtaining licenses and upgrade infrastructure to remain an investor destination. ### Strengthening governance — recent actions - Anti-corruption: - Government began tackling grand corruption in 2016; 2018 anti-corruption law clarifies and enhances legislative framework, strengthens declaration of income and wealth in government and SOEs, including public access to declarations. - Linking (by end-2019) of databases on taxation, AML, customs, and land transactions should facilitate asset verification. - Corporate governance: - Stricter corporate governance regulations aligned with OECD best practices and tighter regulations to prevent related party transactions and collusion are likely to be introduced as part of the revised Securities Law. - Indicators: - Control of Corruption score deteriorated since 2015 but the 2017 Provincial Governance and Public Administration Performance Index is more positive. - Note: governance indicator scale ranges from -2.5 (lowest) to 2.5 (highest). ### Staff position — priorities to improve governance and fight corruption - Greater Fiscal Transparency and Stronger Public Investment Management: - Strengthen fiscal reporting and procurement systems; minimize irregularities in land acquisitions; clarify roles in the Public Investment Law; finalize a comprehensive PPP law including risk management and supervision. - Better Income and Asset Declarations, Stronger Judiciary and Legal Framework: - Centralize and expand asset declarations; strengthen independence and capacity of the Government Inspectorate and State Audit; strengthen judiciary capacity for contract enforcement, restructuring and bankruptcy; improve disclosure of court judgments; protect officials acting in good faith; include legal protection for financial supervisory staff. - Strengthening Anti-Money Laundering systems: - Staff welcomes the National Action Plan to strengthen the AML/CFT framework and execution; close legislative gaps concerning customer due diligence for politically exposed persons; FATF assessment to begin in 2019. ### Authorities’ views (Box) - Commitments and priorities: - Committed to reforming economic institutions, completing the 2016–20 equitization plan and planning for 2021–30. - Priorities include streamlining taxation and administrative rules; amending the land law; revising the Enterprise Law to allow 100 percent FOLs in all but strategic sectors; amending the Securities Law; reorienting FDI strategy toward advanced, environmentally friendly sectors with strong domestic linkages; improving data and dissemination consistent with Article VIII, Section 5. - On anti-corruption: preparing implementing regulations, providing training, centralizing asset declaration registry; implementation expected to be challenging due to cash transactions and lack of property registration. - Preparing for AML APG assessment in October 2019; extending AML law to domestically exposed persons not under consideration. ### Staff appraisal — key assessments and recommendations - Resilient growth: sound fundamentals and reform momentum contributing to broad based, private sector-led and non-inflationary growth. - External sector: external position substantially stronger than fundamentals; removing investment distortions and more exchange rate flexibility would reduce the external imbalance; gradual reserve accumulation should continue until monetary framework modernized. - Fiscal sustainability: countercyclical tightening lowered government and PPG debt; priorities are broadening revenue bases and raising quality of spending and PFM. - Financial discipline: finalize plans to recapitalize SOCBs; use Basel II as an incentive for liberalization paired with modern macroprudential system. - Structural reforms: accelerate reforms to reduce concentration of land ownership in state hands; create high-quality infrastructure; reduce regulatory and licensing barriers; reform tertiary and vocational education for the digital era. - Data and statistics: forthcoming revisions to national income and BOP data welcomed; fiscal accounting and reporting need to improve; IMF providing TA. - Governance: steps to strengthen economic governance welcome; further enhancements needed to anti-corruption law, asset declarations and legal framework. --- ### Key numeric indicators and projections (selected) - Real GDP (percent change): 2014: 6.0; 2015: 6.7; 2016: 6.2; 2017: 6.8; 2018: 7.1; 2019 (proj.): 6.5; 2020 (proj.): 6.5. - CPI (period average): 2014: 4.1; 2015: 0.6; 2016: 2.7; 2017: 3.5; 2018: 3.5; 2019 (proj.): 3.6; 2020 (proj.): 3.8. - Core inflation (end of period): 2014: 2.7; 2015: 1.7; 2016: 1.9; 2017: 1.3; 2018: 1.7; 2019 (proj.): 2.1; 2020 (proj.): 2.2. - Current account (percent of GDP): 2014: 4.9; 2015: -0.1; 2016: 2.9; 2017: 2.1; 2018: 2.4; 2019 (proj.): 2.2; 2020 (proj.): 1.9. - Exports f.o.b. (billions of USD): 2018: 244.0; 2019 (proj.): 273.0; 2020 (proj.): 307.3. - Gross international reserves (billions of USD): 2018: 55.3; 2019 (proj.): 66.2; 2020 (proj.): 77.7. - Net lending/borrowing (percent of GDP): 2018: -4.4; 2019 (proj.): -4.4; 2020 (proj.): -4.2. - PPG debt (end of period, percent of GDP): 2018: 55.6; 2019 (proj.): 54.4; 2020 (proj.): 53.3; 2024 (proj.): 49.3. - External debt (percent of GDP): 2018: 45.6; baseline projection 2024: 52.7. - Banking sector indicators: - Regulatory Capital to Risk-Weighted Assets: 2018: 12.1. - Non-performing Loans to Total Gross Loans (standard FSI): 2018: 1.9 (staff cites current NPL level as 6.5 percent in another assessment). - Credit growth: 17.4 percent in 2017; less than 13 percent in 2018; SBV plans to lower credit growth further, to close to nominal GDP growth. - Pension metrics: - Replacement rates around 70 percent. - Retirement ages: 55 years for women and 60 years for men. - Coverage estimated at about 20-25 percent. - NPV of pension liabilities until 2050 (1 percent discount rate): 172 percent of GDP; NPV of pension revenues: 158 percent of GDP. - VSS assets invested in government bonds roughly 12 percent of GDP. --- *Source: 1vnmea2019002 — IMF staff report content provided in the supplied PDF.* ### 1. Preparing for the Digital Economy ___________________________________________________________ 17 ### 1. Preparing for the Digital Economy ### Context and background - Rapid, inclusive growth averaged 6.6 percent per annum during 2014–18 and reached a 10-year high of 7.1 percent in 2018. - Reforms since 1986 (doi moi) and recent fiscal and financial consolidation underpin the expansion. - Vietnam faces twin transitions: from plan to market and from farms to factories and services, and must upgrade its growth model to exploit rapid digital innovation. - Vietnam has a narrow 20-year window before rapid aging sets. ### Recent developments and outlook - Growth remained resilient into 2019 Q1 at about 7 percent (6.8 percent relative to 2018 Q1). - Key drivers: growth in incomes and consumption, strong trade, tourism and remittances; manufacturing surged and direct investment inflows remained strong. - Trade surplus widened in 2018; export growth slowed in 2019 Q1 due to slower smartphone exports. - Inflation: headline averaged 3.5 percent and core averaged 1.5 percent in 2018. Inflation reached 2.9 percent in April (year-on-year); core inflation at 1.9 percent. - Outlook: growth is expected to soften in 2019 to 6.5 percent; headline inflation projected at 3.6 percent and core inflation at 2.1 percent. Medium-term growth expected to slow to 6.5 percent per annum, and inflation likely to remain close to the 4 percent target. ### External sector and reserves - External position in 2018 assessed as substantially stronger than fundamentals: Current Account (CA) gap reached 6.4 percent of GDP and exchange rate undervaluation 8.4 percent (Appendix II). - International reserves rose to U.S.$ 65 billion, 24 percent of GDP and 76 percent of the ARA metric at end-April 2019. - Trade tensions between the United States and China: quantitative models suggest a small positive overall impact on Vietnam (- 0.3– 0.8 percent change in exports) due to trade diversion offset by lower exports to China of intermediates and capital goods. - Potential larger effects from investment shifts as firms move facilities to Vietnam in response to rising costs in China. ### Risks - Downside risks have risen (Appendix I); external risks from slower partner growth and trade policy uncertainty dominate. - Banking sector fragilities persist despite ongoing recapitalization. - Bottlenecks related to the anti-corruption campaign could delay investment. - Upside: FTAs could yield productivity gains; growth could surprise on the upside if trade diversion and investment relocation continue. ### Authorities’ views - Authorities broadly shared staff’s assessment; committed to macrofinancial stability. - They view their 2019 growth target (6.6–6.8 percent) as achievable. - They noted that SBV intervention is bidirectional and that 2018 Dong depreciation was less than other countries. - Authorities are revising FDI strategy to ensure greater linkages with domestic industry. ### Policy issues and staff position - Overall: government commitment to fiscal adjustment is welcome, but quality of adjustment should improve and specific measures should be enacted to ensure timely implementation. - Credit tightening and development of capital markets are positive; authorities should build modern market infrastructure and macroprudential tools. - Use fiscal space if downside risks materialize; if growth surprises on the upside, accelerate fiscal consolidation and recalibrate policy levers as needed. - Move to Basel II and recapitalization of SOCBs should not be delayed. - Addressing governance and corruption provides an opportunity to strengthen the rule of law. ### Fiscal policy: recent trends and projections - Vietnam reversed rapid rise in PPG debt up to the 12th Party Congress (January 2016) and undertook fiscal consolidation. - State budget deficit stabilized at about 4.6 percent of GDP in 2017–18 (GFS measure), down from 5.5 percent in 2014–2016. - Including VSS surplus and other EBFs, the general government (GG) deficit averages 2.7 percent of GDP in 2017–18. - PPG debt declined to 55.6 percent of GDP at end-2018, down 4 points of GDP from its 2016 peak. - Authorities plan gradual fiscal consolidation; state budget deficit projected to decline to 4.2 percent in 2020 (2.6 percent with EBFs). - Under staff baseline, PPG debt projected to fall to 53.2 percent of GDP by 2020 and 49.3 percent in 2024. ### Fiscal policy recommendations (staff) - Continue tackling PPG debt and improve the quality of fiscal adjustment. - Enact specific fiscal measures to ensure timely implementation of deficit targets. - Preserve strong revenue mobilization (24 percent of GDP at the state budget level, 31 percent with EBFs) amid declining ODA, oil and trade revenues. - Consider lowering the statutory PPG debt ceiling from 65 to 50 percent of GDP in 2024 to create fiscal space for public investment and fiscal risks from SOEs, banking contingent liabilities, aging and climate change. ### Revenue-side reforms recommended - Recent increases in environmental and excises are welcome, but more fundamental tax reform is needed to: - Broaden tax bases. - Reduce informality incentives. - Mitigate declines in ODA, oil and trade revenues. - Staff encourages a broad tax policy review including VAT (domestic VAT collections have weakened); excises; CIT; tax incentives and transfer pricing; property tax and current transaction and stamp duties (very low). - Speed up establishment of property and land registries. ### Expenditure-side and social priorities - Reduction in public employee numbers and increase of base salaries are welcome; further rationalization of the public sector wage bill is possible. - Conduct in-depth analysis of staffing needs for the next 5-year plan. - Social and infrastructure spending needs are large: SDG costing exercise points to gaps of 7 percent of GDP annually in public and private spending, of which 1 percent in health and the rest in roads, water and electricity. - Raise level and efficiency of infrastructure investment; consider private funding via PPPs. - Maintain access to tertiary education while addressing skills mismatches via university and vocational links to industry. ### Pensions and aging - Under current policies VSS outlays will overtake revenues in the 2030s. - Proposed reforms under discussion in the National Assembly include raising retirement ages from 60 to 62 for men, and 55 to 60 for women, and tightening eligibility and base calculation criteria. - Staff advises swift implementation, monitoring and adjustments to address unfunded pension liabilities, while protecting vulnerable groups. - Integrate VSS and other EBFs in the macro-fiscal framework. ### Health insurance and health spending - Public health care coverage expanded to 88.5 percent in 2018; per capita health spending rising. - Health care spending rose from 7.9 percent of the budget in 1995 to 14.2 percent in 2014; the Health Insurance Fund has swung into deficit. - VSS plans to strengthen cost controls, consolidate collections and raise co-payments—these steps are welcome. - Additional measures: enhance referral system; increase competition in pharmaceuticals; create electronic patient records; address high out-of-pocket spending; consider more pre-funding of health care costs and improving collections and reducing informality. ### Fiscal systems, reporting and debt management - Fiscal accounting and reporting suffer from partial coverage and long lags; GFSM representations of the entire general government should be introduced as standard in 2021–30. - Limit spending carry-forward and eliminate revenue carry-forward; require EBFs to provide detailed quarterly reports. - Budget documents should include medium-term debt sustainability analyses and fiscal risk statements; TA in fiscal reporting is a priority. - Public debt management improved but needs more flexibility: treasury bonds issued at minimum 5-year maturity prevent active cash management and slow money market development. - Issuance of T-bills recommended to complete the short end of the yield curve and provide a risk-free security. - To reduce high government cash balances, cash held at commercial banks should be swept into the SBV daily. *Source: https://www.imf.org/-/media/files/publications/cr/2019/1vnmea2019002.pdf* ### 18. Staying the fiscal course. The authorities broadly agreed with staff’s views. They are ### 18. Staying the fiscal course. The authorities broadly agreed with staff’s views. They are ### Fiscal policy and public investment - Authorities committed to continued fiscal consolidation and are enforcing the statutory debt limit and the cap in the state budget deficit. - Public debt and guarantees and public sector headcount are being reduced further. - Public investment remains shielded from cuts. - PIMA recommendations are reflected in the new Public Investment Law (PIL). - A law on PPPs is being drafted to help limit risks related to PPP procurement and management. ### Tax policy and administration - Authorities are confident they will be able to increase revenue further based on administrative reforms, including the use of IT and digitalization, to broaden revenue bases. - They are studying options for property taxation and registries. - Review of different tax policy laws is ongoing and will take more time than expected due to strong opposition. - The MOF is considering adopting policies through the draft Tax Administration Law which will be read by the NA in its May-June session. - Planned administrative measures to increase revenue include: - (i) Strengthening cooperation among the General Department of Taxation, Customs Office, SBV, Ministry of Security and other institutions to enhance coordination, strengthen supervision and reduce tax arrears; - (ii) Adopting electronic tax transactions; - (iii) Adopting risk management in tax administration; - (iv) Requiring enterprises to use electronic invoices in transaction of goods sales and service provision; - (v) Strengthening measures to combat tax base erosion, tax evasion and profit shifting. ### Social security and health - Authorities agreed public pension coverage is narrow but argued high informality makes further expansion challenging. - They will review the pension calculation method (currently lifetime wages) and replace it with wages during the five years before retirement. - On health, authorities agreed that expansion in coverage combined with limited expenditure control resulted in cost escalation. ### Public debt management and fiscal accounting - Authorities focused on improving debt management: public guarantees are granted only sparsely, external debt is being further reduced, and bond maturities lengthened. - Benefits of issuing short term bills to assist financial market development and monetary policy will be implemented. - Authorities are addressing fiscal accounting issues; the new PIL will limit investment carry-over, but revenue carry-forward is likely to remain. - They plan to present GFSM-conforming fiscal accounts to the NA in 2020; integration of social security into fiscal accounting is deemed unlikely in the short-term. ### Credit growth and monetary policy framework - Aggregate and bank-by-bank limits on credit growth are a key plank of SBV’s monetary framework. - Credit growth trend: - 17.4 percent in 2017; - less than 13 percent in 2018; - SBV plans to lower credit growth further, to close to nominal GDP growth. - SBV sought to constrain real estate lending by imposing higher risk weights and limiting short-term funding for long-term projects. - SBV limited consumer lending by introducing a cap on the share of cash loans and prohibiting lending to borrowers with weak credit. - Plans to create a credit rating agency are at an advanced stage. - Vietnam is moving to adopt Basel II standards by January 2020; banks that meet the standards will be granted higher credit ceilings. - Over the medium term, SBV intends to replace administrative allocation of credit with market-based mechanisms. - Staff requests more information on: - high corporate debt (140 percent of GDP); - private external debt (25 percent of GDP). ### Exchange rate, reserves, and staff recommendations - SBV manages the Dong within a three percent band and is SBV’s principal nominal anchor. - The Dong depreciated by a modest 2.1 percent vis-à-vis the U.S. dollar in 2018. - The Dong appreciated by 3.8 percent in REER terms in 2018, reflecting depreciation of the RMB. - U.S. dollar hoards are U.S. $60 billion or 25 percent of GDP. - Staff recommendations and positions: - Allow greater exchange rate flexibility within the three percent band in the near term; consider modest nominal appreciation vis-à-vis the U.S. dollar within the band to condition market expectations and help reverse cash dollarization. - If faced with persistent large shocks, re-center the band. - With the switch to IT expected to take several years, gradual reserve accumulation should continue until 100 percent of the ARA metric for a pegged regime is reached. - Staff assumes SBV reserves will reach near 100 percent of the ARA metric by 2024. - The exchange rate band should be gradually widened in the context of the shift to IT. - To prepare for a price-based regime: stabilize the interbank market rate within a narrow band by paying interest on reserves; then phase out credit growth targets and use an interbank rate as a main operational target. ### Monetary modernization and inflation targeting - Authorities maintain a cautious, gradual approach to modernizing the monetary framework; modernization will take between six and eight years. - Fund capacity development (multi-year project) is expected to play a key role in building SBV forecasting and policy analysis capacity. - Continuing administered price liberalization is expected to add about two percentage points to the CPI. - Staff view on the future inflation target: - It may be premature to lower the target for 2021–30 below 4 percent now. - The target should be subject to infrequent reviews and a tolerance range of one percent to deal with volatile CPI components. ### Banking sector: earnings, NPLs, and capital - Bank earnings have improved; shift to retail lending and fee income has contributed to profitability though growth has slowed. - NPLs: - Current NPL level cited as 6.5 percent. - Staff expects NPLs to continue to come down from 6.5 percent to close to the average for emerging market economies (4-5 percent). - Banks have bought back NPLs from the Vietnam Asset Management Corporation (VAMC). - Resolution 42 of 2017 facilitated more efficient NPL resolution by providing more legal powers to seize collateral and sell NPLs at auction. - Bank capital: - Adoption deadline for Basel II rules is January 1, 2020 (Circular 41). - Most large private banks are well capitalized to meet Basel II thanks to retained earnings and foreign investor equity injections. - Systemic SOCBs face a capital shortfall of two percent of GDP. - Authorities have formulated a bank-by-bank strategy for recapitalizing large SOCBs; financing sources under internal discussion. - Policy options urged by staff include: equity issues to private sector (including raising FOLs beyond current plans), retained dividends, some injection of state funds, and some bank bond issuance to boost Tier 2 capital. - Raising FOLs for healthy banks is not on the table now, although FOLs for weak banks are (up to 100 percent). ### Macroprudential measures, risk management, and data needs - SBV has stepped up prudential measures, including a cap on the ratio of short-term funding to long-term lending. - SBV strengthened banking sector stress tests and monitoring of early warning indicators. - A high-level, multi-agency National Financial and Monetary Advisory Council has been created, chaired by the Deputy Prime Minister, to monitor system-wide risks and advise on policy measures. - Staff urges: - Strengthening the macroprudential framework, including loan-to-value and debt service-to-income requirements to address potential risks from consumer and mortgage loans. - Careful sequencing of financial liberalization; maintain credit ceilings while allowing banks that have achieved Basel II standards more room for lending. - Improved dissemination of Financial Stability Reports. - Data gaps and priorities for improvement: - Real estate prices; - Household and corporate leverage; - Evergreened loans; - SME balance sheets; - Disaggregated credit and banking sector and corporate exposures; - Official international reserves, the International Investment Position, EBFs, and SOEs. - Planned IMF TA with GSO and the MOF will aim at improving real estate statistics; SBV to play a role once the bank lending survey comes on stream. - Requiring banks to report collateral values would help SBV better assess credit risks over time. ### Authorities’ views (summarized) - Monetary policy: Authorities consider their 2018 response effective in maintaining orderly fx market conditions; priority is maintaining inflation below target and further tightening credit growth. - Credit growth ceilings: SBV agreed bank-by-bank credit caps should be removed eventually but argued it is not the right time; will allocate higher credit caps to banks that satisfy Basel II as a first step. - Banking sector: Satisfying Basel II capital rules is a milestone; recapitalizing systemic SOCBs is urgent and necessary. Prudential measures will be tightened as necessary. Authorities welcome IMF TA. - Capital markets: Authorities view growing equity and bond markets as important; expect revisions to the Securities Law to enhance market transparency and encourage foreign investment; view capital market financing as the main source for medium- to long-term investment funds. *IMF Country Report content (excerpt).* ### Box 1. Vietnam: Preparing for the Digital Economy ### Box 1. Vietnam: Preparing for the Digital Economy ### Embracing the digital revolution - New digital technologies are spreading fast in Vietnam, aided by the fast-growing wireless internet, including in fintech, mobility, and other aspects of the sharing economy. - International technology companies have set up operations in the country, providing proof that Vietnam’s economy has the potential to become even more diversified, complex and move up the quality ladder. - In fintech, business developments are concentrated in electronic payments. - The authorities have designated NAPAS (National Payment Corporation of Vietnam) to become the single hub for processing payments, which may pose private businesses at legal risks. - Staff understands that the authorities are considering applying a new foreign ownership limit to payment servicers. ### Opportunities and challenges of digitalization - The digital economy will continue to expand in coming years, spurred by 5G, a growing Internet of Things and blockchain. - It will produce an explosion of data and techniques, including artificial intelligence systems, to harvest it and create new businesses. - Vietnam’s large internet and digital-savvy population is well placed to exploit the opportunities embedded in the new technologies. - Universities and polytechnics should work more closely with the business community and the government to upgrade curricula and ensure that graduates have STEM and other skills demanded by big tech. - The regulatory regime should be flexible, balancing the need to experiment with (and learn from) adopting emerging digital platforms in payments, peer to peer lending and other fintech applications with consumer protection. - Balanced regulation and streamlined, efficient procedures for obtaining licenses and upgrades of Vietnam’s infrastructure should all help ensure that it remains a destination of choice for investors and entrepreneurs. ### Strengthening governance (context and recent actions) - The government began tackling grand corruption in 2016 and significant sentences have been handed down in several high-level cases. - The revamped 2018 anti-corruption law clarifies and enhances the legislative framework for combating corruption, by strengthening the declaration of income and wealth in government and SOEs, including public access to declarations. - The linking (by end-2019) of databases on taxation, anti-money laundering, customs, and land transactions should facilitate asset verification. - Stricter corporate governance regulations aligned with OECD best practices and tighter regulations to prevent related party transactions and collusion are likely to be introduced as part of the revised Securities Law to improve transparency and disclosure for listed enterprises. - It is too early to see the effects of these efforts on corruption: the Control of Corruption score deteriorated since 2015 but the 2017 Provincial Governance and Public Administration Performance Index is more positive. - Note on governance indicator scale: Score ranges from -2.5 (lowest) to 2.5 (highest). ### Staff Position — Priorities to improve governance and fight corruption - Despite progress in recent years, additional efforts are needed to improve governance and fight corruption. Priorities reflect recommendations of IMF TA and echo suggestions in SM/18/125 (Appendix VI). Actions are needed along three fronts as follows. Greater Fiscal Transparency and Stronger Public Investment Management - Fiscal reporting and procurement systems must be strengthened, especially competitive bidding and e-procurement as suggested in the PIMA. - Efforts to reduce irregularities in land acquisitions are a good step. - Regarding the Public Investment Law, the authorities should aim for more clarification of roles between government agencies on project approval and between line ministries and provinces. - A comprehensive PPP law that includes risk management and supervision should be finalized quickly. Better Income and Asset Declarations, Stronger Judiciary and Legal Framework - Further improve asset declarations to align them with best practices, by making them more centralized, expanding the information covered and the disclosure requirement. - Strengthen the independence of the Government Inspectorate against undue political influence and abuse. - Grant the State Audit, Government Inspectorate, and ministerial and subnational Inspectorates more resources and improve their technical capacity (World Bank 2016). - Strengthen the capacity of the judiciary to enforce contracts, strengthen legal interpretation, and facilitate resolution, restructuring and bankruptcy. - Greater disclosure is needed of court judgments and case records. - Clarify the roles of judges as arbiters rather than parties in cases. - Enhance capacity for speedier resolution of cases. - Improve the legal framework to incorporate safeguards against unfounded criminal prosecution of public officials for good faith performance of their duties. - To ensure compliance with Basel Core Principle 1.5, include legal protection for financial supervisory staff against lawsuits (IMF FSAP 2013). - Consider legislative protection against criminal liability for tax officers. Strengthening Anti-Money Laundering systems - Staff welcomes the National Action Plan to strengthen the AML/CFT framework and execution. - In line with FATF standards, the Plan envisages outreach on AML issues, training and regulatory capacity building, and closing regulatory gaps by November 2019. - Legislative gaps remain concerning customer due diligence for politically exposed persons. - The FATF assessment which will get underway in 2019 will focus on the effective implementation of legislative provisions and institutional frameworks. - Following the Asia Pacific Group (APG) assessment in October 2019, the IMF stands ready to assist the authorities in their efforts to make progress to address APG recommendations during the one-year observation period leading up to the 2020 FATF decision. - Staff welcomes engagement with stakeholders in Vietnam, including the international community, think tanks, academia and the private sector, with interest in improving economic governance and fighting corruption. ### Authorities’ Views - The authorities underscored that they are committed to reforming Vietnam’s economic institutions, complete the 2016–20 equitization plan and draw additional plans for 2021–30. - Stressed that commitment to institutional reforms is also driven by obligations under international trade agreements. - Priorities include: - Streamlining and simplifying taxation and administrative rules; - Amending the land law to make land use and zoning more transparent and subject to streamlined procedures; - Revising the Enterprise Law to reduce licensing requirements, remove duplicative procedures, and allow 100 percent FOLs in all but strategic sectors; - Amending the Securities Law to focus supervision on larger firms; - Reorienting the foreign direct investment strategy toward advanced sectors, are environmentally friendly and have strong linkages with domestic industry; - Implementing reforms, in close collaboration with IMF technical assistance, to address data weaknesses and improve the dissemination of data, including for international reserves and the international investment position, consistent with their obligations under Article VIII, Section 5. - On anti-corruption: authorities are preparing implementing regulations and providing extensive training to declarants and inspectors related to the revised anti-corruption law and are moving to centralize the asset declaration registry. - They expect implementation of the law to be challenging given the largely cash transactions, lack of registration of property and land use, and the need to upgrade technology and skills. - The authorities are preparing for the upcoming AML review by APG in October 2019 but extending the current AML law to domestically exposed persons is not under consideration. - The authorities welcome IMF technical assistance to address concerns raised by the APG review. ### Staff Appraisal — Key assessments and recommendations Resilient growth - The economy remains resilient to date to rising trade tensions and heightened external risks, although the weaker external conditions are expected to lead to a soft landing of growth. - Sound fundamentals, the authorities’ commitment to macroeconomic stability and positive reform momentum are contributing to broad based, private sector-led and non-inflationary growth. - Rural-urban migration and economic modernization continue, helping to raise wages and total factor productivity. External Sector Assessment - The external position is substantially stronger than warranted by fundamentals and desirable policies. - Removing distortions that inhibit investment and making the exchange rate more flexible within the band should help reduce the external imbalance. - Over time, Vietnam’s need for additional international reserves will decline as its monetary framework is modernized and its exchange rate becomes more flexible. - In the meantime, over the next several years, it should continue gradual reserve accumulation. Fiscal sustainability - Countercyclical tightening of fiscal policy in recent years has enabled Vietnam to lower government and PPG debt in relation to GDP and create some fiscal space. - The authorities remain committed to further consolidating their public finances over the medium term. - Broadening revenue bases and raising the quality of spending and of public financial management are priorities, especially building high quality infrastructure and protecting social spending. - They need to create more fiscal space to meet longer term challenges arising from aging and climate change. Financial discipline and reform - Tighter limits on credit growth, the shift to retail banking, introduction of Basel II requirements and progress with bank recapitalization and the organic emergence of a capital market are all under way. - The authorities should finalize their plans to recapitalize SOCBs. - The use of Basel II as an incentive mechanism to liberalize the financial system is welcome. - Liberalization should go hand in hand with the creation of a modern macro-prudential system to replace the administrative allocation of credit. Structural reforms - The reform drive needs to be broadened, deepened and accelerated to tackle the remaining barriers to investment. - Priority areas include reforms to reduce the concentration of land ownership in state hands; accelerate the creation of high-quality infrastructure; further reductions in regulatory and licensing requirements; and reforms to tertiary and vocational education to prepare the economy for the new digital era. Data and Statistics - Forthcoming revisions to national income and balance of payments data are welcome; they are based on new surveys and richer administrative sources of data. - Fiscal accounting and reporting need to improve by compiling more detailed, timely and comprehensive fiscal data for the entire general government. - The Fund is assisting by providing technical services on data and statistics. - Greater information sharing and transparency throughout the government and vis-a-vis the general public should be an integral part of modernizing institutions of economic management and will help the country reach full emerging market status. Governance (appraisal) - Vietnam’s steps to strengthen economic governance and fight corruption are welcome. - Further enhancements are needed to the new anti-corruption law to strengthen income and asset declarations and the legal framework. - Greater transparency and data availability will help improve governance and fight corruption. *Box 1. Vietnam: Preparing for the Digital Economy* ### 54. The staff recommends that the next Article IV Consultation take place on the standard ### 1vnmea2019002 - 54. The staff recommends that the next Article IV Consultation take place on the standard 12-month cycle. ### Growth and Inflation - The staff recommends that the next Article IV Consultation take place on the standard 12-month cycle. - Real GDP (percent change): - 2014: 6.0 - 2015: 6.7 - 2016: 6.2 - 2017: 6.8 - 2018: 7.1 - 2019 (proj.): 6.5 - 2020 (proj.): 6.5 - CPI (period average): - 2014: 4.1 - 2015: 0.6 - 2016: 2.7 - 2017: 3.5 - 2018: 3.5 - 2019 (proj.): 3.6 - 2020 (proj.): 3.8 - CPI (end of period): - 2014: 1.8 - 2015: 0.6 - 2016: 4.7 - 2017: 2.6 - 2018: 3.0 - 2019 (proj.): 3.7 - 2020 (proj.): 3.8 - Core inflation (end of period): - 2014: 2.7 - 2015: 1.7 - 2016: 1.9 - 2017: 1.3 - 2018: 1.7 - 2019 (proj.): 2.1 - 2020 (proj.): 2.2 - Findings from figures: - Growth led by the service sector and industrial activity, reflected in strong domestic demand. - Headline inflation remained at low levels and was mainly driven by food and administered prices. - Monetary policy has been tightened and private sector credit growth declined to below 13 percent y/y. ### External Sector and Reserves - Balance of payments: - Current account (in percent of GDP, Table 1 / Table 3): - 2014: 4.9 - 2015: -0.1 - 2016: 2.9 - 2017: 2.1 - 2018: 2.4 - 2019 (proj.): 2.2 - 2020 (proj.): 1.9 - Trade and FDI: - Trade balance (billions of USD, Table 2): - 2014: 12.1 - 2015: 7.4 - 2016: 11.0 - 2017: 10.8 - 2018: 15.8 - 2019 (proj.): 16.0 - 2020 (proj.): 16.5 - Exports f.o.b. (billions of USD): - 2014: 150.2 - 2015: 162.0 - 2016: 176.6 - 2017: 215.1 - 2018: 244.0 - 2019 (proj.): 273.0 - 2020 (proj.): 307.3 - Imports f.o.b. (billions of USD): - 2014: 138.1 - 2015: 154.6 - 2016: 165.5 - 2017: 204.3 - 2018: 228.2 - 2019 (proj.): 257.1 - 2020 (proj.): 290.8 - Direct investment (net, billions of USD, Table 2): - 2014: 8.1 - 2015: 10.7 - 2016: 11.6 - 2017: 13.6 - 2018: 15.0 - 2019 (proj.): 16.2 - 2020 (proj.): 17.3 - FDI inflows remained strong, mainly focused in manufacturing and recently real estate. - Reserves and exchange rate: - Gross international reserves (billions of USD): - 2014: 34.3 - 2015: 28.3 - 2016: 36.7 - 2017: 49.2 - 2018: 55.3 - 2019 (proj.): 66.2 - 2020 (proj.): 77.7 - Reserves in months of prospective GNFS imports: - 2014: 2.4 - 2015: 1.9 - 2016: 2.0 - 2017: 2.4 - 2018: 2.4 - 2019 (proj.): 2.5 - 2020 (proj.): 2.6 - The REER has resumed an appreciating trend; FX intervention limited depreciation of the dong. ### Fiscal Position and Public Debt - Fiscal balance (percent of GDP, Table 3 / Table 4b): - Net lending (+)/borrowing (-): - 2014: -6.3 - 2015: -6.4 - 2016: -3.9 - 2017: -4.7 - 2018: -4.4 - 2019 (proj.): -4.4 - 2020 (proj.): -4.2 - Net lending/borrowing including EBFs (where reported): - 2017: -2.9 - 2018: -2.6 - 2019 (proj.): -2.6 - 2020 (proj.): -2.6 - Public and publicly guaranteed debt (end of period, percent of GDP): - 2014: 54.7 - 2015: 57.1 - 2016: 59.7 - 2017: 58.2 - 2018: 55.6 - 2019 (proj.): 54.4 - 2020 (proj.): 53.3 - Revenue and expenditure (percent of GDP, Table 4b): - Revenue and grants: - 2014: 23.1 - 2015: 22.2 - 2016: 23.8 - 2017: 24.0 - 2018: 24.5 - 2019 (proj.): 23.4 - 2020 (proj.): 23.3 - Expenditure: - 2014: 30.5 - 2015: 28.5 - 2016: 30.2 - 2017: 27.8 - 2018: 29.2 - 2019 (proj.): 28.8 - 2020 (proj.): 27.8 - Findings from figures: - Fiscal position improved in 2018, contributing to lower public debt levels. - Tax revenue collections have improved over time but remain on a downward trend relative to peers. - Public expenditure driven mainly by non-social current spending; falling yields have moderated debt service costs. ### Financial Sector: Stability and Risks - Banking sector indicators (Table 6 and figures): - Regulatory Capital to Risk-Weighted Assets: - 2013: 13.4 - 2014: 11.8 - 2015: 12.8 - 2016: 12.6 - 2017: 12.1 - 2018: 12.1 - Non-performing Loans to Total Gross Loans (standard FSI): - 2013: 3.1 - 2014: 2.9 - 2015: 2.3 - 2016: 2.5 - 2017: 1.8 - 2018: 1.9 - Return on Assets: - 2013: 0.5 - 2014: 0.3 - 2015: 0.4 - 2016: 0.5 - 2017: 0.6 - 2018: 0.7 - Sectoral findings: - Banking sector profitability improving but remains low by ASEAN standards. - Legacy NPLs persist in some banks; capital adequacy ratios remain low in some state-owned commercial banks due to dividend payments to the budget. - Credit growth has subsided and is funded by stable credit-deposit ratios, but a rise in higher-risk consumer lending may worsen asset quality in a downturn. - Monetary aggregates and credit (Table 5): - Credit to the economy (total, percent of GDP): - 2014: 100.3 - 2015: 111.9 - 2016: 123.8 - 2017: 130.8 - 2018: 133.3 - 2019 (proj.): 137.9 - 2020 (proj.): 141.8 - Credit to the economy (year-on-year percent change): - 2014: 13.8 - 2015: 18.8 - 2016: 18.8 - 2017: 17.4 - 2018: 12.7 - 2019 (proj.): 13.7 - 2020 (proj.): 13.1 - Broad money (M2) year-on-year percent change: - 2014: 17.7 - 2015: 16.2 - 2016: 18.4 - 2017: 15.0 - 2018: 12.4 - 2019 (proj.): 15.5 - 2020 (proj.): 14.9 ### Competitiveness and Business Climate - Structural strengths and gaps: - Vietnam benefits from a well-educated labor force and fundamentals that attract FDI. - Room for policy action: - Reduce trade barriers. - Raise levels of public capital stock. - Raise the quality of regulations. - Perception issues: - Perception of corruption and weak institutions leaves scope for improving the business environment. - Benchmark indicators (from figures): - Ease of Doing Business Score showed improvement between 2017 and 2019 in relative ranking (Doing Business score framework as presented). ### Medium-Term Projections and Key Macro Ratios (selected) - Medium-term (Table 3 projections): - Real GDP: 2019–2024 projected at 6.5 (2019), 6.5 (2020), 6.5 (2021), 6.5 (2022), 6.5 (2023), 6.5 (2024). - CPI (period average): projected 3.6 (2019), 3.8 (2020), 3.8 (2021), 3.9 (2022), 4.0 (2023), 4.0 (2024). - Gross international official reserves (billions of USD): projected 66.2 (2019), 77.7 (2020), 90.5 (2021), 103.8 (2022), 117.8 (2023), 133.6 (2024). - Total external debt (in billions of USD): projected 121.9 (2019), 133.3 (2020), 147.6 (2021), 164.4 (2022), 184.1 (2023), 206.1 (2024). - Public and publicly guaranteed debt (end of period, percent of GDP): projected 54.4 (2019), 53.3 (2020), 52.5 (2021), 51.5 (2022), 50.4 (2023), 49.3 (2024). - Memorandum items: - Nominal GDP (in billions of U.S. dollars): 241.3 (2018), 260.5 (2019), 282.4 (2020), projected 305.8 (2021), 331.3 (2022), 359.6 (2023), 391.0 (2024). - Per capita GDP (in U.S. dollars): 2,551 (2018), 2,728 (2019), 2,929 (2020), projected 3,142 (2021), 3,374 (2022), 3,629 (2023), 3,913 (2024). *Source: Vietnamese authorities; and IMF staff estimates and projections.* ### Appendix I. Risk Assessment Matrix ### Appendix I. Risk Assessment Matrix ### External Risks - Sharp tightening of global financial conditions due to market expectation of US monetary policy - Likelihood: L - Impact: M: Decline in financial market confidence, capital outflows (including a reemergence of dollarization) with pressure on the exchange rate and reserves, stock market correction and tightening of liquidity conditions, increase in sovereign yields, pressure on banks with weak balance sheets - Policies to Minimize Impact: - Tighten monetary policy and allow exchange rate flexibility, with judicious currency intervention to avoid excessive volatility and continue building reserves. The exchange rate band may need to be re-centered if there is a shift in fundamentals. - Strengthen bank balance sheets to improve resilience. - Modernize the monetary framework using inflation as a nominal anchor. - Accelerate growth friendly fiscal consolidation to create more fiscal space and improve the quality and quantity of public investment and continue structural reforms to support FDI. - Weaker-than-expected global growth (US, China, Europe) - Likelihood: M/M/H - Impact: H: Decline in growth due to weaker export growth, FDI, and remittances. Pressures on the exchange rate and international reserves. Deterioration in public sector and bank balance sheets. - 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 strengthen balance sheets, preserve investor confidence regarding the long-term prospects of the domestic economy, build resilience. - Undertake fiscal rebalancing to support growth and public investment while ensuring debt sustainability. - Rising protectionism and retreat from multilateralism - Likelihood: H - Impact: M: Weaker export growth and FDI; supply chains could be interrupted. However, Vietnam could benefit from trade and investment diversion from the region. - Policies to Minimize Impact: - Rapid implementation of CPTPP and FTAs with the EU, Eurasian Economic Union, and Korea. Deepen regional trade integration. - Strengthen competitiveness and the business climate through accelerated SOE, structural, and banking sector reforms. - Further improve the climate for FDI by increasing foreign ownership limits, revamping tertiary education, reforming land use, and improving the regulatory framework and governance. - Cyber-attacks on critical global infrastructure and institutions that undermine international payment systems and disrupt the flow of goods and services - Likelihood: M - Impact: H: Vietnam’s high internet penetration and highly open economy make it vulnerable to global cyberattacks. Trade, financial market conditions and economic growth could all be adversely affected for a time. - Policies to Minimize Impact: - Build public and private sector buffers, strengthen financial stability and institutions, improve domestic business and investment climate to better weather disruptions from cyber-attacks. - Further strengthen resilience to, and awareness about, cyber security risks. ### Domestic Risks - Low quality fiscal consolidation - Likelihood: M - Impact: M: Weaker medium-term productivity and output growth, higher sovereign yields, crowding out complicate debt dynamics and impact on bank balance sheets. Lower investor confidence and capital flight create exchange rate pressures. - Policies to Minimize Impact: - Strengthen revenues by improving tax administration, introducing a property tax. - Curtail non-essential spending, reduce wage bill by implementing civil service reform, improve quality of investment spending. - Use SOE equitization receipts to help finance the budget, recapitalize state owned banks, and buy back debt, but this should not substitute for structural consolidation. - Improve the quality, comprehensiveness and transparency of fiscal statistics to enable better policies. - Continued reliance on credit targets - Likelihood: H - Impact: H: Excessive risk taking exacerbates weaknesses in bank balance sheets. Credit misallocation gives rise to economic inefficiencies, reduces productivity and growth and creates an adverse sovereign-macroeconomic-financial feedback loop. - Policies to Minimize Impact: - Continue reducing credit growth targets and phase them out over the medium-term and better align credit growth with nominal GDP growth to reduce the credit gap and reduce leverage. - Accelerate NPL resolution and recapitalization of systemically important banks, resolve small unviable banks, strengthen safety nets. - Monitor vulnerabilities and proactively manage risks to prevent excessive risk taking by banks. - Make progress on developing a macroprudential framework. - Climate change and sustainable development - Likelihood: H - Impact: H: Vietnam is among the top ten countries affected by air pollution. By 2100, climate change could impact more than 12 percent of the population and reduce growth by 10 percent. - Policies to Minimize Impact: - Lower the intensity of fossil fuels by raising the contribution of renewable energy. - Provide stronger incentives for green growth through taxation of fossil fuels that fully price environmental externalities. - Invest in climate resilient infrastructure. - Shift to autonomous, electric, shared vehicles to reduce congestion and pollution in cities. - Improve government capacity to coordinate technological change and promote green growth. ### Legend and Staff Assessment - “L” =Low; “M” =Medium; “H” =High. - 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, and “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, 1vnmea2019002 — IMF staff.* ### 45.6 percent in 2018. PPG external debt is on a downward trend—at 24 percent of GDP—in line with ### 1vnmea2019002 - 45.6 percent in 2018. PPG external debt is on a downward trend—at 24 percent of GDP—in line with ### External debt trends and composition - External debt was 45.6 percent of GDP in 2018. - PPG external debt is on a downward trend—at 24 percent of GDP—in line with the authorities’ switch to domestic financing sources and limiting of guarantees. - Private external debt declined to 22.1 percent of GDP, owing to the reclassification of a large transaction from debt to FDI (a foreign investor bought US$ 4.7 billion worth of shares in an SOE equitized in December 2017). ### Baseline projections and vulnerabilities - Baseline: external debt would increase moderately to 46.8 percent of GDP in 2019 and 52.7 percent of GDP by 2024, as gross external financing needs rise in line with the projected erosion of the current account surplus. - Vietnam’s external debt is vulnerable to real depreciation and current account shocks while growth and interest rate shocks have limited impact on external debt dynamics. - The currency’s observed long-term real appreciation trend is an upside. ### Public sector debt dynamics (selected figures from Public Sector DSA) - Nominal gross state debt (in percent of GDP): 2017: 49.9; 2018: 58.2; 2019: 55.6; 2020: 54.4; 2021: 53.2; 2022: 52.4; 2023: 51.5; 2024: 50.4; 2024 (later line) 49.3. - Of which: guarantees (in percent of GDP): 2017: 10.2; 2018: 9.1; 2019: 8.0; 2020: 7.2; 2021: 6.7; 2022: 6.2; 2023: 5.8; 2024: 5.5; 2024 (later) 5.3. - State gross financing needs (in percent of GDP): 2017: 8.5; 2018: 7.1; 2019: 6.9; 2020: 7.7; 2021: 7.8; 2022: 8.0; 2023: 5.9; 2024: 5.5; 2024 (later) 6.8. - Real GDP growth (in percent): 2017: 5.9; 2018: 6.8; 2019: 7.1; 2020–2024: 6.5 (each year). - Inflation (GDP deflator, in percent): 2017: 9.2; 2018: 4.1; 2019: 3.3; 2020: 3.2; 2021: 3.3; 2022: 3.5; 2023: 3.7; 2024: 4.0. - Effective interest rate (in percent): 2017: 4.2; 2018: 4.3; 2019: 4.5; 2020: 4.6; 2021: 4.5; 2022: 4.5; 2023: 4.6; 2024: 4.7; 2024 (later) 4.9. - Change in gross state sector debt (cumulative 2018–2024): -6.3. - Identified debt-creating flows (cumulative 2018–2024): -4.0. - Primary deficit (in percent of GDP): 2017: 3.2; 2018: 2.8; 2019: 2.4; 2020: 2.3; 2021: 2.1; 2022: 2.0; 2023: 1.7; 2024: 1.4; cumulative 11.0. - Primary (noninterest) revenue and grants (in percent of GDP) cumulative: 139.4. - Primary (noninterest) expenditure (in percent of GDP) cumulative: 150.3. - Automatic debt dynamics (cumulative 2018–2024): -14.0. - Interest rate/growth differential (cumulative 2018–2024): -16.1. - Real interest rate contribution (cumulative 2018–2024): 2.6. - Real GDP growth contribution (cumulative 2018–2024): -18.7. - Exchange rate depreciation (2018 value): 0.9 (other years shown: 0.4, 0.5). - Fiscal—Net privatization proceeds (negative) cumulative: -2.1. - Contingent liabilities include 0.2 percent of GDP remaining cost of recapitalizing Agribank (8.8 trillion dong), assumed to be finalized by end-2019. ### Alternative scenarios and stress tests (selected assumptions and impacts) - Baseline underlying assumptions (2019–2024): - Real GDP growth: 2019–2024 = 6.5 each year. - Inflation: 3.2, 3.3, 3.3, 3.5, 3.7, 4.0. - Primary Balance: -2.3 (2019), -2.1 (2020), -2.0 (2021), -1.7 (2022), -1.4 (2023), -1.4 (2024). - Effective interest rate: 4.6, 4.5, 4.5, 4.6, 4.7, 4.9 (2019–2024). - Constant Primary Balance Scenario: Primary Balance held at -2.3 for 2019–2024. - Stress tests indicate: - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, and Combined Shock scenarios are modelled with varying impacts on gross nominal public debt (in percent of GDP) and public gross financing needs (in percent of GDP). - Combined Macro-Fiscal Shock increases effective interest rate projections (example series 4.6, 4.6, 5.1, 5.8, 6.4, 6.9 in one panel). - Risk assessment benchmarks used for heat-map style assessment: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt. ### External debt sustainability (bound tests and Table 1 highlights) - Table 1: Baseline external debt path (in percent of GDP): 2014: 38.3; 2015: 41.9; 2016: 44.8; 2017: 49.0; 2018: 45.6; 2019: 46.8; 2020: 47.2; 2021: 48.3; 2022: 49.6; 2023: 51.2; 2024: 52.7. - Change in external debt (selected years): 2018: -3.4; 2019: 1.2; 2020: 0.4; 2021: 1.1; 2022: 1.3; 2023: 1.6; 2024: 1.5. - Identified external debt-creating flows (2014–2024 row sample): 2018: -12.9; 2019: -11.2; 2020: -10.9; 2021: -10.6; 2022: -10.1; 2023: -9.8; 2024: -9.5. - Current account deficit, excluding interest payments (in percent of GDP): 2018: -3.7; 2019: -3.3; 2020: -3.0; 2021: -2.9; 2022: -2.6; 2023: -2.4; 2024: -2.3. - Exports (US$ billions): 2017: 103.6; 2018: 107.2; 2019: 111.0; 2020: 115.2; 2021: 120.2; 2022: 125.4; 2023: 130.8; 2024: 136.6. - Imports (US$ billions): 2017: 100.4; 2018: 102.4; 2019: 106.4; 2020: 110.7; 2021: 115.7; 2022: 121.0; 2023: 126.4; 2024: 132.2. - External debt-to-exports ratio (in percent): 2018: 42.5; 2019: 42.2; 2020: 40.9; 2021: 40.1; 2022: 39.6; 2023: 39.1; 2024: 38.6. - Gross external financing need (in billions of US dollars): 2018: 29.0; 2019: 36.3; 2020: 40.7; 2021: 47.3; 2022: 54.7; 2023: 64.2. - Gross external financing need (in percent of GDP): 2018: 12.8; 2019: 10-Year (table contains label "10-Year 10-Year11.1 12.9 13.3 14.3 15.2 16.4" within the series). - Scenario with key variables at their historical averages: 2019: 46.8; 2020: 48.1; 2021: 49.6; 2022: 50.8; 2023: 51.7; 2024: 52.3. ### Pensions, VSS, and long-term fiscal implications - Rapid prospective aging: the old dependency ratio is expected to double over the next 25 years. - Replacement rates are around 70 percent, compared with the OECD average of 54 percent. - Retirement ages: 55 years for women and 60 years for men (noted as far below the OECD average of 67 years and below other Asian countries at between 63 and 65 years). - Coverage is estimated at about 20-25 percent. - VSS will play an increasing role in Vietnam’s debt dynamics as of 2030. - Baseline pension projection: the Pension Fund, the largest element of Vietnam’s Social Security (VSS), will run deficits starting around 2035. - Pension revenue stood at around 5.2 percent of GDP, and expenditure at 3.2 percent of GDP in the baseline projection discussion. *Source: IMF staff (document content provided).* ### 2017. Keeping all parameters constant, spending will increase steadily, and overtake revenues in ### 1vnmea2019002 - 2017. Keeping all parameters constant, spending will increase steadily, and overtake revenues in ### Pension system sustainability and fiscal implications - Keeping all parameters constant, spending will increase steadily, and overtake revenues in 2030. - The NPV of pension liabilities until 2050 (1 percent discount rate) are 172 percent of GDP, while the NPV of pension revenues lies at 158 percent of GDP. - VSS holds and invests about 90 percent of all assets and surpluses in government bonds, roughly 12 percent of GDP. - PPG debt net of VSS holdings of government debt is 46 percent of GDP in 2017. - Projected VSS deficits will require additional borrowing in the future in the absence of reforms: - By 2022 GDP growth is expected to outpace VSS asset growth. - Around 2035 VSS will start experiencing deficits and its assets will decline to around 7 percent of GDP by 2035. - VSS is expected to run out of assets in 2044 and will have to borrow in addition to the general government. - By 2050, VSS debt could be as high as 8 percent of GDP. ### Main findings on VSS and public debt - VSS is financially unsustainable in the absence of reforms. - Without policy changes, the deficit in the pension system could add to public debt as of 2035. - Even if the health insurance fund is kept in financial balance, the aging population will strain the health insurance fund, which has few assets and has experienced almost zero balances over the last years. ### Recommended timing and approach to reforms - Begin VSS reforms now: pension reforms take decades to complete and should be implemented as soon as possible to ensure long-term sustainability. - A combination of several parametric reforms would put the pension fund at a more sustainable footing; some individual measures might seem drastic but jointly they are more feasible. ### Menu of parametric reform scenarios (all policy changes implemented as of 2021) - Inflation indexation: - Full shift from wage indexation to inflation indexation. - Real wage growth assumed at [5.5] percent, and inflation at 3.5 percent per year. - Increase in retirement age: - Increase in the official retirement age of 0.4 years per year, until the retirement age of 62 for women, and 65 for men. - Note: An increase of retirement ages in an 0.4 increment until 62 years of age for both men and women is already being discussed by the authorities. - Reduction in benefits: - 1 percent reduction per year compared to the baseline, until a total reduction of 1/3 compared to the baseline is reached (in 2050). - Increase in the contribution rate: - Increase of 1 percent of contributions compared to the baseline every two years until a 10 percent total increase is reached in 2035. - Increase in coverage: - Pension coverage increases with nominal per capita GDP until it reaches 80 percent of the workforce (in 2035). - Given a significant lag in covered pensioner numbers, their number increases by 1 percent of additional contributors per year compared to the baseline until 2030. - After 2030, each year an additional 2 percent are added, until covered pensioner numbers reach 80 percent of total pensioners (in 2055). ### Effects of reform scenarios - All policy changes significantly delay the deficit in the pension fund: - Inflation indexation, reduction in benefits, and increase in retirement ages would push the first deficit occurrence to around 2045. - Increases in the contribution rate would delay the first deficit occurrence to 2050. - An increase in coverage rates would push the pension surplus up noticeably until 2045; however, absent other reforms the fast increase in covered pensioners as of 2035 would lead to rapid spending increase and a significantly larger structural pension deficit as of 2050. - Out of all scenarios, the reduction in benefits would lead to the lowest long-term deficit. ### Figures and indicators cited - Old Age Dependency Ratio figure covers 2010–2050 (Population 60 and older / Population 15-59). - Vietnam Pension Surplus 2014–2050: Pension spending to GDP, Pension revenue to GDP, Baseline pension surplus. - Scenario analysis timeline spans 2018–2050 comparing Inflation Indexation, Increase Retirement Age, Reduction in Benefits, Increase in Contribution Rate, and Baseline pension surplus. - VSS Assets and PPG Debt figure tracks 2017–2049 in percent of GDP (VSS Assets, GDP VSS securities, PPG debt excluding VSS cross debts, PPG debt excluding VSS). ### Appendix V — Monetary policy and the exchange rate: main findings - Main findings: - (i) Real exchange rate developments are explained mostly by Balassa-Samuelson effects. - (ii) A rules-based FX intervention strategy has effectively stabilized the nominal FX rates and inflation. - (iii) An inflation target regime can be a more effective nominal anchor than FX intervention. - The State Bank of Vietnam (SBV) sets 4 percent of inflation as a domestic nominal anchor and also announces a target FX rate vis-à-vis US dollar as an external nominal anchor; the SBV actively intervenes in the FX market through reserve accumulation/decumulation and by adjusting interest rates. - Introducing more FX flexibility is a key step toward modernizing the monetary policy framework toward an inflation targeting (IT) regime. - Two-step DSGE-based approach for policy experiments: - (i) Construct a small open economy DSGE model and estimate parameters on Vietnamese data; decompose time series for output growth, inflation, and real exchange rates into structural shocks. - (ii) Keeping estimated structural parameters and shocks unchanged, conduct counterfactual policy exercises: (i) without FX interventions, and (ii) with strict commitment to IT. - Empirical background: - Over the last two decades, the real FX rate vis-à-vis the US dollar has appreciated by more than 60 percent, while the nominal FX rate has continuously depreciated; average inflation was around eight percent for the last two decades. - The real FX rate is closely tracked by the relative price of the manufacturing sector (R-squared is more than 0.96 for the last two decades). - The Balassa-Samuelson relationship is used to define a balanced growth path and detrending in the DSGE model. - SBV reserve rule estimation (2004Q4–2018Q3): - Quarterly-on-quarterly growth in FX reserve will: (i) decline by 8.6 percent in response to FX depreciation by one percentage point, and (ii) decline by 0.1 percent in response to a one percentage point increase in the reserve to GDP ratio. - Model and estimation: - The DSGE model includes: IS curve, new Keynesian Phillips curves for tradable and non-tradable goods, Taylor rule, UIP condition, market clearing conditions including balance of payments identity, and a reserve accumulation/decumulation rule for SBV. - Estimation uses quarterly data from 2005Q1 to 2018Q3 for seven variables: (1) GDP growth, (2) GDP growth for the manufacturing sector, (3) CPI inflation rate, (4) nominal interest rate (the discount rate), (5) reserve to GDP ratio, (6) FX rate vis-à-vis the US dollar, and (7) the real interest rate in the U.S. (FF rate deflated by CPI inflation). - Key quantitative model results: - FX interventions by 1 percentage point of GDP induce 1.2-1.9 percentage point appreciation of the nominal FX rate. - Effects of FX interventions on the real FX rate are small and short-lived, likely due to high pass-through of FX rates in Vietnam. - Variance decomposition summary: - Real FX rate: More than half of fluctuations explained by internal shocks (including TFP shock to manufacturing) via Balassa-Samuelson effect; other variance mostly due to a shock to the real FX rate (deviations from UIP); FX intervention and monetary policy shocks are almost negligible. - Nominal FX rate: Internal shocks remain main driver but smaller share; FX intervention and monetary policy shocks contribute significantly (20 and 15 percent, respectively). - Inflation: More than half of fluctuations driven by internal shocks; FX intervention and monetary policy shocks play a significant role; external shocks contribute less than 10 percent. - FX reserve: Contribution of FX intervention shock is very small; FX reserve mostly driven by a systematic part of FX interventions and the monetary policy shock, with monetary policy shock accounting for more than half of its fluctuations. - Identification and estimation challenges: - The effect of FX intervention is hard to identify due to endogeneity; structural DSGE estimation and instrumental-variable strategies are used to address this. *Prepared by IMF staff based on the supplied chapter content.* ### 14. The effects of introducing FX flexibility are examined by a counterfactual policy ### 14. The effects of introducing FX flexibility are examined by a counterfactual policy exercise ### Counterfactual framework and simulation design - Counterfactual monetary policy framework under the floating FX regime: - Mute the response of reserve accumulation to the nominal FX rate. - Set the FX intervention shock to zero for all periods. - Counterfactual stricter inflation targeting (IT) regime: - Mute the response of the nominal interest rate to the nominal FX rate and FX reserve. - Reinforce the nominal interest rate response to inflation (doubling the response). - Set the monetary policy shock to zero for all periods. - Counterfactual simulation paths for inflation, the nominal FX rate, and output growth are produced by: - Changing structural parameters to the counterfactual policy parameters. - Inserting the estimated sequence of structural shocks into the model. - Note on shocks: "Internal shock" includes the aggregate and manufacturing TFP shocks. "External shock" includes the FX rate shock (deviations from UIP) and the US monetary policy shock. ### Impulse responses to a US monetary policy tightening - Baseline model with FX interventions: - A 1 percentage point increase in the US interest rate would depreciate the nominal FX rate vis-à-vis the US dollar by around 0.6 percent on impact but be almost neutral in the long run. - Counterfactual economy without FX interventions: - A 1 percentage point increase in the US interest rate would cause more than 1 percent depreciation of the nominal FX rate. - The effects on the nominal FX rate would remain even in the long run. - Interpretation: Rule-based FX intervention can mitigate depreciation pressure caused by an external shock. ### Variance decomposition for Vietnam (Real and Nominal FX Rate and Inflation) - Variance decomposition (%): - Real FX rate: - Internal shock: 63.4 - External shock: 35.6 - FX intervention: 0.7 - Monetary policy: 0.3 - Nominal FX rate: - Internal shock: 36.5 - External shock: 26.5 - FX intervention: 21.5 - Monetary policy: 15.6 - Inflation rate: - Internal shock: 53.9 - External shock: 7.8 - FX intervention: 21.9 - Monetary policy: 16.4 - FX reserve: - Internal shock: 13.6 - External shock: 23.8 - FX intervention: 5.1 - Monetary policy: 57.5 ### Counterfactual without FX interventions: level and volatility effects - Nominal FX rate: - Would have experienced much larger depreciations in the last decade, particularly around the global financial crisis. - Inflation: - Average inflation rate would have been around 22 percent relative to 8 percent in data. - Volatility: - Without FX interventions, the standard deviation of the nominal FX rate, inflation and output growth would have been more than doubled. - Conclusion: FX interventions have significantly dampened economic volatility. ### Systematic versus non-systematic FX interventions - Muting the FX intervention shock (non-systematic part) has little effect on counterfactual simulation paths. - The systematic part of reserve accumulation/decumulation responding to the nominal FX rate is more important for stabilizing the economy. - Rationale: Systematic FX intervention changes investors’ expectations about future nominal FX rate developments. - Consistent with literature emphasizing the efficacy of rule-based FX interventions (e.g., Basu et al. 2018). ### Counterfactual stricter IT regime results - Counterfactual policy framework implemented by: - Muting the nominal interest rate response to nominal FX rates and FX reserve. - Doubling the nominal interest rate response to inflation. - Setting the monetary policy shock to zero for all periods. - Outcomes under stricter IT regime: - Both the level and volatility of inflation would have been much lower than data. - The nominal FX rate would have been almost flat (not depreciated). - As a byproduct of lower inflation volatility, real GDP growth would have been somewhat more volatile. - Interpretation: A stricter IT regime can be a substitute for FX intervention to stabilize inflation and the nominal FX rate, though with trade-offs for real growth volatility. ### Policy implications and conclusions - Systematic FX interventions have significantly contributed to stabilizing Vietnam’s economy under a weak commitment to IT: - FX interventions have stabilized the nominal FX rate, inflation, and output growth over the last two decades. - The systematic FX intervention responding to the nominal FX rate is more effective than non-systematic interventions. - With a stricter commitment to IT, the role of FX intervention may be reduced: - FX interventions have mainly stabilized the economy by cutting amplification of domestic monetary shocks through the FX market rather than by directly mitigating external shocks. - If the authorities can manage adverse effects of domestic monetary shocks via a credible and strict IT regime, FX interventions may not be necessary for stabilization. - Recommendation on FX flexibility and sequencing: - Given other benefits of FX flexibility (absent from the model), the State Bank of Vietnam (SBV) should gradually introduce FX flexibility as it establishes credibility for commitment to IT. - Evidence from other research (Obstfeld et al. (2017) referenced) suggests countries with a floating FX regime have been more resilient to external shocks, particularly global financial shocks. - Gradual introduction of FX flexibility is advised in the process of modernizing the monetary policy framework toward IT, as credibility for a stricter IT regime is established. *Source: IMF Staff estimates; IMF chapter text.* ### 4. Economic reforms and modernization has continued, helped in part by Vietnam’s ### 1vnmea2019002 - 4. Economic reforms and modernization has continued, helped in part by Vietnam’s ### Procurement: findings and recommendations - Findings: - The comprehensive procurement framework provides clear instructions on how and when to apply various procurement methods, narrowing the circumstances and reducing the thresholds under which direct contracting can occur. - Thresholds leave room for abuse through contract splitting. - Direct contracting and single-bidder situations are common: almost 70 percent of all public contracts were directly contracted in 2017, accounting for about 13 percent of the total value of public contracts (IMF 2018a). - Lack of an independent, widely-trusted, bidder complaint handling mechanism: complaints are ultimately reviewed and assessed by the procuring entity itself. - Lack of data on procurement complaints and resolution undermines process effectiveness. - Court cases are rarely resorted to because the process is costly and time consuming. - Information systems to monitor and disclose procurement information have improved but remain incomplete. - The Vietnam e-government procurement (e-GP) system, launched in 2015, is not used widely (only about 2–3 bidders per package bidding electronically). - Recommendations: - Ensure more effective competition in public procurement as a high-level reform priority to improve public investment efficiency. - Minimize cases of direct procurement to a low percentage by: - Restricting single-bidding situations for major contracts under competitive procurement. - Removing the monetary threshold for direct contracting. - Electronically procuring contracts more. ### Monetary framework: findings and reform path - Findings: - The SBV currently relies on indicative credit growth and M2 targets and a stable exchange rate closely tied to the U.S dollar. - The intention is to shift to targeting inflation as the nominal anchor in the context of a stable exchange rate, and gradually phase out credit growth targets as banks transition to Basel II capital standards starting in January 1, 2020. - The Vietnamese economy still features characteristics of a centrally planned economy, where the central bank is an integral component of the State (IMF 2017) and therefore follows government guidelines when formulating monetary policy. - Relative to other emerging market inflation targeters, the SBV features low central bank independence and accountability. - The SBV lacks both political independence—given that the SBV Governor is a cabinet member—and operational independence. - The SBV Governor legally shares responsibility with the Prime Minister on the use of the monetary policy toolkit. - Recommended reforms for transitioning to inflation targeting: - Far-reaching reforms to establish a consistent and forward-looking monetary policy by modifying the SBV’s institutional foundations and its policy and operational framework. - Grant operational independence to the SBV so it can take policy decisions in a structured, systematic, and informed manner without government interference (IMF 2017). - First-best: amend the SBV Law to establish that the central bank is empowered to choose monetary instruments without government interference and to use them freely to achieve the inflation target. - Second-best: enshrine operational independence in the National Plan approved by the National Assembly. - SBV law could explicitly prohibit provision of credit to the government and clearly establish rules under which the SBV provides advances to the government (IMF 2017). - Improve SBV accountability: Governor of the SBV should be responsible for reporting to the government and the National Assembly. - Focusing the SBV mandate on domestic price stability would enhance monetary policy effectiveness, facilitate holding the SBV accountable and developing a coherent central bank communication. - Note: - Maintaining low and stable inflation typically creates favorable conditions for long-term investment and economic growth. ### Soft infrastructure: data, transparency, and market governance - Findings and priorities: - Vietnam must accelerate towards international standards for regulatory excellence, transparency and disclosure, including improving data quality and timely publication. - A collaborative and comprehensive approach across all agencies is needed to address data and analytical gaps, with greater public access to information to better communicate, educate and improve accountability. - High priority areas include: - Collecting and releasing budget data according to GFSM2014 standards (IMF 2018b). - Public dissemination of the financial accounts of all state-owned enterprises (not just those of listed companies), extra budgetary funds and foreign exchange reserves. - Better data quality on external statistics (IMF 2018c), domestic and external debt of households and non-financial companies, including intra-company debts of foreign direct investment companies, and developing real estate price indices (IMF 2018d). - Vietnam should establish a National Summary Data Page (NSDP) to allow users to access data, view metadata, and browse online databases. - Increase transparency and governance of equity markets toward international standards, including by requiring public companies above a certain size to be listed and modernizing the legal framework and accounting standards to support Vietnam’s move to emerging market status. ### Control of Corruption: progress, risks, and policy priorities - Findings: - Since 2016, the government has started tackling grand corruption and several high-level corruption cases have been prosecuted with significant sentences handed down. - A new anti-corruption law was adopted in late 2018 to strengthen the legislative framework for tackling corruption, including a more effective and efficient system for the declaration of income and wealth by all civil servants and the extended public sector. - The new law requires greater collaboration and coordination with AML and credit institutions when illegal activities are detected. - Vietnam’s average Control of Corruption (CoC) score deteriorated since 2015, possibly reflecting a lag with which improvements are reflected in these indices. - The 2017 PAPI survey indicates progress across regions in transparency, vertical accountability, control of corruption in the public sector, public administrative procedures, and public service delivery; largest improvements are in perception and actual experience of control of corruption in the public sector. - An emerging downside of anti-corruption measures: perceptible rise in policy inaction and investment delays due to chilling effects of anti-corruption initiatives on public sector policy decisions. - Vietnam’s Government Inspectorate report on a 10-year review of implementing Anti-Corruption law reported that damages caused by corruption exceeded an estimated US$2.6 billion. - Policy priorities and recommendations: - Anti-corruption system improvements: - Further improve the asset declaration system to align with international best practices, e.g., a centralized repository of asset declarations, expanding the information covered, and mechanisms for verification. - Safeguard the independence of the Government Inspectorate of Vietnam against undue political influence and introduce accountability measures to protect against abuse. - Enhance whistleblower protections, e.g., safeguards against retaliation. - Strengthen specialized oversight agencies (State Audit of Vietnam, Government Inspectorate, ministerial and subnational Inspectorates) with greater autonomy, resources, and technical capacity (World Bank 2016). - Judiciary reform: - Improve enforcement of contracts, strengthen legal interpretation, and facilitate resolution, restructuring and bankruptcy proceedings. - Reduce dependence of the judiciary on the executive; increase disclosure of judgments and case records. - Clarify roles of judges, and increase independence in selection of judiciary members (World Bank 2016). - Address court capacity constraints due to growing size and complexity of cases. - Balance accountability and empowerment: - Increase regulatory clarity and simplicity in areas such as land use and public investment to reduce overlap and duplication across agencies and jurisdictions. - Ensure policy targets and objectives are realistic and technically informed to avoid perceptions of malpractice when political targets are missed. - Incorporate legislative protections against criminal prosecution for public officials for good faith performance of their duties (e.g., to ensure compliance with Basel Core Principle 1.5 for bank supervision and analogous protections for tax officers). ### Anti-money laundering (AML/CFT) - Findings and next steps: - Authorities are finalizing their national assessment of money laundering and terrorist financing risks to form the basis for a national action plan. - AML/CFT framework and execution (including customer due diligence requirements for politically exposed persons) should be strengthened in line with FATF standards to address key country risks. - The upcoming 2020 FATF assessment will begin in 2019 and will focus on effective implementation of legislative provisions and institutional frameworks. ### Appendix VII — Capacity Development Strategy: overview and recent activity - Overview: - IMF technical assistance and training focuses on Fund core areas and aligns with surveillance priorities in the 2019 Article IV consultation Policy Note. - Main priorities of Fund capacity development (CD): - Modernize monetary and financial sector institutions and management: move gradually toward greater exchange rate flexibility and an inflation targeting regime and away from targeted credit; strengthen bank balance sheets and financial risk assessment. - Strengthen Vietnam’s fiscal systems and institutions: improve fiscal reporting and macro-fiscal analysis, assess fiscal risks (PPPs, aging, natural disasters), implement PIMA recommendations to improve public procurement and other public financial management aspects. - Improve quality of data across the board to prepare Vietnam for formal entry into Emerging Market status: improve coverage, accuracy, timeliness, availability of metadata of national accounts, monetary, financial and fiscal data, and data provided by SOEs, EBFs, reserves. - These CD priorities aim to improve the business climate, accountability and governance, raise investment and reduce the external surplus. - Capacity Development in 2018−19: key activities - Modernization of monetary framework: - IMF facilitated cross-country knowledge exchange on inflation targeting in 2018 with senior external experts from the Czech Republic, Israel, Peru, and Thailand. - Peer-to-peer exchange among high level inflation-targeting ASEAN central bank officials and external experts; one-day IMF workshop in Hanoi on forecasting. - The State Bank of Vietnam (SBV) committed to inflation targeting and is gradually introducing greater two-way flexibility in the exchange rate within a ± 3 percent band. - An ICD-MCM scoping mission is scheduled in March 2019 to assess readiness for customized training on developing a Forecasting and Policy Analysis System (FPAS). - High quality fiscal adjustment: - IMF surveillance has stressed the need for high quality fiscal consolidation to improve debt sustainability by improving tax administration, broadening the tax base, expanding high-priority public investment while moderating current spending. - An IMF Public Investment Management Assessment completed in 2018 with recommendations on prioritizing, executing, and improving transparency and governance related to public investment, PPP and procurement. - IMF provided detailed recommendations regarding a revised public investment law to be considered by the National Assembly. - IMF helped organize a regional workshop on infrastructure in Hanoi in January 2019. - Statistics: - IMF technical assistance supports transitioning to GFSM 2014 for fiscal accounts; improvements in price, national accounts and external sector statistics (including debt); developing a real estate price index; improving high frequency indicators. - Assistance to build a National Summary Data Page (NSDP) for Vietnam and develop a road map to transition to SDDS in 2020. - Training and institution building: - IMF provides training via technical assistance, workshops (capital flow management and infrastructure investment), dedicated training and technical assistance (medium-term debt strategy; debt sustainability framework; PFM; reserve management), and regional workshops and peer-to-peer learning. *Source: https://www.imf.org/-/media/files/publications/cr/2019/1vnmea2019002.pdf* ### 4. Going forward, the priorities for capacity building will remain broadly in line with ### 4. Going forward, the priorities for capacity building will remain broadly in line with ### Overview - Priorities remain: modernization of the monetary framework; improving debt sustainability, fiscal transparency, and effective fiscal policies and institutions for taxation, public investment, and procurement; raising the bar on data quality and regulatory standards. - Capacity building will inform the authorities’ next multi-year reform strategy plan for 2021−30. - As IMF technical assistance recommendations are implemented, dedicated technical support and training, and additional technical assistance may be needed. - IMF teams will closely cooperate with the World Bank to ensure coherence in recommendations and avoid duplication of efforts. ### Monetary and exchange rate policy - IMF will provide customized training to SBV staff after an initial assessment of their technical capacity to understand, operate and implement forward-looking monetary models, following a roadmap to build that capability. - Analytical background work for the 2019 Article IV will cover: - the monetary transmission mechanism in Vietnam, - credit gap estimates, and - the optimal inflation rate that should be targeted by the SBV in 2020 and over the medium-term. - This analytical work will support the IMF’s continued emphasis on modernizing the monetary framework. ### Fiscal policy and sustainability - IMF engagement will review and support structural reforms in tax policy, tax administration, and public investment. - 2019 IMF surveillance commitments: - (i) assess the budgetary impact of policy changes and incorporate them into the medium-term fiscal strategy and debt sustainability assessments; - (ii) undertake a more comprehensive and longer-term fiscal analysis than has been the norm. - The longer-term fiscal analysis will illustrate fiscal implications of a comprehensive assessment of general government balance sheets, including granular information on extra budgetary funds and budget financing. - Building on staff analysis of expenditure needs to meet Sustainable Development Goals (SDGs) on education, health and infrastructure by 2030, IMF surveillance will present a long-term debt sustainability analysis to illustrate growing budgetary pressures from ageing, [climate change], and achieving SDGs. - Technical assistance is underway to review the performance of cash management and treasury management systems to inform the authorities’ next long-term reform strategy. ### Strengthening the financial sector - SBV’s supervisory and risk management capacity should be further strengthened to: - (i) ensure effective supervision as the banking system prepares to transition to Basel II by January 1, 2020; and - (ii) address emerging issues such as Fintech and related data management, central bank digital currency and monetary prudential policy options for cyber risk management. - A capacity development strategy will be developed in these areas, including updating some aspects of the 2013 FSAP such as: - compliance of the supervisory regulatory framework with Basel Core Principles, - framework for stress testing bank balance sheets and liquidity, and - crisis management frameworks. - Given the World Bank’s involvement in supporting SBV’s financial sector surveillance, the capacity building strategy should be developed collaboratively to build synergies and avoid duplication. ### Improving soft infrastructure and governance - IMF surveillance and capacity building will support upgrading statistics and regulatory frameworks to international best practices. - Building on an assessment under the IMF’s GAT framework, high priority areas include: - Anti-corruption framework and AML/CFT: - Further improve the new anti-corruption framework to international best practices with IMF technical support. - Strengthen the AML/CFT framework (including customer due diligence requirements for politically exposed persons) in line with FATF standards and improve actual implementation ahead of the planned 2020 assessment by FATF. - Transitioning to SDDS in 2020: - Emphasize greater transparency and disclosure to regional and international standards to achieve the goal of moving to SDDS by 2020. - Support timely disclosure of key national account, fiscal and monetary statistics through the NSDP. - Fiscal transparency: - Produce and disseminate fiscal statistics according to the GFSM (IMF technical assistance ongoing). - Full disclosure of financial accounts of extra budgetary funds and externally audited balance sheets of state owned enterprises, government financing and assets in the banking system, and better and more transparent procurement systems are critical. - Monetary and financial statistics: - Improve data quality on credit and sectoral credit breakdowns, real estate markets and exposures to proactively detect and manage financial sector risks. - Priorities for technical assistance include developing a property price index, improving reporting of monetary statistics to the IMF, and improving external sector and debt statistics. ### Multi-Year Surveillance and Capacity Building Priorities (summary from table) - Time horizon covered: Past, 2019, 2020, 2021 with Ongoing and Planned Capacity Development. - Key issue groups and selected entries (coverage indicators shown in the source table): - 2. Macro-financial Issues: - 2-1. Capital Inflows: Medium traction; coverage marks √ √√√ in 2019–2021. - 2-2. Monetary and exchange rate policy: High traction in 2019; Medium traction thereafter; coverage marks √ √√√√. - 2-3. Banking Sector Soundness: High traction in 2019; Medium thereafter; coverage marks √ √√√; World Bank involvement. - 2-4. Balance Sheet Currency Mismatch: Low traction. - 2-5. Macroprudential Policy: High traction in 2019; Low thereafter; coverage marks √ √√√; World Bank involvement. - 2-6. Financial Supervision and Regulation: High traction in 2019; Low thereafter; coverage marks √ √√√; World Bank involvement. - 2-7. Currency Substitution and De-dollarization: Medium traction; coverage marks √ √√√. - 3. SDGs/FfD Commitments: - 3-1. Domestic Revenue mobilization: Medium traction; coverage marks √√. - 3-2. Infrastructure Investment: High traction in 2019; Medium thereafter; coverage marks √√. - 3-3. Building Policy space/economic resilience: High traction in 2019; Medium thereafter; coverage marks √√. - 3-4. Environmental sustainability, equity/inclusion: High traction in 2019; Medium thereafter; coverage marks √; World Bank involvement noted. - 3-5. Domestic financial market promotion: High traction; coverage marks √; World Bank involvement. - 3-6. Data enhancement: High traction; coverage marks √√. - 4. Fund’s New “Core” Issues: - 4-1. Gender: Low traction; coverage mark √. - 4-2. Macrostructural: High traction in 2019; Medium thereafter; coverage marks √; World Bank involvement. - 4-3. Climate Change and Sustainability: High traction in 2019; Medium thereafter; coverage marks √. - 4-4. Governance: High traction in 2019; Medium thereafter; coverage marks √√. *Source: IMF staff text in the provided PDF chapter.* ### Appendix VIII. Progress Against IMF Recommendations ### Appendix VIII. Progress Against IMF Recommendations ### Fiscal Policies - Recommendation: Continue the gradual consolidation of the public finances by lowering the budget deficit and public debt. - Action: The authorities continued to adhere to lower budget deficit targets and to grant guarantees sparingly. Public debt has declined significantly. - Recommendation: Improve the quality of fiscal adjustment by undertaking reforms in revenue policy and administration to broaden and diversify revenue bases. - Action: The authorities raised environmental and excise taxes but have refrained from broad revenue policy reforms (such as raising VAT rates), which have met resistance. On the other hand, the authorities continue to improve revenue administration. - Recommendation: Review current spending with a view to reducing the wage bill and undertaking civil service reforms. - Action: The authorities are gradually lowering head count in the civil service and tightening non-essential current spending. Increases in retirement ages for men and women are being reviewed by the NA. Additional efforts will be needed as outlined in the staff report. - Recommendation: Protect capital expenditure and raise its efficiency, including by undertaking a Public Investment Management Assessment (PIMA). - Action: The PIMA has taken place, coordinated by the CEC, and its recommendations are being reviewed with implementation expected in 2019-20. - Recommendation: Improve public financial management and fiscal data, accounting and reporting. - Action: Treasury operations are being reviewed with assistance from IMF TA. The authorities agree in principle that the coverage of the fiscal accounts needs to be expanded and become more detailed. ### Monetary Policy - Recommendation: Tighten monetary policies, raise interbank rates and reduce credit growth targets. - Action: Monetary policy was tightened, interest rates rose to close to the repo rate and credit growth targets were further tightened as discussed in the staff report. - Recommendation: Begin to modernize the monetary framework by anchoring monetary policy on price stability, allowing greater exchange rate flexibility and phasing out credit growth targets. - Action: The SBV has started the multiyear process of modernizing its monetary framework with IMF technical support. - Exchange rate framework and operations: - The exchange rate arrangement is classified as defacto stabilized. The de jure arrangement is managed floating. - In August 2015 the SBV widened the VND/USD trading band to +/-3 percent from +/-1 percent while devaluing the central parity by one percent. - In January 2016 the SBV 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. - Technical assistance in 2019: - FAD provided TA on strengthening Vietnam’s Treasury cash management. - MCM organized a scoping mission for preparing comprehensive training on Forecasting and Policy Analysis System (FPAS). - STA provided TA on Government Finance Statistics, National Accounts, Property Price Index, high frequency indicators and e-GDDS. - CDOT provides TA on external sector statistics and STI organizes trainings. ### Financial Sector Policies - Recommendation: Further strengthen the banking system and its supervision by recapitalizing state-owned commercial banks and managing them at arm’s length. - Action: Recapitalization of state-owned commercial banks is a priority for the authorities. Modalities are now being internally discussed on a bank by bank basis. The introduction, in January 2020, of Basel II capital requirements is accelerating the process. - Recommendation: Speed up NPL resolution by finalizing the implementing regulations of Resolution 42. - Action: The implementation of Resolution 42 has been accelerated, facilitating disposal of collateral, asset restructuring and NPL disposal. - Recommendation: Improve the capacity to manage financial risk. - Action: The SBV is improving its capacity to conduct stress tests and produces financial stability reports (not published). A high-level committee has been set up to monitor system-wide financial risks. - Capacity-building and past TA: - Recent 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. - From December 2008 to January 2012, a resident advisor assisted the authorities in improving banking supervision. - The IMF-World Bank Financial Sector Assessment Program was undertaken during 2012–13. ### Structural Policies - Recommendation: Develop non-bank, long-term financing to support investment. - Action: A domestic credit rating agency is being created and the legal and institutional framework for capital and securities markets is being strengthened. - Recommendation: Continue to shrink the economic role of the state and address governance and data gaps. - Action: The equitization of large SOEs in non-strategic sectors identified in the 2016-20 plan continues. Regulatory burdens continue to be lightened, including a new legal framework for SMEs. A new public investment law was introduced. The authorities’ fight against corruption continues. Data gaps are being addressed on an ongoing basis. The authorities reviewed and will revise the national accounts and balance of payments data, with IMF technical support. - Recommendation: Lower the intensity of dirty fossil fuels and raise the contribution of renewables and natural gas. - Action: New environmental taxes were enacted and new investments to promote liquified natural gas are in the pipeline. ### Data, Statistics, and Reporting - Assessment of data adequacy for surveillance: Data provision has some shortcomings, but is broadly adequate for surveillance. Most affected areas are financial sector, national accounts, government finance, and external sector statistics. - National accounts: - GSO provides quarterly (cumulative) and annual data on GDP by type of economic activity and by expenditure (both in current and constant prices). - Successive STA TA missions recommended that GSO prioritize improving the Quarterly National Accounts (QNA) statistics and compile discrete and independent quarterly GDP rather than cumulative estimates. - National Accounts base year is 2010; under the 2011–2020 Statistics Department Strategy, Vietnam plans to implement the 2008 SNA by 2020. - Prices statistics: - Headline inflation averaged 3.54 percent with core inflation of 1.48 percent in 2018. - In Q1 2019, inflation increased slightly to 2.63 percent (ayoy), and remains below the authorities’ 4.0 percent target. - CPI methodology broadly in line with international standards; rental equivalence approach for owner occupied housing implemented; sample and weights improvements recommended for 2019 CPI update. - Government finance statistics: - Government operations data cover consolidated state budget across four levels of government but 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, and the Sinking Fund). - Compilation is on a cash basis for final annual data; as a result, government financing data, particularly domestic bank financing, cannot be reconciled between fiscal and monetary accounts. - The World Bank and the IMF have recommended improving coverage of fiscal data and aligning definitions with the GFSM 2014. The authorities expect to provide GFSM 2014 consistent data starting in 2018. - Monetary statistics: - SBV reports monetary data monthly to STA using old report forms with limited information; STA encouraged development of a reporting scheme with comprehensive breakdowns to facilitate migration to standardized report forms. - External sector statistics: - Balance of payments statistics rely on limited source data, resulting in gaps. Starting from 2013 data, the authorities report balance of payments in BPM6 format; timeliness remains an issue. - STA TA via TAOLAM focused on improving FDI data, development of IIP and external debt. - Remaining recommendations: insufficient resources for International Transaction Reporting System; annual FDI survey incorporation; treatment of goods for processing in line with BPM6; improvement of remittances estimates; study of unrecorded trade in gold; address significant errors and omissions; distinguish reserves transactions from valuation changes; improve timeliness and dissemination, including IIP. - Financial Soundness Indicators: - Vietnam reports 10 of the 12 core FSIs, 7 of the 13 encouraged FSIs for deposit takers, and one FSI for real estate markets with semi-annual frequency to the IMF’s FSI website. Data are reported with lag of more than two quarters. - Data dissemination and standards: - Vietnam became a participant in the GDDS in September 2003, superseded by the e-GDDS in 2015. - An STA mission in April 2016 assisted authorities to develop a National Summary Data Page (NSDP) for e-GDDS implementation and recommended a strategy toward SDDS. - Currently, no government finance statistics are reported for publication in the IMF’s Government Finance Statistics Yearbook (GFSY) or International Financial Statistics (IFS). Annual GFS data through 2004 (excluding extra-budgetary and social security funds) were previously reported for GFSY. No sub-annual fiscal data have been reported for IFS since 2001. ### Fund Relations, Technical Assistance, and Contacts - Membership status: Joined September 21, 1956; Article VIII. - Quota and holdings: - Quota: 1,153.10 SDR Million, 100.00 Percent of Quota. - Fund holdings of currency: 1,153.10 SDR Million, 100.00 Percent of Quota. - Reserve position in Fund: 0.01 SDR Million, 0.00 Percent of Quota. - SDR Department: - Net cumulative allocation: 314.79 SDR Million, 100.00 Percent Allocation. - Holdings: 269.77 SDR Million, 85.70 Percent Allocation. - Latest financial arrangements (historical): - 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: 2019 = 0. 35; 2020 = 0. 48; 2021 = 0. 48; 2022 = 0. 48; 2023 = 0. 48. - Total: 2019 = 0.35; 2020 = 0.48; 2021 = 0.48; 2022 = 0.48; 2023 = 0.48. - Article IV cycle: Vietnam is on a 12-month consultation cycle. The previous Article IV consultation was held in Hanoi during April 3–19, 2018, and was concluded by the Executive Board on June 19, 2019. - Technical assistance and capacity-building (selected): - 2018: high level MCM-APD workshop on modernization of monetary policy framework; FAD conducted a Public Investment Management Assessment (PIMA). - 2019: FAD TA on Treasury cash management; MCM scoping mission for FPAS training; STA TA on GFS, National Accounts, Property Price Index, high frequency indicators and e-GDDS; CDOT TA on external sector statistics; STI trainings. - Past TA: statistics, reserve management, debt management, bank resolution, stress testing, monetary operations and liquidity management; resident advisor for banking supervision from December 2008 to January 2012; IMF-World Bank FSAP in 2012–13. - Resident Representative: Starting June 2019, Mr. François Painchaud will be the Resident Representative for Vietnam and Lao P.D.R., based in Hanoi. ### Selected Recent Economic Outcomes and Outlook (authorities’ statement) - Economic performance: - 2018 GDP growth: 7.1 percent (slightly above the 6.7 percent target). - Headline inflation (2018 average): 3.54 percent. - Core inflation (2018 average): 1.48 percent. - Q1 2019 inflation: 2.63 percent (ayoy), below the authorities’ 4.0 percent target. - Authorities’ view: In the context of rising trade tensions and global uncertainties, the Vietnamese economy in 2018 and early 2019 remained resilient, supported by strong macroeconomic fundamentals. The authorities remain committed to macroeconomic stability, private sector-led growth, and upgrading institutions of macroeconomic management toward the transition to upper middle-income status by 2030. *Prepared by David Corvino (APD); staff report informational annex content as of June 4, 2019, and related sections in the Vietnam staff report for the 2019 Article IV Consultation.* ### 4. For 2019, the authorities project the economy to sustain its strong growth momentum ### 4. For 2019, the authorities project the economy to sustain its strong growth momentum ### Growth outlook and inflation expectations - Authorities project growth target of around 6.8 percent for 2019. - Headline inflation for 2019 is projected to be well-anchored at around 3.7 percent, below the target of 4.0 percent. - Core inflation is projected at 1.7 - 2.0 percent (yoy). - Growth drivers identified: gains in productivity, more effective investment (particularly public investment), administrative measures and structural reforms to streamline administrative and licensing procedures, and easing domestic private sector access to land and credit. ### Downside risks and policy response - Recognized downside risks: global trade tensions and elevated trade policy uncertainty affecting Vietnam via trade, financial, and expectations channels. - Policy responses and reforms planned or underway: - Accelerated fiscal adjustment and improved quality of consolidation to narrow infrastructure and social spending gaps and address rapid aging. - Further modernization of monetary framework and upgraded banking sector supervision. - Continued bank recapitalization and adoption of Basel II standards scheduled for 2020. - Strengthened SOE management and privatization of government-owned companies in non-strategic sectors. - Enhanced data provision and dissemination. - Additional efforts to improve governance and fight corruption, including greater fiscal transparency, better public investment management, and a stronger AML/CFT framework and execution. ### Fiscal policy: recent outcomes and 2019 commitments - 2018 outcomes and medium-term path: - State budget deficit expected to stabilize at 3.46 percent of GDP in 2018. - Gross public and publicly guaranteed debt declined to 58.4 percent of GDP at end of 2018 and is expected to further fall below 50 percent of GDP by end-2024. - Cash balance of around 9 percent of GDP as stated in the staff report (includes State Treasury cash balance, extra-budget funds, and provincial financial reserves). - 2019 fiscal commitments and measures: - Authorities committed to contain public debt of around 61.3 percent of GDP and budget deficit of less than 3.6 percent as targeted for 2019. - Planned measures: fundamental tax reform to broaden tax bases and reduce informality of incentives; broad review of tax policy and revision of tax laws (VAT, excises, and CIT); strengthen tax administration; preserve strong revenue mobilization amid declining ODA and oil revenues. - Expenditure-side measures: increase urgently needed public investments, rationalize the public sector wage bill, and improve public investment efficiency. - Consideration of reforms recommended by the recent PIMA mission for implementation at an opportune time. - Medium-term fiscal strategy: - Aim to contain the budget deficit to3.8 percent of GDP by 2020. - Strategy includes preparing for longer-term fiscal challenges related to rapid population aging projected to set in around 2030-35 and adopting high-quality, sustained measures balanced between revenues and expenditures while safeguarding public investment and social protection spending. - Public debt management: - More diversified maturity profile for T-bond issuances to enable active cash management and money market development. - Authorities recognize benefits of sweeping cash resources at the SOCBs into the State Treasury’s single account at the SBV and are considering Fund TA advice and alternative models for designing a TSA that accounts for country specificities and sequencing. ### Monetary and exchange rate policy - Credit and monetary stance: - In 2018, credit growth declined to below 14 percent, lower than the SBV’s 17 percent ceiling. - Credit growth is expected to decelerate further in 2019; administrative allocation of credit will be retained for an extended period. - When all banks adopt Basel II standards and supervisory/regulatory preconditions are met, relaxation or gradual phasing out of credit ceilings can be considered to move to indirect instruments. - Exchange rate and reserves: - SBV maintained orderly market conditions and ample liquidity amid heightened volatility in 2018; allowed greater two-way exchange rate flexibility within the current band; gradual reserve accumulation continued with fully sterilized interventions. - Resulting depreciation was 2.2 percent against the U.S. dollar. - Authorities remain committed to a flexible exchange rate as the primary shock absorber but aim to avoid excessive exchange rate volatility that could disrupt markets and spill over to the real economy. - External balance assessment: - Authorities note different approaches to external balance assessment yield opposite results and stress that Vietnam’s large current account surplus in recent years is attributed to structural factors not fully captured by the EBA-lite model. - Emphasis that external rebalancing should not be borne solely by an exchange rate adjustment; a well-designed mix of policies should be pursued flexibly. - Current account surplus has been adjusting in the right direction and will continue to decline over the medium term, aided by ongoing public investment and structural reforms strengthening domestic demand. ### Financial sector health and reforms - Banking sector improvements: - Bank earnings have risen due to a shift to retail lending and consumer finance; non-interest income from corporate bond issuance, credit cards, and cash transfer has increased. - Increased bank lending to SMEs as large firms issue more corporate bonds. - Fintech is expanding customer bases and fostering financial inclusion. - NPL resolution and vulnerabilities: - NPL ratios have been declining; aggressive NPL resolution with the Vietnam Asset Management Corporation (VAMC) and implementation of the 2016–2020 Masterplan and National Assembly’s Resolution No 42 on Piloting NPL Resolution. - Authorities acknowledge NPL ratios remain high and that bank balance sheets are still vulnerable to shocks; bank recapitalization, especially for SOCBs, is a top priority and should be accelerated. - As the January 1, 2020, deadline for implementing Basel II rules approaches, authorities have formulated a bank-by-bank strategy for recapitalizing large SOCBs using private money where possible and allowing SOCBs to retain earnings and equitization proceeds as needed. - Non-banking sector and systemic coordination: - Authorities view vulnerabilities in the non-banking sector as potentially adverse if not contained. - Plan to form a multi-agency financial stability committee chaired by a Deputy Prime Minister to discuss system-wide risks and policy measures regularly. - SBV improving its Financial Stability Report and will consider disseminating main conclusions across key agencies. - Vigilance toward Fintech developments and cybersecurity challenges. ### Structural reforms, governance, and AML/CFT - Institutional modernization and private sector focus: - Government committed to private sector-led growth and has shifted to a state enabling model. - Regulatory quality and ease of doing business have improved. - Legal framework for SOEs revamped with creation of an independent State Capital Management Committee (SCMC) to oversee large SOEs. - Future reform priorities: - Modernize institutions of macroeconomic management. - Strengthen supervision and management of the banking sector and SOEs. - Allow 100 percent foreign ownership in areas not critical to national security. - Modernize regulation, reduce concentration of land in state hands, and strengthen data provision and dissemination. - Governance and AML/CFT efforts: - 2018 anti-corruption law strengthens assets declaration system to align with best practices. - National Risk Assessment on money laundering and terrorism financing for 2012 – 2017 identified overall ML risk as “higher medium” and overall FT risk as “low”. - Decision No. 474/QD-TTg dated April 30, 2019 adopted the National Action Plan to address AML/CFT deficiencies and risks for 2019-2020. - The Plan aims to strengthen AML/CFT effectiveness, adopt FATF standards, prepare for the upcoming APG assessment, include outreach, training, regulatory capacity building, and close regulatory gaps by November 2019. ### Conclusion and international cooperation - Authorities will continue implementing the reform agenda to realize the country’s full growth potential while recognizing that sustainable results take time. - Focus areas to make growth more inclusive and resilient: fiscal prudence, well-grounded monetary management and financial stability, improved SOE competitiveness, and a sound banking system. - Pace and depth of reforms will be calibrated 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. *Source: 1vnmea2019002* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1vnmea2019002.pdf_