## 1vnmea2021001 ## Source details **Canonical URL:** [1vnmea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1vnmea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1vnmea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1vnmea2021001.pdf.json) --- ### High-frequency indicators and COVID-19 impact - Pre-COVID landscape: - Growth averaged 7 percent in recent years. - Inflation remained close to the authorities’ 4 percent target. - Public and publicly guaranteed debt (PPG) was 43 percent of GDP in 2019. - International reserves rose to US $78.5 billion and were 96 percent of the ARA metric at end-2019. - Household debt stood at nearly 50 percent of GDP at end-2019; over half was borrowing by small household businesses and a further 25 percent was housing-related loans. - As of December 2019, only 18 out of 43 banks (accounting for 60 percent of total banking system’s assets) met the capital standards required for Basel II adoption. - Health containment and outcomes: - Recorded infections and case fatality rates were notably low: 1367 cases and 35 deaths reported as of December 7, 2020. - Vietnam conducted slightly more than 1.4 million tests; nearly 1,000 people tested per confirmed case. - Activity and financial indicators: - Economic activity plummeted in April 2020; domestic activity resumed in May. - GDP grew by 2.9 percent in 2020. - Credit growth picked up to 12 percent (y/y) in December 2020, from a trough of 8.8 percent (y/y) in May 2020. - Exports contracted sharply in Q2 2020, then rebounded; merchandise imports remained weak. - Labor market: - Labor force fell by 4.2 percent (y/y) in Q2 2020. - Number of businesses temporarily suspending operations rose by 81 percent (Q3 y/y); firms resuming operations increased by 25 percent. - Policy response summary: - Initial fiscal package totaled 4.1 percent of GDP with tax, land fees, and social insurance contribution deferrals. - SBV reduced policy rates (repo and refinancing rates cut by 150 and 200 bps in total between March and October). - Credit package of new loans by commercial banks amounting to 3.9 percent of GDP complemented fiscal efforts. ### Fiscal outlook, financing, and risks - Headline fiscal projections: - The deficit is expected to reach 5.4 percent of GDP in 2020 (budget envisaged 3.5 percent). - Net lending (+)/borrowing (-) (percent of GDP): 2019 -3.3; 2020 -5.4; 2021 projection -4.7 (Table 1). - Public and publicly guaranteed debt (end of period, percent of GDP): 2019 43.4; 2020 46.6; 2021 projection 47.1 (Table 1). - Drivers of wider 2020 deficit: - Declining revenues and operation of automatic stabilizers. - Higher cash transfers and capital spending. - Financing: - Higher deficits expected to be financed mostly through domestic debt issuance. - Public debt expected to remain around 46 percent of GDP in 2020 and decline over the medium-term under staff baseline. - Key fiscal measures and implementation (as of end-November, 2020): - Measures with budget impacts: 291.7 (VND trillion) / 3.7 percent of GDP (revised GDP, 2020, in VND trn). - VAT, CIT and land rental deferrals: 174.0 (VND trillion) / 2.2 percent of GDP / 65.9 percent of the plan. - Cash transfers: 36.0 (VND trillion) / 0.5 percent of GDP / 12.7 percent of the plan. - Additional health spending: 6.7 (VND trillion) / 0.1 percent of GDP / 50.8 percent of the plan. - Measures with off-budget impacts: 380.5 (VND trillion) / 9.6 percent of the plan. - Key risks and uncertainty: - Principal risk: a protracted recovery and economic scarring linked to weaker labor markets, worsening corporate balance sheets, persistent banking system weaknesses, and trade tensions. - Trade-policy steps: preliminary countervailing duties on vehicle tires; Section 301 investigations; U.S. Treasury designation as a currency manipulator in December 2020 with potential enhanced engagement. - Corporate solvency risk: staff simulations suggest 45 percent of businesses’ debt could be at risk of default, compared to 28 percent before COVID-19. - Banking stress: system-wide NPLs could reach over 7 percent under baseline if loans are properly classified, up from 4.6 percent in 2019. ### Monetary, exchange rate, and financial sector policy - Monetary policy actions and transmission: - SBV cut repo and refinancing rates (150 and 200 bps cumulative cuts between March and October). - Short-term interbank rate hovered around zero since late May 2020; policy rates somewhat de-linked from overnight interbank movements. - Transmission to long-term rates moderate with notable lag. - Recommended near-term monetary stance: - Remain supportive given subdued inflation and a negative output gap. - Room for further effective monetary easing likely limited. - Consider measures to lower long-term borrowing costs: further lowering policy rates, central bank relending program or special discount window, relaxing lending-rate caps to priority sectors. - Exchange rate recommendations: - Enhance exchange rate flexibility to facilitate external adjustment. - FX interventions limited to smoothing excess volatility; reserves broadly adequate. - Allow greater two-way flexibility within the current ± 3 percent band by setting the SBV buying rate near the upper end of the FX trading band; re-center the band if persistent large shocks occur. - Banking sector surveillance and reforms: - Monitor loan restructuring and loss estimates; normalize loan classification and provisioning rules gradually. - Strengthen recapitalization plans and facilitate capital raising; pace Basel II adoption (authorities targeting early 2023). - Consider broadening macroprudential tools: countercyclical-capital buffer, capital-conservation buffer, limits on LTV and DSTI ratios. - Consider raising foreign ownership limits (currently 30 percent) and reducing state-ownership of SOCBs from 65 percent to 51 percent. ### Policy priorities and recommendations - Overarching imperative: - Address corporate and labor market stresses to set stage for robust recovery. - Fiscal policy guidance: - Fiscal policy should play a bigger role given available fiscal space. - With continued slack, fiscal stance should remain neutral or moderately expansionary in 2021; improve government spending execution. - Fiscal support should be timely, temporary, and targeted; shift from liquidity support toward growth-enhancing measures as recovery takes hold. - Consider temporary corporate income tax (CIT) loss-carry backwards; temporary accelerated depreciation or investment tax credits; targeted temporary CIT reductions for distressed but viable SMEs. - Social protection and labor measures: - Scale-up coverage by relaxing eligibility criteria and extending safety net (e.g., to families with children and the elderly). - Staff calculation: doubling replacement income rate of some existing programs to around 60 percent for a temporary 3-month period would cost an additional 0.1 percent of GDP. - Consider hiring subsidies, tax credits, and active labor market policies to incentivize job training. - Financial stability and corporate restructuring: - Maintain support for viable firms while ensuring liquidation of nonviable firms is expeditious. - Time-bound, targeted loan-restructuring extensions; strengthen insolvency frameworks including specialized SME bankruptcy regime and personal insolvency regime for over-indebted small entrepreneurs and households. - Strengthen supervision, thematic stress tests, and bank capitalization efforts. ### Supporting medium-term growth, resilience, and reforms - Revenue mobilization: - Tax-to-GDP ratio relatively low; credible medium-term revenue strategy critical to rebuild fiscal buffers. - Authorities plan to reduce budget deficit to 3 percent of GDP over the medium-term. - Tax policy and administration reforms: - Rationalize tax expenditures; broaden VAT base; raise excise duties; adopt a unified property tax. - Fully operationalize large tax-payer unit and comprehensive compliance strategies; expand e-tax services and simplified procedures. - Public investment and social spending: - Room to increase public investment share of GDP by rationalizing current outlays and improving efficiency. - Priorities: roads, electricity, water, adaptive and digital infrastructure. - Strengthen social-protection permanently using unique citizen identification and e-payments. - Gradual increase in retirement age welcome; further parametric reforms needed. - Greening the recovery: - Raise renewables contribution; fully price carbon in fossil fuels; reverse recent reductions in environmental protection taxes on aviation fuels. - Invest in adaptation and climate-resilient infrastructure. - Fiscal framework strengthening: - Numerical ceilings should apply only to public sector FX debt; avoid hard limits for private sector FX debt. - Improve fiscal reporting, continue merging extrabudgetary funds, strengthen public investment management. - Consider adopting a prudent debt anchor at 55 percent of GDP in medium-term frameworks while keeping current statutory ceiling as an upper bound. ### Key statistics and projections (selected exact figures) - Real GDP (percent change): 2016 6.7; 2017 6.9; 2018 7.1; 2019 7.0; 2020 2.9; 2021 projection 6.5 (Table 1). - CPI (period average): 2016 2.7; 2017 3.5; 2018 3.5; 2019 2.8; 2020 3.2; 2021 projection 4.0 (Table 1). - Public and publicly guaranteed debt (end of period, percent of GDP): 2016 47.6; 2017 46.3; 2018 43.6; 2019 43.4; 2020 46.6; 2021 projection 47.1 (Table 1). - Gross international reserves (in billions of U.S. dollars): 2016 36.7; 2017 49.2; 2018 55.3; 2019 78.5; 2020 94.8; 2021 projection 113.7 (Table 1). - Current account balance (including official transfers, percent of GDP): 2016 -0.6; 2017 1.9; 2018 3.8; 2019 2.2; 2020 2.3; 2021 projection 1.6 (Table 3 projections). - Net lending (+)/borrowing (-) (percent of GDP): 2019 -3.3; 2020 -5.4; 2021 projection -4.7 (Table 1). - Bank NPLs (Non-performing Loans to Total Gross Loans): 2013 3.1; 2014 2.9; 2015 2.3; 2016 2.3; 2017 1.8; 2018 1.8; 2019 1.6 (Table 6). - Credit to the economy (percent change, end of period): 2016 18.8; 2017 17.4; 2018 12.7; 2019 12.8; 2020 12.1; 2021 projection 12.3 (Table 1). ### External sector, reserves, and external debt sustainability - Current account and reserves: - Current account surplus was 3.8 percent of GDP in 2019. - Current account surplus projected to narrow to 2.2 percent in 2020; projected to increase modestly in 2021. - International reserves expected to increase to US$94.8 billion and to 108 percent of the ARA metric at end-2020. - External debt headline projections (Table 1 baseline): - Total external debt-to-GDP: 2019 37.2 percent. - Baseline path (in percent of GDP): 2015 33.0; 2016 35.2; 2017 39.0; 2018 36.2; 2019 37.2; 2020 37.6; 2021 38.0; 2022 37.4; 2023 36.9; 2024 36.6; 2025 36.4. - External debt-to-exports ratio (percent): 2019 43.1; 2020 44.9; 2021 43.2. - Gross external financing need (billions of US dollars): 2020 33.3; 2021 32.4; 2022 39.3; 2023 48.9; 2024 56.1; 2025 61.6. - Stress-test highlights: - Combined shock with 30 percent depreciation scenario shows external debt could reach box figure 53 (percent of GDP) in Figure 6. - External debt dynamics manageable under baseline but sensitive to real depreciation and current account shocks. ### Corporate vulnerabilities and labor market impacts - Corporate sector pre-crisis: - SMEs less profitable than regional peers; median ICR in entertainment, hotel and travel sectors lower than 1. - For over half the firms in hardest-hit sectors, cash stock covered less than 2 months of operating expenses. - COVID-19 stress-test projections: - About 45 percent of the debt would be in distress on average, compared to 28 percent before the COVID-19 shock. - Sectors like hospitality, travel, and entertainment could see debt-at-risk increase from 50 to 80 percent. - Labor-market impacts (Annex III): - Authorities estimate over 30 million workers impacted through job and income reductions and/or losses. - Labor force declined by over 4 percent (y/y) in Q2; employment shrunk with almost 2.5 million jobs destroyed relative to the previous quarter (a 4.8 percent decline y/y). - Average monthly wages fell by 2.8 percent y/y. - Female workers experienced a decline of almost 6 percent in Q2-2020 (y/y); male workers declined 3.7 percent. - Share of informal employment above 56 percent (as of 2018); vulnerable employment over 50 percent. ### Business dynamism, formalization, and structural reform priorities - Firm entry and exit: - Newly registered firms on average accounted for almost 25 percent of total firms in activity between 2016 and 2019; in 2019 new firms accounted for 18 percent of total firms in operation. - New firms on average hire 9.5 employees; entrants in Vietnam are 2–4 times larger than entrant firms in OECD countries by employment. - Firms on average wait over 13 months since establishment to formalize. - Structural reform priorities: - Simplify and reduce regulatory burdens on private firms; improve access to land and finance for SMEs. - Continue SOE reforms and strengthen governance; reduce corruption; ease entry and exit costs. - Labor-market reforms to reduce skill mismatches; strengthen links between education, training, and skill demand. - Improve data frameworks, including coverage of real estate market statistics and corporate bond issuances. - Promote digitalization, Fintech with regulatory sandboxes, and green investments. *Source: 1vnmea2021001 - 1. High Frequency Indicators in Wake of COVID-19 (IMF staff report excerpt).* ### 1. High Frequency Indicators in Wake of COVID-19 ____________________________________________ 25 ### 1. High Frequency Indicators in Wake of COVID-19 ### The pre-COVID landscape - Vietnam experienced a prolonged period of high growth and structural transformation prior to 2020. - Growth averaged 7 percent in recent years, buoyed by manufacturing activity and solid domestic demand. - Inflation remained close to the authorities’ 4 percent target. - Public and publicly guaranteed debt (PPG) was contained to 43 percent of GDP in 2019, below the 65 percent statutory limit. - Government bond yields and borrowing costs had been on a declining trend. - Public investment slowed in recent years partly due to capacity constraints. - Tax revenues remained below peers, reflecting compliance issues and pervasive tax exemptions. - International reserves rose to US $78.5 billion and were 96 percent of the ARA metric at end-2019. - Household debt stood at nearly 50 percent of GDP at end-2019; over half of this was borrowing by small household businesses and a further 25 percent was housing-related loans (mostly mortgages). - Banking system: higher profitability and liquidity entering 2020; write-offs and loan recoveries, declining credit growth and improved quality of new credit contributed to lower NPLs. Capital buffers were above regulatory requirements but low compared to peers in some SOCBs. As of December 2019, only 18 out of 43 banks (accounting for 60 percent of total banking system’s assets) met the capital standards required for Basel II adoption. - Structural challenges remained: sizeable share of SMEs with limited financial resources and low productivity, sizable SOE footprint, export-led FDI sector with limited domestic linkages, widespread labor informality, and regulatory burdens constraining private investment. ### COVID-19 impact and policy response - Health containment and outcomes: - Swift containment measures, aggressive contact tracing, targeted testing, and isolation helped limit infections. - Recorded infections and case fatality rates were notably low: 1367 cases and 35 deaths reported as of December 7, 2020. - Activity and financial indicators: - Economic activity plummeted in April 2020 amid mobility restrictions; domestic activity resumed in May. - GDP grew by 2.9 percent in 2020, the slowest pace in a decade. - Credit growth picked up to 12 percent (y/y) in December 2020, from a trough of 8.8 percent (y/y) in May 2020. - Exports contracted sharply in Q2 2020, then rebounded; medical/protective equipment and work-from-home-related electronics exports outperformed. - Merchandise imports remained weak. - Labor market: - Labor force fell by 4.2 percent (y/y) in the second quarter of 2020, the first decline in 5 years, before rebounding somewhat. - The initial employment adjustment occurred largely through rising underemployment. - Low-skilled workers and those in the informal economy were hit hardest; informal employment rebounded quickly as restrictions eased. - Number of businesses temporarily suspending operations rose by 81 percent (Q3 y/y), offset in part by a 25 percent increase in firms resuming operations. - Fiscal policy: - Initial fiscal package totaled 4.1 percent of GDP and comprised tax, land fees, and social insurance contribution deferrals for eligible firms (including SMEs and self-employed). - Existing cash transfers were temporarily expanded to cover part-time workers, self-employed and informal workers, and the poor and near-poor; implementation, take-up, and coverage were low due to capacity constraints and strict eligibility criteria. - Use of below-the-line and quasi-fiscal measures was limited compared to peers. - Selected fiscal measures and implementation (as of end-November, 2020): - Measures with budget impacts: 291.7 (VND trillion) / 3.7 percent of GDP (revised GDP, 2020, in VND trn) - VAT, CIT and land rental deferrals: 174.0 (VND trillion) / 2.2 percent of GDP / 65.9 percent of the plan - Deferrals of excise tax on domestically produced cars: 18.0 (VND trillion) / 0.2 percent of GDP / 98.8 percent of the plan - Exemption and reduction of other taxes, fees and charges: 40.2 (VND trillion) / 0.5 percent of GDP / 22.8 percent of the plan - Cash transfers: 36.0 (VND trillion) / 0.5 percent of GDP / 12.7 percent of the plan - Additional health spending: 6.7 (VND trillion) / 0.1 percent of GDP / 50.8 percent of the plan - Measures with off-budget impacts: 380.5 (VND trillion) / 9.6 percent of the plan - Deferrals of contribution to Social Security funds: 9.5 (VND trillion) / 0.2 percent of GDP / 0.4 percent of the plan - Concessional VBSP lending to affected firms: 16.2 (VND trillion) / 0.2 percent of GDP / 0.0 percent of the plan - Cutting electricity prices: 120.2 (VND trillion) / 0.2 percent of GDP / 9.2 percent of the plan - Monetary and financial sector policy: - SBV reduced policy rates: the repo and refinancing rates were cut by 150 and 200 bps in total between March and October. - Other SBV measures included reductions in central bank bills outstanding and cuts to deposit and lending rate caps. - SBV introduced a legal framework to flexibly restructure existing bank loans, temporarily waive or lower interest payments, and provide temporary forbearance on loan classification for restructured loans. - A credit package of new loans by commercial banks amounting to 3.9 percent of GDP complemented fiscal efforts to prevent widespread corporate bankruptcies. - SBV requested banks to refrain from paying dividends and to reduce bonuses, salaries, and electronic payment fees. ### Outlook and risks to the recovery - 2020 and near-term projections: - Economy estimated to grow by 2.9 percent in 2020. - Headline inflation was at 3.2 percent in 2020; core inflation at 2.3 percent. - Negative output gap estimated at 1 percent in 2020. - Growth projected to strengthen to 6.5 percent in 2021 as activity normalizes, businesses recover, and private consumption and business investment rebound. - Manufacturing and retail sales expected to lead the recovery; travel and hospitality services expected to remain subdued. - Economic scarring expected to temporarily weigh on potential growth as labor re-allocation takes place and capital stays idle in hardest-hit sectors. - External sector and reserves: - Current account surplus was 3.8 percent of GDP in 2019. - The current account surplus is projected to narrow to 2.2 percent in 2020, driven largely by collapsing tourism receipts and weaker remittances, partially offset by subdued imports and lower income payments. - Financial inflows are expected to decline in 2020, reflecting slowing FDI and portfolio inflows. - International reserves are expected to increase to US$94.8 billion and to 108 percent of the ARA metric at end-2020. - The current account surplus is expected to increase modestly in 2021, and financial inflows to strengthen with the domestic and global recovery. - Data and measurement caveats: - Historical revisions to balance of payments data, notably upward changes in investment income of FDI firms, show that current account surpluses in recent years were significantly lower than initially reported: the annual average surplus over 2015–18 was revised from 1.9 to 0.2 percent of GDP, indicating challenges in determining the precise magnitude of misalignment. *Source: 1vnmea2021001 - 1. High Frequency Indicators in Wake of COVID-19 (IMF staff report excerpt).* ### 15. The fiscal deficit is expected to widen. The deficit is expected to reach 5.4 percent of GDP ### 1vnmea2021001 - 15. The fiscal deficit is expected to widen. The deficit is expected to reach 5.4 percent of GDP ### Fiscal outlook and projections - The deficit is expected to reach 5.4 percent of GDP in 2020, compared to 3.5 percent envisaged in the budget. - Drivers of the wider deficit in 2020: - Declining revenues and the operation of automatic stabilizers. - Higher cash transfers and capital spending boosting spending. - In 2021: - The headline deficit is expected to narrow as priority expenditures remain in place to support the recovery, while revenues recover with improved economic activity, albeit only gradually owing to loss carry-forward provisions. - The cyclically adjusted primary deficit is projected to decline by 0.4 percentage points of GDP (a moderately contractionary fiscal stance), even though other spending, including health and public investment, would increase relative to the 2020 budget and 2019 outcomes. - Financing and public debt: - Staff estimates the higher deficits to be financed mostly through domestic debt issuance. - Public debt is expected to remain at around 46 percent of GDP in 2020, and to decline over the medium-term, suggesting available fiscal space. ### Key risks and uncertainty - The outlook is subject to uncertainties (Annex VIII). Principal risk: a protracted recovery and economic scarring linked to: - Weaker labor market conditions. - Worsening corporate balance sheets. - Persistent banking system weaknesses. - Trade tensions. - Upside possibility: deployment of an effective vaccine or therapy could boost confidence and growth prospects. - Trade policy uncertainty: - In November 2020, the U.S. Department of Commerce imposed preliminary currency-based countervailing duties on imports of vehicle tires from Vietnam. - Section 301 investigations into Vietnam’s currency practices could potentially lead to broad-based trade measures or other actions. - In December 2020, the U.S. Treasury designated Vietnam as a currency manipulator in its report to Congress and stated it would commence a process of enhanced engagement which could lead to remedial action if the underlying issue is not resolved after one-year. - These steps could adversely impact the bilateral trade relationship, fuel foreign investor uncertainty, and potentially impinge on monetary policy decisions by limiting exchange rate flexibility. - Corporate solvency risks: - SMEs faced low profitability, weak liquidity buffers, and thin equity cushions even prior to the crisis (Annex IX). - Staff simulations suggest that 45 percent of businesses’ debt could be at risk of default, compared to 28 percent before COVID-19. - Corporate distress could propagate through upstream and downstream linkages, increasing firm closures, bankruptcies, and job losses. - Banking system strains: - Bank profitability and capital buffers are set to worsen due to loan restructuring, higher provisioning, and defaults. - Staff estimates that system wide NPLs could reach over 7 percent under the baseline scenario if loans are properly classified (i.e., without forbearance), jumping from 4.6 percent in 2019. - Asset quality concerns are pronounced for lending to household businesses and corporates affected by COVID-19. - Funding strains in the highly leveraged real-estate sector or a sharp correction in real-estate prices could amplify vulnerabilities. - SOCBs and smaller commercial banks with thin buffers and large maturity mismatches could be significantly impacted. ### Authorities’ views - The authorities concurred with the outlook for growth and were mostly concerned with external risks. - They emphasized that strong policy actions, including effective control of local outbreaks, helped mitigate the impact of the health crisis and support the recovery. - They expected the economy to grow by over 6 percent in 2021 as consumer confidence and formal employment strengthen and private investment rebounds. - Risks seen as mostly external: prolonged global recession and trade tensions with the U.S. - Authorities reiterated commitment to further open up the economy and emphasized the upsides of diversifying export markets following recently signed FTAs. - Authorities shared staff’s assessment of pockets of vulnerability in the corporate sector but saw financial risks as manageable. - On external position, the authorities broadly agreed with staff’s assessment but cautioned against inappropriate interpretation of gap estimates, emphasizing high-level uncertainty in the estimates and structural distortions driving external imbalances. - They stressed that Vietnam’s exchange rate policy was intended to ensure price stability and build reserve buffers, not to manipulate the currency to benefit exports. ### Policy issues and recommendations - Overarching policy imperative: set the stage for a robust recovery by addressing corporate and labor market stresses to avoid derailing the recovery. - Fiscal policy: - Should play a bigger role given available fiscal space. - Fiscal policy can do more and better; with continued slack and available fiscal space, the fiscal stance should remain neutral or moderately expansionary in 2021, with improvement of government spending execution as priority. - This would imply somewhat greater fiscal support than currently factored into staff’s baseline projection to facilitate the recovery. - Fiscal policy could switch to a gradual consolidation once the recovery is complete and downside risks have eased. - Monetary policy: - Should continue to be supportive, but room for further effective monetary easing is likely limited. - Any potential extension of loan restructurings should be mindful of underlying banking system vulnerabilities. - Policy mix priorities: - Fiscal policy should focus on supporting vulnerable households, additional liquidity flows to viable firms, ensure liquidation of nonviable firms is expeditious, and safeguard financial stability. - Authorities should remain agile and proactively adjust the size and composition of policy support given considerable uncertainty and significant downside risks. - Additional fiscal stimulus may be warranted if downside risks materialize, along with modest additional monetary easing. - Greater two-way exchange rate flexibility should be allowed to facilitate adjustment to a potentially challenging external environment. ### Fiscal policy: near-term calibration and measures - Containing health and economic fallout: - Health expenditure should be topped-up as needed; higher allocation for health expenditure envisaged in the 2021 budget is welcome, but further spending may be needed to secure resources for a vaccine rollout. - Expand and improve adequacy and efficiency of social protection: - Scale-up coverage by relaxing burdensome eligibility criteria and extending the safety net (e.g., to families with children and the elderly). - Staff’s calculations suggest that doubling the replacement income rate of some existing programs to around 60 percent (the level under formal unemployment insurance) would cost an additional 0.1 percent of GDP if introduced for a temporary 3-month period. - Better identification of beneficiaries at the local government level should help speed up disbursements. - Recent relaxation of eligibility criteria slightly increased uptake of concessional loans from the development bank (VPSB); scope exists to further increase loan duration and amounts. - Re-consider tax deferrals and support firms: - Weak uptake and profitability argue against an expansion or extension of tax deferrals. - Instead, introduce temporary corporate income tax (CIT) loss-carry backwards to improve firms’ cash flows. - Temporary provisions for accelerated depreciation or investment tax credits could lower the user cost of capital and encourage firm investment. - Temporary CIT reductions could be better targeted to distressed but viable SMEs in priority sectors (in place of the current approach that only uses 2020 income as the basis for eligibility). - Facilitating resource reallocation: - Consider hiring subsidies, but keep liquidity support temporary to enable reallocation of resources towards growing sectors. - Encourage tax credits for firms and households and other active labor market policies to incentivize job training. - Target support to viable sectors and affected regions for effectiveness. ### Supporting longer-term growth, resilience, and reforms - Mobilizing domestic revenue: - Critical to rebuild fiscal buffers and meet investment needs post-COVID. - Vietnam’s tax-to-GDP ratio is relatively low compared with emerging market peers, calling for a credible, well-coordinated medium-term revenue strategy. - Authorities’ plans to reduce the budget deficit to 3 percent of GDP over the medium-term will help replenish fiscal buffers. - Tax policy and administration: - A comprehensive reform of direct and indirect taxes is long overdue; focus on rationalizing tax expenditures, broadening the VAT base, raising excise duties, and adopting a unified property tax. - Envisaged tax administration improvements include fully operationalizing the large tax-payer unit and adopting comprehensive compliance improvement strategies for high-risk taxpayer segments and issues. - Consider improving the tax agency’s organizational structure and expanding implementation of e-tax services and simplified procedures in tax registration, filing, payment and refunds. - Spending measures to boost growth and inclusivity: - Increase public investment: - Room exists to further increase public investment spending as a share of GDP by utilizing savings from rationalizing current outlays, while improving efficiency and prioritization. - Focus on closing SDG gaps in roads, electricity and water sectors; invest in adaptive and digital infrastructure to boost growth and aid targeting of social assistance and financial inclusion. - Strengthen social-protection systems permanently: - Improve targeting and widen coverage using unique citizen identification and cross-linking databases. - Encourage e-payments leveraging high mobile phone penetration to reach those without bank accounts. - Enroll workers into programs that can be activated and scaled up to provide unemployment support in emergencies. - The recently approved gradual increase in retirement age for both men and women is welcome; further parametric reforms needed to improve coverage and adequacy and ensure pension system sustainability. - Greening the recovery: - Raise the contribution of renewables and fully price carbon in fossil fuels to shift toward environmentally sustainable growth. - Reverse recent reductions in environmental protection taxes on aviation fuels as soon as possible. - Recent flooding and increasing frequency of extreme weather-related events underscore need for adaptation investments and climate-resilient infrastructure. - Strengthening fiscal policy frameworks: - Upgrade the external debt framework: - Numerical ceilings should apply only to public sector FX debt; avoid hard limits for the private sector that could constrain viable infrastructure investment. - Strengthen public financial management (PFM): - Strengthen fiscal reporting, including further limiting spending and revenue carryforwards. - Continue merger of some extrabudgetary funds into the budget. - Strengthen public investment management across the public investment cycle per 2018 PIMA recommendations. - Adopt a prudent debt anchor: - Consider adopting a prudent debt anchor at 55 percent of GDP in medium-term frameworks while keeping the current statutory ceiling as an upper bound to account for potential shocks, rising age-related spending costs, and other fiscal risks. *Source: Vietnamese authorities and IMF staff projections (excerpt).* ### 28. The authorities stressed the importance of prudent fiscal policies, balancing fiscal ### 1vnmea2021001 - 28. The authorities stressed the importance of prudent fiscal policies, balancing fiscal ### Fiscal policy: balancing sustainability and support - Authorities stressed the importance of prudent fiscal policies, balancing fiscal sustainability considerations with the need to support growth. - Agreed need to improve execution and coverage of policy support; recent acceleration of public investment disbursement rates and expanded coverage of social-safety programs noted. - Fiscal policy should be adjusted to the pace of the recovery but a more cautious stance was argued for to avoid depleting policy space given the uncertain outlook. - The 2021 budget envisages growth-friendly fiscal consolidation measures, including delaying adoption of the new civil-service salary scale while prioritizing public investment and health spending. - The 2021–30 tax-administration strategy is expected to help mobilize revenues over the medium term; options for upgrading tax policy are under study. - A revised public-debt ceiling below 65 percent of GDP for 2021–25 is currently under consideration and is seen as more prudent in light of the recent GDP re-basing. - Summary of recommended fiscal response (short-term / medium-term objectives and measures) highlighted: use fiscal space as needed; support should be timely, temporary, and targeted; gradually rebalance from liquidity support toward growth-enhancing measures; priorities include supporting jobs, expanding social protection benefits, prioritizing public investment and health spending, improving tax administration and conducting a broad tax policy review. *Source: IMF staff.* ### Monetary and exchange rate policy: supporting recovery while ensuring stability - SBV has sought to balance support for the economy with maintaining exchange-rate stability and anchoring inflation. - Since late May 2020, the short-term interbank rate has hovered around zero driven by unsterilized foreign exchange purchases amid continued inflows, more robust deposit than credit growth, and softening inflation; policy rates somewhat de-linked from movements in the overnight interbank rate. - Transmission to long-term interest rates has been more moderate and entails a notable lag. - Weak policy transmission stems from historically volatile interbank rates, reflecting the lack of an interest rate corridor, emphasis on exchange-rate stability in the policy framework, and volatile movements of government deposits that complicate liquidity management. - Recommended near-term stance: monetary policy should remain supportive given subdued inflation and a negative output gap. - Possible additional measures to lower long-term borrowing costs include: - further lowering policy rates to limit an increase in future interbank rates and signal commitment to accommodative conditions; - providing longer-term lending to commercial banks via a central bank relending program or a special discount window; - relaxing lending-rate caps to priority sectors to incentivize banks to lend to riskier borrowers with promising business plans. - Exchange rate recommendations: - Enhance exchange rate flexibility to facilitate external adjustment and management of domestic liquidity conditions. - FX interventions should be limited to smoothing excess volatility and helping resolve market dysfunction; foreign-exchange reserves are broadly adequate at the current juncture. - Allow greater two-way flexibility within the current ± 3 percent band by setting the SBV buying rate near the upper end of the FX trading band; recent appreciation of the SBV’s buying rate noted as a step in the right direction. - If faced with persistent large shocks, SBV should re-center the band. - Medium-term modernization of the monetary policy framework: - Relax deposit and lending-rate caps to strengthen market-based pricing and improve credit allocation. - Gradually lift aggregate and bank-by-bank credit growth ceilings on credit institutions. - Ongoing IMF FPAS TA will help improve SBV’s forecasting ability and policy analysis. - Greater two-way exchange rate flexibility together with these steps would improve credit allocation and strengthen transmission of monetary policy. - Capital account liberalization guidance: - Proceed cautiously and be carefully sequenced, as recommended by recent IMF TA. - First step: exclude the private sector from the ceiling on external debt and improve monitoring of short and medium-term borrowing. - Subsequent phase: tie capital-account liberalization to monetary policy modernization and gradual increase in exchange-rate flexibility. - Implement a comprehensive macroprudential strategy supported by improved data reporting to manage credit risks. - Authorities’ views: - Agreed liquidity conditions should remain accommodative in the near term but committed to prudent monetary policy balancing recovery support with financial stability risks. - Considered central bank relending program necessary only in exceptional situations to support viable firms. - Noted monetary policy transmission to bank lending rates strengthened but still operates with a long lag. - Market-based monetary policy system needs time to develop; removal of credit ceilings should be gradual and orderly. - Greater two-way exchange rate flexibility desirable over time but currency stability and higher external buffers are warranted at this juncture given the crisis and uncertain global economy. ### Macro-financial policies: remaining vigilant and managing vulnerabilities - Support for viable but vulnerable firms should be maintained and gradually replaced with policies facilitating restructuring; extensions of loan-restructuring schemes should be timebound and targeted. - Strengthen and simplify mechanisms for corporate restructuring and resolution. - Recommended measures: - Solvency support for viable firms: selective government intervention (e.g., equity injections) for viable, strategic firms facing pandemic-related difficulties; interventions should be transparently reported, monitored, and have clear exit strategies. Nonviable firms should be encouraged to liquidate. - Support for SMEs: complement central bank lending facility with Vietnam Development Bank and SME Guarantee Funds providing guarantees to support increased lending volumes and extended maturities, with clear government backstops. - Efficient insolvency frameworks: consider (i) introducing a specialized SME bankruptcy regime to fast-track reorganization and liquidation; (ii) improving out-of-court restructuring frameworks, especially for SMEs; (iii) allowing firms to initiate bankruptcy proceedings before becoming insolvent; consider establishing a personal insolvency regime for over-indebted small entrepreneurs and households. - Banking sector monitoring and supervisory actions: - Closely review loan restructuring processes and banks’ loss estimates; assess COVID-19 impact on loan quality and profitability. - Gradually normalize loan classification and provisioning rules to avoid moral hazard and preserve progress in bank transparency and governance. - Ensure banks properly recognize legacy and emerging NPLs after expiration of loan-restructuring schemes. - Enhance systemic risk monitoring, deepen analysis on exposures to pandemic-affected sectors and real estate, and conduct thematic stress tests. - Strengthening banking system resilience once crisis abates: - Monitor banks’ plan and timeline for Basel II adoption; facilitate capital raising including consideration of equity issuances. - Consider raising foreign ownership limits beyond current rules (currently set at 30 percent) and reducing state-ownership of the SOCBs from the current threshold of 65 percent to 51 percent. - Staff welcomes authorities’ intent to help recapitalize SOCBs by allowing them to keep retained earnings. - Medium-term regulatory and supervisory gaps to close: - Broaden macroprudential tools, e.g., consider introducing a countercyclical-capital buffer or capital-conservation buffer, and setting limits on LTV and DSTI ratios. - Deepen capital markets by ensuring market transparency, integrity and consumer protection through timely disclosure and infrastructure (e.g., establishing a credit rating agency). - Promote Fintech with regulatory sandboxes while remaining mindful of risks accumulating outside the traditional financial sector. - Authorities’ views: - Agreed support measures should be time-bound and targeted and financial stability safeguarded. - Loan restructuring and regulatory forbearance to be gradually phased out and carefully calibrated. - More provisioning supported by reduced dividend payouts and improved bank business models would help banks dispose of expected higher NPLs. - Importance of monitoring corporate bond and real estate sectors, and strengthening regulation on consumer lending, concentration risks, and bank exposures prior to the pandemic emphasized. - Basel II adoption remains a key priority, timeline extended to early 2023. - Fintech seen as accelerated by the pandemic; need to balance prevention of risk with promotion of innovation. ### Macro-structural policies: reducing dualism and lifting productivity - More decisive reforms needed to address pervasive economic dualism that holds back investment and productivity growth and fuels external imbalances. - Staff analysis suggests removing all distortions to the level found in Korea could increase total factor productivity (TFP) by more than 40 percent. - Priority reforms to improve business environment and level playing field: - Simplify and reduce regulatory burden on domestic private firms. - Improve access to land and financial resources, particularly for SMEs. - Reduce corruption to spur firm profitability, investment, and growth. - Ease entry and exit costs for formal firms to increase formalization, reduce informality, and allow faster reallocation of resources. - Continue SOE reforms, including improving governance to increase competition and efficiency. - Labor market and human capital reforms: - Reduce labor skill-mismatches and increase human capital and technology access to boost labor productivity. - Address sizable fraction of labor force reporting skill mismatch; tackle frictions and gaps in educational and vocational training. - New Labor Code (effective in 2021) now covers workers previously employed informally by registered firms and is expected to help reduce labor market frictions and lower informality. - Close information gaps, reduce market fragmentation, and strengthen labor-market governance, including increased coordination and data sharing between agencies. - Strengthen links between education, training, and skill demand; improve access to digital infrastructure. - Reforms to enhance GVC participation: - Upgrade participation in global-value-chains and develop a dense network of domestic suppliers to benefit from post-pandemic shifts. - Authorities’ views: - Agreed further structural reforms could boost productivity; stressed advances in streamlining and simplifying administrative procedures. - Higher public investment seen as catalytic for private investment and employment. - New Labor Code seen as an important first step in tackling labor informality in registered firms. - Rollout of a unique-ID system expected to improve efficiency of support programs, including for informal workers. - Commitment to reform economic institutions, strengthen business environment, and skills development in 2021–2025 national development strategy. - Digitalization and priority to high-tech and green projects in FDI strategy to improve domestic spillovers from GVC participation, particularly for SMEs. ### Other issues: data, governance, and anti-corruption - Data frameworks: - Data provision broadly adequate for surveillance but further improvement necessary to upgrade to standards consistent with other emerging markets. - Priority areas: improve quality, coverage, and timeliness of fiscal, monetary, and credit reporting and external statistics. - Expand coverage of real estate market statistics, corporate bond issuances and other credit exposures to monitor vulnerabilities and manage financial sector risks. - Strengthen inter-agency coordination and data sharing to address coverage and reporting gaps. - Governance and anti-corruption: - Efforts underway to improve governance and strengthen anti-corruption framework, but significant room for improvement remains. - Government Inspectorate of Vietnam report notes corruption remains a serious and complex challenge. - Steps taken: investigating and prosecuting serious corruption cases in public and private sectors, strengthening implementation of the 2018 Law on Anti-Corruption, introducing a National Public Sector Service Portal (e-government). - Vietnam published its first National Risk Assessment on Money Laundering and Terrorist Financing in 2019. - Ongoing Mutual Evaluation of Vietnam on AML/CFT will further inform prioritization of policies and measures to strengthen the AML/CFT framework. *Source: IMF staff; content excerpted from the IMF PDF chapter/section provided.* ### 47. The authorities’ response to COVID-19 has been commendable. The pandemic disrupted ### 1vnmea2021001 - 47. The authorities’ response to COVID-19 has been commendable. The pandemic disrupted ### Assessment of the crisis response and current outlook - The authorities’ response to COVID-19 has been commendable. - The pandemic disrupted a prolonged period of high growth and impressive improvements in living standards. - Early and decisive efforts on the health and economic policy fronts have contained the fallout from the crisis, and a strong recovery is in train. - The build-up of fiscal, external, and financial buffers prior to the pandemic has underpinned Vietnam’s resilience to the shock. ### Uncertainty and risks - Widespread availability of effective vaccines and therapies could boost confidence and accelerate the recovery relative to the baseline forecast. - Remaining sources of uncertainty: - labor market conditions are still weak; - corporate balance sheets have worsened since the onset of the crisis; - banking system weaknesses persist; - the economy is heavily reliant on external trade and vulnerable to trade tensions and a protracted global recession. - Policy and external risks: - The imposition of countervailing duties and the ongoing investigation into Vietnam’s currency practices could constrain otherwise desirable monetary policy decisions and depress confidence and investment. - A prolonged period of low growth runs the risk of stoking larger-scale corporate distress, labor market disruption, and banking system strains. ### Macro policy stance and near-term guidance - Macro policies should remain supportive in 2021 and adjusted flexibly to the pace of the recovery. - Fiscal policy: - A neutral or moderately expansionary fiscal stance would help avoid derailing the recovery, prevent job losses from becoming permanent, and support vulnerable households. - Improved execution and better targeting are priority. - Monetary policy: - Given muted inflation, monetary policy should remain accommodative. - Greater exchange rate flexibility within the current band would facilitate external adjustment and better management of domestic liquidity conditions. ### Revenue mobilization and fiscal medium-term strategy - Mobilizing revenues is critical to rebuild fiscal buffers and support durable, inclusive, and green growth. - A gradual fiscal adjustment should start once the recovery is cemented, with policy efforts centered on revenue mobilization. - Revenue mobilization would create space to scale up priority social and infrastructure spending to support growth and boost climate resilience. - Continued efforts to enhance revenue collections and upgrade fiscal policy frameworks will help safeguard fiscal sustainability. ### Financial sector resilience and reforms - Financial system resilience should be bolstered. - Policy sequencing and reforms: - Corporate support for viable firms should be gradually phased out and loan classification rules normalized. - Private debt restructuring frameworks should be enhanced to reduce economic costs associated with any capital reallocation. - Continued strong supervision together with timely efforts to address problem loans and strengthen regulatory and supervisory frameworks will help address financial system risks. - Banks' capital positions need to be further strengthened over the medium term and Basel II requirements adopted by early 2023 to buttress the sector's resilience. ### External position and related reforms - Achieving a lasting balance in the external position will require steadfast reform efforts. - Observations and recommendations: - The external position in 2019 was substantially stronger than warranted by fundamentals and desirable policies, reflecting underlying distortions. - Removing structural impediments for investment and enhancing the social safety net to discourage excessive household savings should help reduce external imbalances. - Modernization of the monetary policy framework to strengthen the transmission of conventional interest rate policies and continued efforts to allow greater two-way exchange rate flexibility will also attenuate the need for reserve accumulation. - Imposition of countervailing duties on Vietnam would be counterproductive for reducing external imbalances as this could potentially impinge on desirable monetary policy decisions and discourage beneficial exchange rate flexibility. ### Structural reforms to boost productivity and resilience - There is significant scope to boost productivity and enhance resilience of the economy. - Recommended priorities: - Continue efforts to improve the business climate, such as streamlining administrative and tax procedures and reducing the footprint of the state. - Ensure a level playing field, particularly for SMEs. - Strengthen anti-corruption efforts. - Alleviate labor skill mismatches, and tackle informality. - Renew efforts to address data gaps and improve data quality. *Source: IMF staff summary of paragraphs 47–53.* ### 54. It is proposed that the next Article IV consultation with Vietnam take place on the ### It is proposed that the next Article IV consultation with Vietnam take place on the standard 12-month cycle. ### High-frequency indicators in wake of COVID-19 - Purchasing Manufacturing Index (PMI) rebounded strongly following the second wave of a localized outbreak. - Retail sales is also gradually recovering. - Services demand remains weak (Retail Sales of Trade Goods and Services: series shown as nominal, y/y percent changes). - Index of Industrial Production (IIP) picked up, driven by pharmaceutical and robust electronics production. - Firm dynamics: Newly Established Firms and Enterprises that Suspended Operation tracked monthly; enterprise entry and exit shown (Number of enterprises, in thousands). ### Growth, labor market, and inflation dynamics - Following a sharp slowdown in Q2, growth picked up, supported by public investment and stronger trade. - The recovery has been broad-based across industries. - Labor market: affected household businesses and registered businesses experienced labor on leave, labor suspended working, and labor lost job/quit working; unemployment and underemployment rates increased (Affected Labor, Unemployment and Underemployment Rate shown). - Investment: The decline in private investment was partially offset by higher public investments; Investment Capital by Sources shows State Budget, Households and Individuals, and FDI contributions. - Credit growth slowed in the first three quarters of 2020 (Credit growth and Credit/Deposit Ratio charts). - Inflation remains subdued, reflecting weak private consumption; Headline and Core inflation series shown (Core excludes raw food, energy, administered prices, health-care and education). ### External sector and buffers - Goods trade rebounded from its June trough; exports and imports series shown (3mma, y/y percent change). - Exports: electronics and machineries experienced the strongest rebound; textile and garments exports remained weak (Exports by Industries, 3mma, y/y percent change). - Services trade plummeted as tourism arrivals dropped to near-zero (Service Exports and Service Imports series). - After buoyant FDI in 2019, inflows slowed, particularly in manufacturing; FDI Commitments and Disbursements presented in billions of U.S. dollars (Projection included). - Other financial inflows also slowed; Financial Account (net) shown in percent of GDP with projection. - Reserves continued to accumulate as the current and financial accounts remained in surplus; Gross international reserves series in billions of U.S. dollars and months of prospective GNFS imports shown. ### Fiscal developments and reform priorities - Fiscal position worsened in 2019, contributing to an uptick in PPG debt. - Public and Publicly Guaranteed Debt increased (series in percent of GDP; statutory debt limit shown). - Tax revenues can be improved, especially VAT collection (VAT series and revenues breakdown: Oil revenues 0.6, CIT 3.1, VAT 4.7, Trade 1.3, PIT 1.4, Other tax revenue 2.3, Non-tax revenue 2.5; change since 2013 chart). - Reforms are needed to rationalize the wage bill and improve health infrastructure (benchmarking for Wage Bill and Employment; Health Security and Capabilities (GHS index 0-100) comparisons). - Consolidated state budgetary operations and budgetary projections presented (Tables 4a and 4b: revenue, tax composition, expenditure, net lending/borrowing, public debt as percent of GDP). ### Banking sector vulnerabilities and financial soundness - Banking system profitability improved before the pandemic but remains low by ASEAN standards (Return on Assets; Regional Comparison: Return on Assets). - Capital adequacy: level of capital adequacy ratio is low, particularly in some state-owned commercial banks, and is lower than in ASEAN peers (Vietnam: Capital Adequacy Ratios; Regional Comparison). - Household leverage has increased rapidly in recent years (Selected Countries: Household Debt-to-GDP Ratio; Change 2013-19 and 2019 levels). - Household and corporate balance sheet strains will push up NPLs; NPLs and other impaired loans series shown with IMF staff estimates for 2020. - Financial Soundness Indicators (2013–19): Regulatory Capital to Risk-Weighted Assets, Regulatory Tier 1, Non-performing Loans to Total Gross Loans, Return on Assets, Return on Equity, Interest Margin to Gross Income, Non-interest Expenses to Gross Income, Liquid Assets to Total Assets (exact series provided in Table 6). ### Productivity gap and resource misallocation - Despite recent progress, Vietnam still lags peers in terms of productivity (Productivity Growth index, 2000=1: China, Thailand, Malaysia, Korea, Vietnam). - Productivity is mainly dragged down by the domestic private sector (TFP by Firm Ownership, 2018; Private domestic = 1 baseline). - Aggregate productivity can be increased by reducing resource misallocation through: - a flexible labor market (Employment protection legislation index), - technological catch-up and FDI-driven technology transfer (Ranking on Technology Absorption and Transfer), - cutting red tape (Business Dynamism and Administrative Burdens rankings), - fighting corruption (Control of Corruption, 2018; scores shown where lower scores indicate weaker governance). ### Key statistics and projections (selected exact figures) - Real GDP (percent change): 2016 6.7; 2017 6.9; 2018 7.1; 2019 7.0; 2020 2.9; 2021 projection 6.5 (Table 1). - CPI (period average): 2016 2.7; 2017 3.5; 2018 3.5; 2019 2.8; 2020 3.2; 2021 projection 4.0 (Table 1). - Public and publicly guaranteed debt (end of period, percent of GDP): 2016 47.6; 2017 46.3; 2018 43.6; 2019 43.4; 2020 46.6; 2021 projection 47.1 (Table 1). - Gross international reserves (in billions of U.S. dollars): 2016 36.7; 2017 49.2; 2018 55.3; 2019 78.5; 2020 94.8; 2021 projection 113.7 (Table 1). - Current account balance (including official transfers, percent of GDP): 2016 -0.6; 2017 1.9; 2018 3.8; 2019 2.2; 2020 2.3; 2021 projection 1.6 (Table 3 projections). - Net lending (+)/borrowing (-) (in percent of GDP): 2019 -3.3; 2020 -5.4; 2021 projection -4.7 (Table 1). - Bank NPLs (Non-performing Loans to Total Gross Loans): historical values include 2013 3.1; 2014 2.9; 2015 2.3; 2016 2.3; 2017 1.8; 2018 1.8; 2019 1.6 (Table 6). IMF staff estimates for 2020 NPLs and other impaired loans presented in chart (2020 data is IMF staff estimates). - Monetary aggregates: Credit to the economy (percent change, end of period) 2016 18.8; 2017 17.4; 2018 12.7; 2019 12.8; 2020 12.1; 2021 projection 12.3 (Table 1). *International Monetary Fund staff report excerpt: Vietnam — high-frequency indicators, macroeconomic developments, fiscal and financial sector analysis, and medium-term projections as presented in the source content.* ### Annex I. Progress Against IMF Recommendations ### Annex I. Progress Against IMF Recommendations ### Fiscal Policies - Recommendations: - Continue gradual fiscal consolidation and tackle PPG debt. - More active cash management is needed to minimize cost of borrowings. - Improve the quality of fiscal adjustment by undertaking reforms in tax policy and administration. - Conduct a broad tax policy review. - Continue to rationalize the public sector wage bill and undertake civil service reforms. - Address unfunded pension liabilities. - Improve public financial management and fiscal data, accounting and reporting. - Actions since 2019 Article IV Consultations: - The 2020 budget envisaged continued lowering of the budget deficit. New government guarantees continue to be strictly limited. - Cash held at commercial banks is swept into the SBV daily, effective early November 2019. Examination of appropriate level of cash buffers’ has been completed. - The law on revenue administration has been strengthened through implementation of the 2019 Tax Administration Law, with an emphasis on better control of enterprises engaging in related party transactions, and of e-commerce, while promoting greater use of e-documents and e-invoices. - While delayed, the authorities intend to conduct a broad tax policy review to develop the Tax System Reform Strategy for 2021–30. - Vietnam continues to gradually lower the public sector headcounts and is streamlining administrative units in localities. - Retirement ages will be gradually raised (from 60 to 62 for men, and 55 to 60 for women), in line with provisions of the new Labor Code, which will speed up pension fund reform. - Fiscal accounting and reporting have continued to improve. MOF is scheduled to launch its first Vietnam GFS manual before end-2020 and will submit GFS data (for 2003–2017) to the IMF. - A comprehensive Treasury modernization program is underway focusing on 6 key areas: budget execution, treasury single account, active cash management, internal audit, financial reporting and information systems. - Vietnam amended and supplemented provisions for implementation of the Auction Law to enhance e-procurement, competitiveness, transparency and efficiency in procurement, including in land allocation procedure. ### Monetary Policy - Recommendations: - Credit growth should gradually come down. - Continue to modernize the monetary framework. - Allow some nominal exchange rate appreciation. - Actions since 2019 Article IV Consultations: - Credit growth slowed in the first three quarters of 2020. - The modernization of the monetary policy framework is ongoing, with the SBV enhancing its analytical and forecasting capacity through IMF-supported FPAS training. - Market exchange rate slightly appreciated in 2019. ### Financial Sector Policies - Recommendations: - Recapitalize state-owned commercial banks (SOCBs). - Strengthen the macroprudential framework, including measures to deal with potential risks from the rise in consumer and mortgage loans. - Strengthen AML system. - Actions since 2019 Article IV Consultations: - The authorities have taken steps to help recapitalize SOCBs, including by revising the legal procedures under which the budget can recapitalize SOCBs. - Macro-prudential measures to limit risks stemming from real estate and consumer loans and further reduce maturity mismatches were introduced. - Assessment of highly suspect cases has been strengthened and detailed guidelines provided on international electronic transaction reporting requirements. ### Structural Policies - Recommendations: - Reform drive needs to be broadened and accelerated to tackle remaining barriers for investments, including to high quality infrastructure. - Improve income and asset declarations, strengthen judiciary and legal framework. - Actions since 2019 Article IV Consultations: - A new PPP law has been approved to help accelerate investment in high-quality infrastructure. - A new Public Investment Law was passed to improve public investment management and efficiency. - The government is further promoting e-government, reducing regulations and licensing requirements, including business licenses, to simplify and improve the business environment. - In 2020, improvements were introduced to strengthen the implementation of the revised Law on Judicial Assessment, the 2020 Law on Enterprise, the 2020 Law on Investment, and the revised Law on Construction. - The Anti-Corruption Law has been accompanied by an extensive communication strategy. - A decree on asset and income control is expected in 2020, while more time will be needed to operationalize the National Database on asset and income control. *Source: 1vnmea2021001 - Annex I. Progress Against IMF Recommendations* ### Annex II. Vietnam’s Containment of COVID-19 ### Summary of outcomes and timeline - With a population of almost 100 million, Vietnam registered only 1,367 cases and 35 deaths as of December 7. - Two main episodes of domestic outbreaks: - First outbreak: early-March to mid-April, followed by almost 100 days without community transmission. - Second outbreak: late-July, mostly in Danang, spread somewhat to surrounding provinces; followed again by a long period of no community transmission. ### Key containment measures and outcomes - Early and nationwide interventions: - Government preparations began in early January, issuing guidance on disease prevention and detection and adopting a transparent and consistent communication strategy. - Measures included wearing masks in public venues ahead of WHO advice, health screening at airports, school closures, public event cancellations, travel bans on foreign visitors, and 14-day quarantine for international arrivals. - Nationwide 3-week curtailment of non-essential activities starting April 1. - Testing, tracing, and quarantine: - Vietnam conducted slightly more than 1.4 million tests, which is a small share of its population of 97 million. - Nearly 1,000 people have been tested per confirmed case. - Aggressive contact tracing and targeted testing isolated cities, neighborhoods, and groups near confirmed cases. - Localized response to second outbreak: - More localized strict social distancing measures were re-introduced in Danang, including a ban on public gatherings of more than 2 individuals and a 5-week curtailment of travel to/from Danang. - Containment measures had a much greater impact in Danang than at the national level and than in Hanoi and Ho Chi Minh City, as evidenced by mobility indicators. - Public awareness and digital tools: - Large-scale public awareness campaign using mass media, government website, grass-root organizations, posters, text messages, voice messages, and a contact tracing app in big cities. *Source: 1vnmea2021001 - Annex I. Progress Against IMF Recommendations* ### Annex III. Labor Market: Effects of COVID-19 and Long-Term Perspectives ### A. Labor Market Implications of the COVID-19 Shock - Aggregate impacts: - The authorities estimate that over 30 million workers were impacted through job and income reductions and/or losses. - The labor force declined for the first time in over a decade in the second quarter, decreasing by over 4 percent (y/y). - Labor participation rate fell by 4 percentage points in Q2. - Employment shrunk, with almost 2.5 million jobs destroyed relative to the previous quarter (a 4.8 percent decline y/y). - Average monthly wages fell by 2.8 percent y/y. - Unemployment increased (22 percent), especially underemployment (over 50 percent). - Partial recovery in Q3: size of labor force and employment bounced back, but underemployment accounts for about 25 percent of the job gains and average monthly wages remain down y/y. - Heterogeneity across industries, gender, and firm ownership: - Largest employment drops: hotels and restaurants, education and training. - More modest declines: manufacturing, wholesale and retail trade. - Modest expansions: transportation and warehouse. - Female workers experienced a decline of almost 6 percent in Q2-2020 (y/y), compared with a decline of 3.7 percent for male workers. - Hardest-hit workers were employed by the domestic private sector (especially females); SOEs and FDI firms saw employment rise slightly. - Policy implications (near-term): - Near-term policies should center on sustaining firms and employment, while fostering market reallocation as the recovery gets underway. - Policy focus should pivot to facilitating reallocation of workers toward firms generating new jobs (“protect the worker, not the job”). - Suggested measures include hiring subsidies and increased training targeted to develop skills needed for new openings. ### B. Informality, Skill Mismatches, and Long-Term Transformation - Extent and patterns of informality: - Share of informal employment in total employment is above 56 percent (as of 2018), and has been relatively persistent. - Share of vulnerable employment (contributing family workers and self-employed as a percentage of total employment) stands at over 50 percent. - Informality is more prevalent in construction and services (restaurants, transport, entertainment) than in manufacturing. - FDI-dominated industries, such as electronics or textiles, have the lowest informality rates. - Around a third of overall informal employment takes place within formal firms. - Link with human capital and skill mismatches: - Informality declines with educational attainment: almost 80 percent of workers with a primary or lower education are informally employed; share declines monotonically with education. - Informality still accounts for over 10 percent of employment for workers with a tertiary education, especially among the young. - Less than a third of informal workers were trained for their jobs; over two-thirds of formal workers were in jobs that matched with their training. - Policy implications (long-term): - Policies should aim at increasing market flexibility, reducing information gaps, and matching education and technical training with labor demand. - Increase the payoff from hiring formal workers by improving human capital and firm-worker matching and decreasing administrative costs. - Promote close collaboration between firms and institutions to foster development of worker skills in line with labor demand. *Source: 1vnmea2021001 - Annex I. Progress Against IMF Recommendations* ### Annex IV. Business Dynamism and Firm Entry and Exit ### Annex IV. Business Dynamism and Firm Entry and Exit ### Overview of firm entry and exit dynamics - Firm net entry rate has been strongly positive in Vietnam, including during the COVID-19 crisis. - Newly registered (formal) firms have significantly outnumbered exiting companies in recent years, reflecting progress with pro-market reforms and high growth rates. - Exit pathways under the legal framework: - Firms can temporarily suspend operations for up to one year during hardship or file for immediate liquidation. - After temporary suspension, firms can resume normal operations or proceed with dissolution. - The number of firms temporarily suspending operations has been relatively close to the number of firms resuming operations, resulting in a low permanent exit rate in recent years. - Temporary suspension policy detail: - Firms that file for a temporary suspension of operations are exempt from the license tax (a tax based on the firm’s equity), as long as the suspension lasts for the full fiscal year. However, they might still be liable for other taxes and any debt incurred. - Evidence suggests liquidation procedures are time consuming and costly, leading to informal mechanisms that dissolve or change ownership of firms. ### Cross-country and size comparisons - Entry rates: - Newly registered firms in Vietnam on average accounted for almost 25 percent of the total number of firms in activity between 2016 and 2019. - In 2019, new firms in Vietnam accounted for 18 percent of the total firms in operation (comparable to Korea (15), the UK (14), and Turkey (13)). - Exit rates: - Exit rates are high when counting all inactive firms in a given year (temporarily suspending operations and those completing or waiting to complete dissolution). - When limited to firms that have completed dissolution, the exit rate is much smaller and comparable to regional peers such as Thailand. - Size of entrant firms: - On average, new firms in Vietnam hire 9.5 employees. - Entrant firms in Vietnam are 2–4 times larger than entrant firms in OECD countries by employment. - Entrant firms in Vietnam are also considerably larger than entrants in other emerging market economies such as Brazil or Turkey. ### Formalization and informality - Entry can include preexisting informal firms choosing to formalize: - Informality is pervasive; many firms start informally and eventually register. - Evidence: Vietnamese firms, on average, wait over 13 months since their establishment to formalize. - Comparing entrants to young firms: accounting for formalization delays, employment by “entrants” in Vietnam is in line with employment by 2-year old firms in other emerging market economies like Brazil. - Implication: Vietnam’s high observed entry rate could reflect a sizable number of informal firms formalizing (for instance, following policies that reduce formalization costs). ### Trends in entrant firm characteristics (COVID-19 period and beyond) - Entering firms have become smaller by employment but have seen a marked increase in registered capital (equity) in the wake of the pandemic. - Possible explanations: - Reduction in formalization costs lowering the minimum size at which potential entrants register. - Entrants becoming more capital-intensive, consistent with a global trend of declining labor share of value added (cited: Karabarbounis and Neiman 2014) and technological shifts. - Supporting evidence: - The 2019 PCI Report finds automation in Vietnam has increased at a higher-than-expected pace, partly due to reductions in training costs and global integration efforts. - The COVID-19 pandemic likely accelerated digital technology adoption and favored production of electronics and other higher-technology-content goods. ### Policy implications and recommendations - Facilitate entry/formalization: - Reduce entry costs for formal firms (formalization costs), including improvements to the business environment, to dissuade young firms from remaining informal and to foster growth as they expand. - Streamline exit processes: - Simplify and speed up dissolution and bankruptcy procedures to allow faster reallocation of productive factors and improve overall economic efficiency. - Expected outcomes: - Reducing formalization costs and streamlining exit would help resource reallocation toward more productive uses and boost productivity. - Caution: - If formalization policies reduce the number of informal firms, observed formal entry rates may fall over time unless informal firm entry offsets that decline. *Prepared by Federico Díez, Alexandre Sollaci, and Anh Thi Ngoc Nguyen. Source: Annex IV. Business Dynamism and Firm Entry and Exit (IMF staff analysis).* ### 7. Cross-country comparisons highlight the scope to narrow external imbalances further ### 7. Cross-country comparisons highlight the scope to narrow external imbalances further ### Cross-country comparisons: savings and investment patterns - Private saving rate - Historically, the private saving rate is broadly in line with other East Asian countries. - It is somewhat higher than in countries at a similar level of economic development reflecting pervasive informality and weak social safety nets. - Gross private fixed capital formation - Gross private fixed capital formation has been lower than in most countries in the region. - FDI and sector composition - The FDI sector, which is strongly integrated with global value chains, accounts for close to 30 percent of total capital formation, suggesting that domestic investments excluding the FDI-sector are even lower. - Public investment - The level of government investment (above 6 percent of GDP) is comparable to regional peers. - Investment needs, particularly in the transportation and power generation sectors, remain large. ### Drivers of low domestic (non-FDI) investment - Structural and institutional bottlenecks cited: - Onerous regulatory and administrative burdens. - Concentration of landownership in state hands. - Weaknesses in financial intermediation of the external surpluses through the banking system. - Domestic sector profile - The domestic sector is dominated by SMEs and informal household businesses. - Domestic sector investment has increased in recent years, but public investment has declined (as shown in the time series of Gross Capital Formation by Sectors). ### Public and external debt sustainability (Annex VII) - Current debt stock and short-term outlook - Vietnam’s public and publicly guaranteed (PPG) debt is estimated at 43.4 percent of GDP in 2019. - Under staff’s baseline projections, PPG debt would increase in 2020 to 46.6 percent of GDP owing to COVID-19, before declining modestly to around 45 percent of GDP in 2025. - Staff continues to assess the debt sustainability risk as low to moderate. - Framework and coverage - The debt sustainability analysis framework for market access countries (MAC DSA) is used. - The analysis covers public domestic and external debt, central and local government, and debt guaranteed by the government for state owned enterprises (SOEs) and specialized financial institutions (SFIs). - Debt guarantees stood at above 5 percent of GDP in 2019 and are assumed almost constant as a ratio to GDP over the medium-term. - Public debt of Vietnam’s social security (VSS) is not included; cross-debt of about 10 percent of GDP is noted and its inclusion would markedly improve the medium-to long-term profile, though rapid aging could deplete VSS assets and add to public debt in the early 2030s. - Macro-fiscal baseline assumptions (Figure 1) - Growth declines from 7.0 percent in 2019 to a projected 2.9 percent in 2020 and stabilizes at potential (6.6 percent) in the medium term. - A primary fiscal deficit of 4.0 percent is projected in 2020 and assumed to decline to below 2 percent of GDP in 2025. - Debt-stabilizing primary balance cited as 2.8 percent of GDP. - Realism of baseline assumptions - Median forecast errors for real GDP growth, primary balance and inflation during 2011–19 are small (around -0.4 percent), suggesting no evidence of systematic projection bias. - The maximum projected 3-year adjustment in CAPB as a percent of GDP over the projection period is considered realistic given experiences of other MACs. - Public debt projections under baseline - Under the baseline, the PPG debt-to-GDP ratio is projected to increase by around 3 percentage points to 46.6 percent of GDP in 2020. - Privatization receipts and a drawdown of government deposits partially compensate for the primary deficit (1.0 percent of GDP). - PPG debt is projected at about 45.0 percent of GDP by 2025, below the government ceiling of 65 percent of GDP. - The share of foreign currency-denominated debt is projected to decrease from 40 percent of total debt in 2019 to about 30 percent in 2025. - Alternative scenarios (Figure 2) - Constant primary balance scenario: if the deficit remained at its 2020 level, PPG debt could increase to around 51 percent of GDP over the medium-term. - Historical scenario (real GDP growth, primary balance and real interest rates set at historical averages): gradual decrease of PPG debt to about 43 percent in 2025. - Standard contingent liability shock of around 12 percent of GDP (representing 10 percent of banking sector assets): puts PPG debt at about 56 percent of GDP by 2025. - Macro-fiscal stress tests - Vietnam is more vulnerable to real interest rate and combo shocks, but these do not pose an immediate risk to debt sustainability. - A real interest rate shock (effective interest rate increased by more than 600 basis points in 2021–2025 compared to baseline) would raise PPG debt to around 48 percent of GDP in 2025. - A combined macro-fiscal shock in 2021 would increase PPG debt to about 52 percent of GDP by 2025 (below the government ceiling of 65 percent, but close to the authorities’ envisaged revised debt ceiling of 55 percent of GDP). - Dynamic simulations - Negative-case scenario: PPG debt could reach about 56 percent of GDP with 10 percent likelihood by 2025. - Positive-case scenario: combination of positive shocks could reduce debt-to-GDP ratio to 30 percent with a 10 percent probability in 2025. - Heat map assessment - The heat map shows a low risk of debt distress: debt-to-GDP and the GFN-to-GDP ratios remain below the 70 and 15 percent thresholds, respectively, under both the baseline and all stress scenarios. - The assessment highlights possible risks in Vietnam’s debt profile, notably in terms of external financing requirements, largely reflecting COVID-19 related pressures. *1vnmea2021001 - 7. Cross-country comparisons highlight the scope to narrow external imbalances further* ### 10. External debt sustainability (Figure 6 and Table 1). Vietnam’s total external debt-to-GDP ### 10. External debt sustainability (Figure 6 and Table 1). Vietnam’s total external debt-to-GDP ### Key findings and headline projections - Vietnam’s total external debt-to-GDP ratio was 37.2 percent in 2019. - Under the baseline, external debt would increase to about 38 percent of GDP in 2021 before stabilizing around 36 percent of GDP over the medium-term. - The external debt-to-exports ratio and gross external financing needs remain manageable at below 50 and 12 percent, respectively. - Table 1 baseline external debt series (in percent of GDP): 2015: 33.0; 2016: 35.2; 2017: 39.0; 2018: 36.2; 2019: 37.2; 2020: 37.6; 2021: 38.0; 2022: 37.4; 2023: 36.9; 2024: 36.6; 2025: 36.4. - Change in external debt (in percent of GDP) from Table 1: 2015: 2.7; 2016: 2.1; 2017: 3.8; 2018: -2.8; 2019: 1.0; 2020: 0.5; 2021: 0.4; 2022: -0.7; 2023: -0.5; 2024: -0.3; 2025: -0.2; debt-stabilizing non-interest current account: 0.0. - Identified external debt-creating flows (in percent of GDP) (2015–2025): 2015: -4.2; 2016: -6.9; 2017: -7.5; 2018: -10.0; 2019: -11.2; 2020: -7.4; 2021: -8.9; 2022: -8.3; 2023: -6.7; 2024: -6.2; 2025: -5.8; stabilization: 0.0. - External debt-to-exports ratio (in percent) by year from Table 1: 2015: 45.2; 2016: 46.9; 2017: 47.3; 2018: 42.5; 2019: 43.1; 2020: 44.9; 2021: 43.2; 2022: 42.6; 2023: 42.5; 2024: 42.9; 2025: 43.4. - Gross external financing need (in billions of US dollars) from Table 1: 2015: 17.0; 2016: 15.6; 2017: 25.0; 2018: 30.9; 2019: 20.6; 2020: 33.3; 2021: 32.4; 2022: 39.3; 2023: 48.9; 2024: 56.1; 2025: 61.6. - Gross external financing need (in percent of GDP) series shown in Table 1: 2015: 7.2; 2016: 6.2; 2017: 9.0; 2018: 10.2; 2019: 6.3; 2020: 11.0; 2021: 10-Year; 2022: 10-Year; 2023: 9.7; 2024: 8.8; 2025: 9.7; 11.0; 11.5; 11.6 (note: Table 1 layout lists multiple year-decade labels; preserve numeric entries exactly as shown). ### Vulnerabilities, shocks, and stress-test results - Vietnam’s external debt is vulnerable to: - Real depreciation and current account shocks. - Growth and interest rate shocks have only limited impact on the external debt dynamics. - Upside risk: the currency’s observed long-term real appreciation trend is an upside risk. - Figure 6 bound-test highlights (external debt in percent of GDP): - Baseline average projection (box figure): 36. - Historical average (box figure): 31. - Interest rate shock scenario label: "i-rate shock" with value 37. - Current account (CA) shock scenario box figure: 42. - Combined shock scenario box figure: 40. - Combined shock with 30 percent depreciation scenario box figure: 53. - Real depreciation shock scenario box figure: 30. - Note on shocks in Figure 6: - Individual shocks are permanent one-half standard deviation shocks. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent occurs in 2021. - Growth shock inputs shown in Figure 6: - Baseline: 2.4; Scenario: 2.6; Historical: 2.5 (growth shock in percent per year). - Baseline: 6.8; Scenario: 6.5; Historical: 6.5 (another growth-related box figure). - Baseline: 1.7; Scenario: 0.4; Historical: 2.1 (another growth-related box figure). ### Underlying macroeconomic assumptions (selected, from Table 1) - Real GDP growth (in percent) series: 2015: 7.0; 2016: 6.7; 2017: 6.9; 2018: 7.1; 2019: 7.0; 2020: 6.5; 2021: 0.6; 2022: 2.9; 2023: 6.5; 2024: 7.2; 2025: 6.9; stabilization: 6.8; long-run: 6.6. - GDP deflator in US dollars (change in percent) series: 2015: -4.9; 2016: -0.2; 2017: 2.8; 2018: 1.9; 2019: 1.0; 2020: 3.1; 2021: 4.6; 2022: 1.3; 2023: 0.3; 2024: 2.5; 2025: 2.6; stabilization: 2.9; long-run: 2.8. - Nominal external interest rate (in percent): 2015: 2.4; 2016: 2.0; 2017: 2.4; 2018: 2.9; 2019: 2.4; 2020: 2.5; 2021: 0.4; 2022: 2.3; 2023: 2.3; 2024: 2.3; 2025: 2.4; stabilization: 2.4; long-run: 2.4. - Growth of exports G&S (US dollar terms, in percent) (selected years): 2015: 7.4; 2016: 9.1; 2017: 20.7; 2018: 13.3; 2019: 9.9; 2020: 16.5; 2021: 8.1; 2022: 1.4; 2023: 12.2; 2024: 9.6; 2025: 8.4; stabilization: 8.2; long-run: 7.7. - Growth of imports G&S (US dollar terms, in percent) (selected years): 2015: 11.5; 2016: 6.8; 2017: 21.4; 2018: 11.0; 2019: 7.5; 2020: 13.9; 2021: 6.6; 2022: 2.3; 2023: 12.7; 2024: 10.5; 2025: 10.5; stabilization: 8.7; long-run: 7.8. - Current account balance, excluding interest payments (in percent of GDP): 2015: -0.2; 2016: 0.9; 2017: 0.2; 2018: -2.9; 2019: -4.6; 2020: -3.0; 2021: -3.1; 2022: -2.4; 2023: -1.2; 2024: -0.9; 2025: -0.8. ### Interpretation and policy implications reflected in the material - External debt dynamics are manageable under the baseline but sensitive to external shocks: - Real depreciation and current account shocks can materially raise external debt-to-GDP. - Growth and interest rate shocks have limited impact on external debt dynamics in the presented scenarios. - The observed long-term real appreciation of the currency constitutes an upside risk to external debt outcomes. - Stress-test scenarios (Figure 6 and Table 1) show combined shocks and a large one-time real depreciation (30 percent in 2021) can push external debt substantially above baseline (e.g., combined shock with 30 percent depreciation: 53 percent of GDP in the box figure). *Source: IMF staff (figures and Table 1 presented in the provided content).* ### Annex IX. Corporate Vulnerabilities and ### Annex IX. Corporate Vulnerabilities and Implications of COVID-19 ### Pre-crisis corporate balance sheet conditions - Corporate sector dominated by SMEs and was less profitable than regional peers (ORBIS data). - Cash flow and debt servicing capacity particularly weak for SMEs concentrated in hardest-hit sectors: travel, hospitality, textile and garments. - Median interest coverage ratio (ICR) in entertainment, hotel and travel sectors was lower than 1, indicating over half the firms in those sectors already faced problems servicing debt. - For over half the firms in the hardest-hit sectors, cash stock covered less than 2 months of operating expenses. - Larger firms: more profitable and stronger cash flows but more leveraged and account for bulk of domestic banks’ corporate exposure. - Data sources cited: Bureau van Dijk’s ORBIS; 2017 Vietnam Enterprise Survey; IMF staff calculations. ### COVID-19 stress-test projections: liquidity and solvency impact - Method: Staff mapped baseline forecasts into sectoral revenue losses across 22 manufacturing and service sectors using Vietnamese Enterprise Survey; projected corporates’ liquidity (net cash) and solvency (debt servicing capacity) based on outstanding debt terms and cost evolution; assumed limited short-run flexibility to reduce operational expenses. - Key projected outcomes: - Around half the small and micro firms could face negative cash flows, mostly in the hardest-hit sectors. - Firms’ solvency could deteriorate markedly, raising default risk. - On average, about 45 percent of the debt would be in distress, compared to 28 percent before the COVID-19 shock. - Sectors such as hospitality, travel, and entertainment could see debt-at-risk increase from 50 to 80 percent. - The crisis could put many SOEs, particularly airlines, in debt distress; other SOE-intensive industries (construction, agriculture, utility) are less affected. ### Propagation through production linkages and labor market implications - Upstream and downstream linkages imply broader propagation of shocks across industries via input-output connections. - Domestic suppliers are exposed to final producers (e.g., textiles, auto) vulnerable to external demand shocks and global supply chain disruptions. - Manufacturing industries rely heavily on transportation services. - Retail, hospitality, tourism and entertainment sectors provide services to each other. - Labor market risks: - Firms with weak initial balance sheets accounted for a sizeable share of employment pre-pandemic. - Nearly half the workers were employed under informal arrangements (e.g., temporary or part-time contracts). - Workers in affected industries face higher risk of wage cuts or layoffs under a protracted shock. ### Policy measures, effectiveness, and further needs - Simulation results on policy measures: - The range of fiscal and credit measures implemented in response to COVID-19 help alleviate liquidity pressures. - Recently introduced policies mitigate immediate risk of corporate default and layoffs, bringing the share of debt-at-risk of default back to pre-crisis level; vulnerable debt (ICR<2) would also decline significantly. - Remaining needs: - A more protracted crisis will require further targeted policy support to address solvency risks. *Prepared by Sophia Zhang and Anh Nguyen; based on IMF staff analysis using ORBIS and the 2017 Vietnam Enterprise Survey.* ### References ### 1vnmea2021001 - References ### References - Arndt, C., F. Tarp, and J. Thurlow (2015) “The Economic Costs of Climate Change: A Multi-sector Impact Assessment for Vietnam”, Sustainability 7: pp. 4131–4145. - Buffie, Edward E., Andrew Berg, Catherine Pattillo, Rafael Portillo, and Luis-Felipe Zanna (2012) “Public Investment Growth, and Debt Sustainability: Putting Together the Pieces”, IMF Working Paper WP/12/144. Washington, DC: International Monetary Fund. - Ghazanchyan, Manuk, Ricardo Marto, Jiri Jonas, and Kaitlyn Douglass (2017) “Collect More, Spend Better: Public Investment in Asian Frontier Markets”, IMF Working Paper WP/17/10. Washington, DC: International Monetary Fund. - IMF (forthcoming) “Fiscal Policies to Address Climate Change in Asia and the Pacific: Opportunities and Challenges”, Joint APD-FAD Paper. Washington, DC: International Monetary Fund. - IMF (2020) “Investing in a Sustainable, Inclusive, and Green Recovery”, Chapter 2 in Fiscal Monitor, October 2020. Washington, DC: International Monetary Fund. - IMF (2018) “Public Investment in the Face of Natural Disasters: A Model Application to Solomon Islands”, Solomon Islands Selected Issues Paper, IMF CR 18/73. Washington, DC: International Monetary Fund. - IMF (2017) “Environment and Climate Change”, Vietnam Selected Issues Paper, IMF CR 17/191. Washington, DC: International Monetary Fund. - Marto, Ricardo, Chris Papageorgiou, and Vladimir Klyuev (2018) “Building Resilience to Natural Disasters: An Application to Small Developing States”, Journal of Development Economics 135: pp. 574-586. ### Vietnam staff report informational annex metadata - Document title: VIETNAM STAFF REPORT FOR THE 2020 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX - Prepared by: Asia and Pacific Department (In consultation with other departments) - Date: January 13, 2021 ### Fund relations — Membership and Quota - Joined: September 21, 1956; Article VIII - Quota (General Resources Account): 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 - SDR Department net cumulative allocation: 314.79 SDR Million — 100.00 percent Allocation - SDR Department holdings: 276.14 SDR Million — 87.72 percent - Outstanding Purchases and Loans: None ### Latest financial arrangements (In millions of SDRs) - ECF1: Date of Arrangement 04/13/2001 — Expiration Date 04/12/2004 — Amount Approved 290.00 — Amount Drawn 124.20 - ECF1: Date of Arrangement 11/11/1994 — Expiration Date 11/10/1997 — Amount Approved 362.40 — Amount Drawn 241.60 - Stand-By: Date of Arrangement 10/06/1993 — Expiration Date 11/11/1994 — Amount Approved 145.00 — Amount Drawn 108.80 - Note: 1 Formally PRGF. ### Projected payments to Fund (In millions of SDRs, based on existing use of resources and present holdings of SDRs) - Forthcoming charges/interest and totals: - 2020: Charges/interest 0.05 — Total 0.05 - 2021: Charges/interest 0.05 — Total 0.05 - 2022: Charges/interest 0.05 — Total 0.05 - 2023: Charges/interest 0.05 — Total 0.05 - 2024: Charges/interest 0.05 — Total 0.05 ### Exchange arrangement - Classified as: defacto stabilized (de jure: managed floating) - SBV actions: - August 2015: widened the VND/USD trading band to +/-3 percent from +/-1 percent while devaluing the central parity by one percent. - January 2016: announced the VND/USD rate would be adjusted daily based on (i) the previous day’s weighted average dong/USD exchange rate; (ii) a weighted average of movements in dong exchange rates vis-à-vis seven other important trading partners’ currencies; and (iii) domestic macroeconomic conditions. - Vietnam maintains an exchange system free of restrictions on making payments and transfers for current international transactions, except for exchange restrictions imposed for security reasons notified pursuant to Executive Board Decision No. 144- (52/51), 8/14/52. ### Article IV Consultations and Technical Assistance - Article IV cycle: 12-month consultation cycle. - Previous Article IV consultation: held in Hanoi during April 3–19, 2018; concluded by the Executive Board on June 19, 2019. - Technical assistance areas (recent years): statistics (government finance, external sector, price, and national accounts), reserve management, debt management, bank resolution, stress testing the banking sector, monetary operations and liquidity management. - Specific TA and activities (selected, by year): - December 2008 to January 2012: resident advisor assisted in improving banking supervision. - 2012–13: IMF-World Bank Financial Sector Assessment Program. - 2018: high level MCM-APD workshop on modernization of monetary policy framework; FAD Public Investment Management Assessment (PIMA). - 2019: ICD scoping mission for FPAS training; first FPAS TA in September; reserve management seminar in December; FAD TA on strengthening Treasury cash management; STA TA on Government Finance Statistics, National Accounts, Property Price Index, high frequency indicators and e-GDDS; CDOT and STA coordination on external sector statistics; STI organized training. - 2020: FAD TA on implementation of the 2021–30 Treasury Modernization Strategy; FAD TA on the 2021–30 Tax System Reform Strategy; FAD and MCM seminars on strengthening debt management and fiscal risk management; MCM TA on private sector external debt management; ICD FPAS TA. - Resident Representative: Mr. François Painchaud — Resident Representative for Vietnam and Lao P.D.R., based in Hanoi, since June 2019. ### Relations with other international financial institutions - World Bank: http://www.worldbank.org/en/country/vietnam - Asian Development Bank: https://www.adb.org/countries/vietnam/main ### Main websites of data (as listed) - State Bank of Vietnam (www.sbv.gov.vn) - Exchange rates - Interest rates - Balance of payments - Credit to the economy - Money Market Operation - Ministry of Finance (www.mof.gov.vn) - Government budget - Customs data - Public Debt Bulletin - General Statistics Office of Vietnam (www.gso.gov.vn) - Consumer Price Index - National accounts - Population and Employment - Investment and Construction - Socioeconomic information ### Statistical issues (As of December 14, 2020) - Assessment of data adequacy for surveillance: - General: 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), and monthly and annual data on external trade, industrial output, retail sales, and prices. - Recommendation: Improve quality of Quarterly National Accounts (QNA) estimates; compile discrete and independent quarterly GDP using consistent data sources and methods. - Current practice: GSO produces cumulative QNA estimates for the first three quarters and the fourth quarter estimate is a residual. - National Accounts base year: 2010. - Plan: Use 2020 as new benchmark year and employ chain-linking volume measures; STA providing TA for benchmarking to implement the 2008 SNA and improve coverage of informal and emerging activities. - Prices statistics: - CPI methodology: broadly in line with international standards. - Monthly CPIs: released by end of reference month. - Current weight reference period: 2014; scheduled update to 2019 in 2021. - CPI basket: scheduled to be updated in 2021. - Residential property price indexes: being developed; limited administrative data delayed progress; indexes based on surveys of property buyers and web scraping targeted for compilation by 2021. - Monthly producer and trade price indices: published quarterly. - STA technical assistance: ongoing for services producer price indexes. - Government finance statistics: - Coverage: consolidated operations of state budget covering central, provincial, district, and commune levels. - Exclusions: quasi fiscal activities of the central bank, state-owned enterprises (SOEs), and extra-budgetary funds (including Social Security Fund, Enterprise Restructuring Fund, Development Assistance Fund, Export Support Fund, local development funds, and the Sinking Fund). - Compilation basis: cash basis for final annual data; provisional data basis varies by source. - Result: Government financing data, particularly domestic bank financing, cannot be reconciled between fiscal and monetary accounts. - Recommendation: Improve coverage of fiscal data and align definitions with GFSM 2014; authorities will provide GFSM 2014 consistent data starting in 2022 supported by CDOT. - Monetary and financial statistics: - SBV reports monetary data monthly to STA using old report forms with limited information. - STA encouraged SBV to migrate to Standardized Report Forms (SRFs) with comprehensive breakdowns by counterparties and currency. - SBV action plan (October 2018): complete migration to SRFs by end-May 2019 — migration still in progress. - Financial Access Survey (FAS): SBV reports some key series including two U.N. SDG indicators. - Financial soundness indicators (FSIs): Vietnam reports 10 of the 12 core FSIs, 7 of the 13 additional FSIs for deposit takers, and one FSI for real estate markets — on a semi-annual basis — with a 12-month lag. - External sector statistics: - Balance of payments reporting: BPM6 format starting from 2013 data. - Weaknesses: compilation of external sector position statistics (IIP, external debt statistics, CDIS). - Improvements: more comprehensive external debt flows and positions available, but capacity constraints prevent compilation of an overall gross external debt position. - FDI survey: annual foreign direct investment survey last undertaken for 2015 reference year and discontinued thereafter; new administrative sources being explored. - CDOT role: regional advisor planning to work with authorities on IIP compilation, comprehensive external debt statistics, CDIS, and reserves data template. - Data standards and quality: - Vietnam participates in the enhanced General Data Dissemination System (e-GDDS) and launched a National Summary Data Page (NSDP) in July 2019. - No data ROSC are available. ### Table 1 — Common Indicators Required for Surveillance (As of May 20, 2019) — Selected entries - Exchange Rates: Date of Latest Observation Nov 2020 — Date Received 12/3/2020 — Frequency of Observation D — Frequency of Reporting D — Frequency of Publication D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation Sep 2020 — Date Received 11/4/2020 — Frequency of Observation M — Frequency of Reporting M — Frequency of Publication N/A - Reserve/Base Money: Date of Latest Observation Sep 2020 — Date Received 11/23/2020 — Frequency of Observation MM — Frequency of Reporting N/A - Broad Money: Date of Latest Observation Sep 2020 — Date Received 11/23/2020 — Frequency of Observation MM — Frequency of Reporting N/A - Central Bank Balance Sheet: Date of Latest Observation Sep 2020 — Date Received 11/27/2020 — Frequency of Observation MM — Frequency of Reporting N/A - Consolidated Balance Sheet of the Banking System: Date of Latest Observation Sep 2020 — Date Received 11/27/2020 — Frequency of Observation MM — Frequency of Reporting N/A - Interest Rates: Date of Latest Observation Dec 2020 — Date Received 12/11/2020 — Frequency of Observation D — Frequency of Reporting D — Frequency of Publication D - Consumer Price Index: Date of Latest Observation Nov 2020 — Date Received 11/29/2020 — Frequency of Observation M — Frequency of Reporting M — Frequency of Publication M - Revenue, Expenditure, Balance and Composition of Financing — General Government: Date of Latest Observation Oct 2020 — Date Received Oct 2020 — Frequency of Observation Q — Frequency of Reporting Q — Frequency of Publication Q - Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation Oct 2020 — Date Received Oct 2020 — Frequency of Observation A — Frequency of Reporting A — Frequency of Publication Semi-Annual - External Current Account Balance: Date of Latest Observation Q3 2020 — Date Received 12/1/2020 — Frequency of Observation Q — Frequency of Reporting Q — Frequency of Publication Q - Exports and Imports of Goods and Services: Date of Latest Observation Nov 2020 — Date Received 12/3/2020 — Frequency of Observation M — Frequency of Reporting M — Frequency of Publication M - GDP/GNP: Latest observation Q3 2020 — Date Received 9/30/20 — Frequency of Observation Q — Frequency of Reporting Q - Gross External Debt: Latest observation 2020 — Date Received Oct 2020 — Frequency of Observation A — Frequency of Reporting A — Frequency of Publication A - International Investment Position: Not available (N/A) Notes from table: - Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (N/A). - Footnotes specify coverage and composition requirements for certain indicators. ### Statement - Statement by Alisara Mahasandana, Executive Director for Vietnam; Firman Mochtar, Alternate Executive Director for Vietnam; and Son Thanh Nghiem, Senior Advisor to the Executive Director — February 5, 2021. *Source: 1vnmea2021001 - References (IMF PDF informational annex).* ### Introduction ### 1vnmea2021001 - Introduction ### Overview and acknowledgements - The Vietnamese authorities thank Ms. Dabla-Norris and her team for candid and constructive discussions and an insightful report. - Authorities appreciate the report’s high-quality analysis and objective assessments on policy responses to the Covid-19 pandemic. - Authorities emphasize continued vigilance and precautionary measures, including wearing masks and strict quarantine at the borders. ### Recent economic developments and outlook - GDP growth reached 2.91 percent in 2020. - Ten-year average GDP growth is 7 percent. - Inflation in 2020 was 3.23 percent, below the authorities’ target of 4 percent. - Poverty rate reduced from nearly 10% in 2015 to less than 3% in 2020. - Authorities’ targets for 2021: GDP growth of 6.5 percent, and inflation at around 4 percent, in line with the national 10-year Socio-Economic Development Strategy (2021–2030). - Main risks identified: - Heightened uncertainties surrounding the global Covid-19 pandemic. - Natural disaster risk. - Financial sector vulnerabilities from loan restructuring, higher provisioning, and defaults. - Policy stance: continue prudent macroeconomic policies, resume fiscal consolidation, and pursue structural reforms to foster green and sustainable long-term growth. ### Fiscal policy — measures, outcomes, and 2021 stance - Fiscal package focused on health crisis management and support to vulnerable sectors and households. - As of December 31, 2020: - Subsidy package worth VND123.6 trillion ($5.3 billion) or 1.5 percent of GDP (reduction and exemption in taxes, rents, and fees) allocated. - Over VND18 trillion ($770 million) allocated for pandemic prevention and household direct support. - Around VND12.400 trillion ($550 million) spent to manage storm impacts and restore production after natural disasters and epidemics. - Fiscal deficit: - 2019: 3.36 percent of GDP. - Latest 2020 fiscal deficit expected to increase to 3.95 percent of GDP. - Authorities project the fiscal deficit to remain below 4 percent of GDP in 2021. - Public debt: contained at around 55.8 percent of GDP as at end-2020. - Public investment: - Public investment disbursement rate reached 82.8 percent, the highest level in 5 years. - Authorities concur with staff on strengthening the public investment framework per the 2018 PIMA recommendations. - Public debt management: - Average maturity of Government bonds lengthened from 3.9 years in 2011 to 13.9 years in 2020 through issuance of longer maturities. ### Monetary and exchange rate policy - Policy priorities: balance accommodative monetary policy to support recovery with price and financial stability. - In 2020, the State Bank of Vietnam (SBV): - Cut policy rates three times. - Injected liquidity into the banking system. - Bank credit growth: recorded 12.13 percent at the end 2020 (below the growth target of 14 percent). - Exchange rate regime: - SBV allows two-way exchange rate movement within the current 3 percent band. - By end-September 2020, gross foreign exchange reserves (GIR) reached $88.9 billion, equivalent to about 3.6 months of imports. - Vietnam's ARA is estimated at 108% for 2020; IMF "adequate" threshold cited as 100–150%. - SBV modernization and support: - Authorities concur with staff on gradual modernization of the monetary policy framework, per Decision No. 986/QĐ-TTg dated August 08, 2018. - SBV appreciates IMF FPAS program support to enhance liquidity forecasting and policy analysis capacity. - Authorities’ view on exchange rate and external assessment: - Large current account surplus attributed to structural factors not fully explained by the EBA-lite model. - Structural reforms to boost domestic demand and adjust external imbalances will take time; external rebalancing should not be borne solely by exchange rate adjustment. - Authorities urge further refinement of the EBA methodology to account for country-specific circumstances. - Authorities emphasize building foreign exchange buffers amid heightened uncertainties and volatile capital flows. - Exchange rate policy intended to ensure price stability and build reserves, not to resist trend appreciation to benefit exports. - Authorities call for clear communication by the Fund on external balance assessment and for continued advocacy of multilateral cooperation and trade openness. ### Financial sector — vulnerabilities, measures, and reforms - Non-performing loans (NPLs) and system indicators: - On-balance-sheet NPL ratio: 1.63 percent in 2019; increased to 2.09 percent at end of October 2020. - On-balance-sheet NPL ratio estimated to remain around 2% by end-December 2020. - Bad debts managed by the Vietnam Asset Management Corporation (VAMC) at about 4.28%. - System-wide NPLs in 2019 (including VAMC and previously restructured loans under decision 780): 4.6 percent (as noted in the Report). - Authorities’ measures and commitments: - Close monitoring of banking asset quality and loan restructuring processes. - Implemented measures: collect information from credit institutions to evaluate amendments to Circular 01 on debt payment rescheduling, exemption and reduction of interest and fees, and maintaining debt classification by banks to support affected customers. - Close supervision of loans to high-risk businesses, especially construction and real estate sectors. - Commitment to banking system restructuring per Project 1058 and Resolution 42. - 2020: National Assembly approved recapitalization of state own commercial banks (SOCBs); Prime Minister signed Decree 121 in October 2020 to create legal basis for SOCBs’ recapitalization to meet Basel II. - Mandates for joint-stock commercial banks to recapitalize and consolidate to strengthen financial health and risk management. - Macroprudential and AML efforts: - SBV developing macroprudential analysis framework, improving reporting quality, and enhancing systemic risk monitoring and warning tools. - Development of Macroprudential Indicators (MPIs) and a database for the Quarterly Early Warning System; gradual application of quantitative methods aligned with international practice. - Planned amendment to the Law on Money Laundering Prevention; SBV preparing a 5-year action plan (2021–2026) to implement Multilateral Assessment Report recommendations. - Anti-Money Laundering Agency implementing reforms to meet international standards for suspicious transaction analysis and information exchange. ### Structural reforms, human capital, digital transformation, and climate - Labor and skills development: - Restructuring of vocational education network; 1,909 vocational education institutions nationwide. - 2020 vocational education enrollment reached about 2.26 million persons (set target achieved). - Number of graduates at various training levels reached set target of 2.19 million persons. - Ratio of trained labor expected to reach 64.5% of labor force. - Vietnam’s total labor force is 54.6 million people aged 15 and above in 2020. - Authorities declared October 4th of each year as Vietnam’s Labor Skills Day, starting from 2020. - Digital transformation: - Prime Minister approved the National Digital Transformation strategy (PM’s Decision No. 749/QD-TTg dated June 3, 2020). - Objectives: strengthen online public services, accelerate non-cash payments and e-commerce, improve shared databases for state management, and implement a digital transformation program for businesses (2021–2025). - Climate adaptation and environmental management: - Commitment to implement the National Climate Adaptation Plan (2021-2030) and the Action Plan implementing the Paris Agreement. - Started a project supported by the German government to implement the Paris Agreement. - Deployment of remote sensing for assessment and management of natural resources, pollution control, disaster prevention, and national security. - Establishing a national remote sensing database with plans to integrate it into the natural resources and environment database. ### Conclusion — policy priorities and cooperation - Authorities reaffirm commitment to: - Maintain prudent macroeconomic policy. - Strengthen structural reform to ensure economic resilience. - Focus macroeconomic policies on supporting recovery while preserving stability. - Continue steadfast implementation of structural reforms to improve productivity and bolster medium-term resilience. - Authorities express appreciation to the Fund for technical assistance and look forward to continued cooperation. *From: 1vnmea2021001 - Introduction* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1vnmea2021001.pdf_