## _cr07387

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---

### Executive Summary — Macroeconomic performance and outlook
- Real GDP:
  - GDP rose by 8.2 percent in 2006.
  - Real GDP is projected to grow by more than 8 percent in 2007.
  - Activity indicators (percentage change, at constant 1994 prices or at current prices): Real GDP: 2004 7.8; 2005 8.4; 2006 7.5; 2006 H1 8.2; 2007 H1 7.9.
  - Industrial production: 2004 16.6; 2005 17.2; 2006 15.9; 2006 H1 21.3; 2007 H1 16.8.
  - Retail sales: 2004 19.4; 2005 20.5; 2006 19.7; 2006 H1 20.9; 2007 H1 22.9.
  - State sector: 2004 14.2; 2005 3.9; 2006 8.0; 2006 H1 16.0; 2007 H1 -7.7.
  - Non-State sector: 2004 20.9; 2005 23.6; 2006 18.9; 2006 H1 21.4; 2007 H1 29.5.
  - Foreign-invested enterprises: 2004 10.3; 2005 20.7; 2006 21.9; 2006 H1 27.1; 2007 H1 28.1.
- Social outcomes: poverty fell from 58 percent in 1993 to less than 25 percent in 2006.
- Near-term summary:
  - GDP is projected to expand by about 8¼ percent in 2007–08, underpinned by strong growth in exports, investment, and private consumption.
  - The average rate of inflation would rise to 7½–8 percent in the near term.
  - The current account deficit would widen to 3¼ percent of GDP but is expected to be more than financed by ODA and private capital inflows.

### External sector, reserves, and capital flows
- Official reserves: rose from $11.5 billion at end-2006 to $19 billion (3½ months of next year’s imports of goods and services) in May 2007.
- Import growth: picked up to 30 percent (y/y) during the first seven months of 2007.
- Current account: high oil prices and booming non-oil exports helped restrain the current account deficit despite faster import growth.
- Capital flows: FDI and portfolio inflows buoyant; contributed to decline in domestic-currency bond yields and a stock market boom.
- Non-oil export growth: grew over 20 percent a year during 2002–2006; non-oil export growth picked up to 28 percent (y/y) during the first seven months of 2007.
- Reserve adequacy: reserves improved but remain modest by regional standards.

### Inflation, administered prices, and demand pressures
- Headline inflation: 8.4 percent (y/y) as of July 2007.
  - Headline inflation by year/period: 2003 2.9; 2004 9.7; 2005 8.8; 2006 6.6; 2006 Mar-07 6.8; Jun-07 7.8; Jul-07 8.4.
- Food inflation (end-of-period, annual percentage change): Food 2003 2.8; 2004 15.6; 2005 11.1; 2006 7.9; Mar-07 8.1; Jun-07 9.9; Jul-07 11.1.
  - Staples: 2003 2.9; 2004 13.6; 2005 7.9; 2006 14.1; Mar-07 14.7; Jun-07 14.9; Jul-07 15.0.
  - Foodstuff: 2003 2.8; 2004 17.2; 2005 12.1; 2006 5.5; Mar-07 5.5; Jun-07 8.1; Jul-07 10.1.
- Core inflation (nonfood component of CPI net of fuel and fuel-related items): 2003 2.6; 2004 1.4; 2005 3.0; 2006 4.3; Mar-07 4.6; Jun-07 4.6; Jul-07 4.6.
- Fuel inflation: 2003 6.0; 2004 22.1; 2005 27.0; 2006 8.0; Mar-07 8.6; Jun-07 9.3; Jul-07 8.5.
- Drivers: rising food and world commodity prices, overdue adjustments in administered prices (electricity tariff +8 percent in January 2007; gasoline prices liberalized in May), shortages of skilled labor, minimum wage increases, strong housing and construction demand.

### Financial markets and banking sector
- Stock market: HCMC Stock Market Price Index rose by 144.5 percent in 2006 and by another 51 percent in early 2007, before receding by about 20 percent during March–July 2007; market capitalization rose from US$0.5 billion at end-2005 to around US$18 billion (25 percent of GDP) as of end-July 2007.
- Credit growth: picked up from 25 percent in 2006 to 35 percent (y/y) as of end-May 2007; joint-stock banks recorded fastest credit growth.
- Reserve requirements: virtually doubled from June 2007 (to a range of 4 to 10 percent).
- Monetary conditions:
  - Policy rates on hold since December 2005 while OMO rate fell markedly.
  - Interbank rates turned negative in real terms; deposit rates remained barely positive.
  - Broad and reserve money growth remained high (e.g., M2 growth to 42 percent and credit to 40 percent as of end-August 2007 in later sections).
- Authorities' plans: step up equitization of SOCBs and SOEs; risk of SOE-dominated financial-industrial groups complicating bank regulation and supervision.

### Fiscal position and outlook
- Overall fiscal deficit: contained to 3.8 percent of GDP in 2006.
- Fiscal outlook:
  - If the government fully implements its plans for 2007, the fiscal deficit could widen to well over 7 percent of GDP in 2007, with the non-oil deficit rising by at least 1–1½ percentage points of GDP.
  - Directors recommended saving any revenue windfalls and postponing funding SOE projects via sovereign bonds.
- Fiscal policy recommendations: revisit tax reform plans, strengthen tax administration (including Large Taxpayer Unit), discontinue indexation of public wages/pensions to the common minimum wage, adopt differentiated and merit-based salary structure, and screen projects funded via investment bonds or on-lending more rigorously.

### Exchange rate and monetary policy framework
- Official regime: managed floating exchange rate; de facto peg to the U.S. dollar over recent years.
- Dong/U.S. dollar rate: depreciated by 1.3 percent in 2006 and by another 0.3 percent during the first seven months of 2007 (further notes: depreciating by about 1 percent a year in later sections).
- Trading band: widened in January 2007 from ±0.25 percent to ±0.5 percent around SBV’s daily reference rate.
- NEER/REER: NEER depreciated by about 8 percent since end-2005; REER broadly stable and close to long-run average.
- Staff recommendation: consider more flexible exchange rate to improve monetary policy effectiveness and buffer economy from volatile capital flows.

### Key risks and vulnerabilities
- Demand pressures could undermine sustainability of growth and complicate disinflation.
- Volatile portfolio capital inflows and rapid credit expansion raise risks of financial instability and possible stock price bubble.
- Growing exposure to global markets increases urgency of reform in state-controlled industries.
- Emergence of SOE-dominated financial-industrial groups could complicate bank regulation and supervision.
- External vulnerability: reserves risen substantially but remain modest by regional standards.

### Staff recommendations and priorities (high-level)
- Contain demand pressures and rein in credit growth; support reserve-requirement increases with efforts to absorb excess bank liquidity (issue sufficient SBV bills).
- Move toward a more flexible exchange rate regime to stem inflationary pressures and reduce intervention and sterilization needs.
- Fiscal consolidation to promote disinflation, medium-term debt sustainability, and space for countercyclical policies.
- Accelerate SOE governance reforms to improve investment quality and facilitate fiscal consolidation.
- Strengthen bank supervision and transparency requirements in the stock market.

---

### Near-term outlook and projections (2006–12)
- Real GDP (Annual growth rate): 2006: 8.2; 2007: 8.3; 2008: 8.2; 2009: 8.0; 2010: 8.0; 2011: 7.8; 2012: 7.8.
- CPI Inflation (period average): 2006: 7.5; 2007: 7.3; 2008: 7.7; 2009: 6.9; 2010: 6.5; 2011: 5.8; 2012: 4.8.
- Saving-investment balance (In percent of GDP): 2006: -0.3; 2007: -3.2; 2008: -3.2; 2009: -3.5; 2010: -3.6; 2011: -3.5; 2012: -3.4.
- Saving (In percent of GDP): 2006: 35.0; 2007: 32.5; 2008: 32.6; 2009: 31.9; 2010: 32.0; 2011: 31.7; 2012: 32.0.
- Investment (In percent of GDP): 2006: 35.3; 2007: 35.7; 2008: 35.8; 2009: 35.5; 2010: 35.6; 2011: 35.2; 2012: 35.4.
- Overall fiscal balance (In percent of GDP): 2006: -3.8; 2007: -6.9; 2008: -6.6; 2009: -5.8; 2010: -5.6; 2011: -5.6; 2012: -5.6.
- Non-oil fiscal balance (In percent of GDP): 2006: -13.5; 2007: -14.8; 2008: -14.5; 2009: -12.8; 2010: -11.7; 2011: -11.0; 2012: -10.5.
- Total public debt (In percent of GDP): 2006: 43.3; 2007: 43.4; 2008: 44.9; 2009: 46.0; 2010: 46.8; 2011: 47.7; 2012: 48.7.

### Medium-term scenario and prerequisites for a soft landing
- Preconditions (staff medium-term scenario):
  - SBV slows credit growth in line with stated objectives.
  - REER of the dong placed on a path of slow appreciation.
  - Overall fiscal deficit declines slowly from 7 percent of GDP (official projection).
  - Non-oil deficit peaks at 14¾ percent of GDP in 2007–08 and falls to 10¾ percent of GDP by 2012.
- Under these assumptions:
  - GDP growth would edge down to slightly below 8 percent in 2011–12.
  - Inflation could be placed on a declining trend from 2008 onwards, aided by WTO-mandated tariff reductions.
  - Current account deficit would edge up to around 3½ percent of GDP over the medium term and continue to be more than financed by FDI and other private inflows.

---

### Debt sustainability and public-debt dynamics (DSA highlights)
- Staff DSA findings:
  - External debt-to-GDP ratio would fall below 30 percent over the medium term under the baseline, provided external borrowing policies remain prudent.
  - Debt service-to-exports ratio would remain below 5 percent.
  - Stock of total public debt would rise from 43½ percent of GDP in 2006 to 48½ percent of GDP in 2012.
  - Debt service-to-revenue ratio would be contained to 14–15 percent.
- Baseline public debt path (policy scenario):
  - Total public debt stock: 43½ percent of GDP in 2007; breaches authorities’ notional ceiling of 50 percent of GDP in 2014; peaks at about 51 percent of GDP in 2016; falls to 46½ percent of GDP by 2027.
- Sensitivity and stress tests:
  - Failure to adjust the primary balance (alternative scenario A2; primary balance remains at -5.5 percent of GDP) yields: NPV debt-to-GDP 81 percent by 2027; NPV debt-to-revenue 351 percent by 2027; debt service-to-revenue 30 percent by 2027.
  - Permanently lower GDP growth (alternative scenario A3) yields: NPV debt-to-GDP 54 percent by 2027; NPV debt-to-revenue 233 percent by 2027; debt service-to-revenue 16 percent by 2027.
- Contingent liabilities scenarios:
  - Alternative Scenario 1 (contingent liabilities = 4 percent of GDP): government absorbs 1 percent of GDP a year over 2008–11; NPV public debt rises slightly faster than baseline but remains below 50 percent ceiling throughout.
  - Alternative Scenario 2 (contingent liabilities = 8 percent of GDP): government absorbs 2 percent of GDP a year over 2008–11; NPV debt breaches 50 percent ceiling by 2012; peaks around 51½ percent of GDP in 2015; declines to about 45 percent in 2027.
- Staff assessment: Vietnam at low risk of external debt distress over 2007–12 under the baseline; inclusion of domestic debt paints a more nuanced picture with domestic debt NPV rising from 19.4 percent of GDP in 2007 to 27 percent by 2012 and NPV debt-to-revenue rising above 200 percent by 2017 under baseline projections.

---

### Downside risks and adverse scenarios
- Exchange rate and capital inflow risks:
  - Large capital inflows with a de facto peg could prevent effective monetary tightening; inflation could remain upward and possibly reach double-digits by 2009–10.
  - Rapid appreciation of the real exchange rate could lead to competitiveness losses and larger current account deficit.
- Financial sector risks:
  - Unchecked credit growth and weak regulation threaten financial stability; stock price volatility and reversal of portfolio inflows could affect banks.
  - Borrowers with stock market-related risks and unhedged foreign-currency loans could harm bank soundness.
- Fiscal risks:
  - Large increases in public wages and pensions, heavy on-lending to SOEs, and/or falling oil revenues could undermine fiscal sustainability.
- Structural/governance risks:
  - Insufficient improvement in banking sector and SOE governance and continued state-sector dominance could weaken investment efficiency and increase future budget burdens.

---

### Key policy challenges
- Adapting monetary and exchange rate policies to contain inflation and protect external stability.
- Strengthening the regulatory framework in the financial system to harness capital market development while reducing risks.
- Advancing banking system reforms to foster competition and efficiency and reinforce prudential supervision.
- Pursuing fiscal consolidation to address capital inflow effects, contain current account deficit, and promote medium-term debt sustainability.
- Accelerating SOE reforms to enable SOEs to meet global competition and reduce budget reliance.

### Policy recommendations and measures (selected, by area)
A. Monetary and exchange rate policies
- Authorities tightened monetary conditions: doubling reserve requirements on bank deposits from June 2007 and increasing sales of SBV bills.
- Staff view: move toward a more flexible exchange rate regime to stem inflationary pressures, reduce intervention and sterilization needs, foster derivatives markets, encourage hedging, and allow the exchange rate to act as a shock absorber.
- Authorities’ stance: progressive increase in exchange rate flexibility while building reserve cushions and maintaining a cautious pace of change.

B. Financial sector measures
- Securities market prudential steps:
  - Phase-out of banks’ lending to securities company affiliates within one year (from January).
  - Increase risk weight of securities-related loans from 100 percent to 150 percent.
  - Cap securities-related credit at less than 3 percent of total loans outstanding (compliance by end-2007).
- Banking sector reform and supervision:
  - WTO-related liberalization: maximum share of individual strategic investors raised from 10 percent to 15 percent (20 percent with PM permission); since mid-June 2007 foreign banks can apply to establish wholly owned subsidiaries.
  - Government injecting VND 11 trillion (US$0.7 billion or about 1 percent of GDP) to SOCBs set for listing; IPOs slated for late 2007 or early 2008.
  - Transition: transfer of government ownership rights on SOCBs from SBV to SCIC after equitization to remove conflict of interest.
  - Draft laws on SBV, Credit Institutions, Deposit Insurance, and Bank Supervision to be submitted beginning in 2008.
  - Interim measures: improve SBV coordination, track transactions among banks, securities affiliates, and issuers; monitor related-party transactions within SOE groups.

C. Fiscal consolidation and debt sustainability
- Save unanticipated additional revenue in 2007 and postpone funding of SOE projects through sovereign bond issuance.
- Revisit tax reform plans and strengthen tax administration; expedite establishment of a Large Taxpayer Unit.
- Discontinue indexation of public wages and pensions to the common minimum wage; adopt more differentiated and merit-based salary structure.
- Screen projects funded through investment bond issues or on-lending more rigorously; strengthen loan appraisal and risk management capacities of the Vietnam Development Bank (VDB).

D. SOE reform, data, and AML
- Accelerate equitization of SOEs, including strategic industrial sectors and public services; role of foreign strategic investors to be determined case-by-case.
- Improve macroeconomic and financial statistics: compile and monitor FSIs, improve coverage of external debt, portfolio flows, and government and SOE bond issues.
- Improve coordination and information-sharing among SBV, SSC, and MOF.
- Implement regulations for Vietnam’s Anti-Money Laundering Decree.

---

### Staff appraisal and concluding observations
- Vietnam’s economic performance impressive over the last decade: Real GDP increased on average by 7½ percent a year and poverty fell sharply.
- Following WTO accession, Vietnam has emerged as an attractive investment destination (FDI approvals reached a record $10 billion last year in the report).
- Policy mix recommended: tighter monetary stance backed by exchange rate flexibility, prudent fiscal consolidation, strengthened financial supervision, accelerated SOE equitization, and improved data and transparency.

*Source: Executive Summary and selected chapters and annexes, IMF staff report (text as provided).*

### Executive Summary ......................................................................................................

### Executive Summary

### Macroeconomic performance and outlook
- Real GDP is projected to grow by more than 8 percent in 2007.
- GDP rose by 8.2 percent in 2006.
- Activity indicators (percentage change, at constant 1994 prices or at current prices):
  - Real GDP: 2004 7.8; 2005 8.4; 2006 7.5; 2006 H1 8.2; 2007 H1 7.9.
  - Industrial production: 2004 16.6; 2005 17.2; 2006 15.9; 2006 H1 21.3; 2007 H1 16.8.
  - Retail sales: 2004 19.4; 2005 20.5; 2006 19.7; 2006 H1 20.9; 2007 H1 22.9.
  - State sector: 2004 14.2; 2005 3.9; 2006 8.0; 2006 H1 16.0; 2007 H1 -7.7.
  - Non-State sector: 2004 20.9; 2005 23.6; 2006 18.9; 2006 H1 21.4; 2007 H1 29.5.
  - Foreign-invested enterprises: 2004 10.3; 2005 20.7; 2006 21.9; 2006 H1 27.1; 2007 H1 28.1.

- Vietnam recorded the second-highest growth rate in Asia over the last decade; poverty fell from 58 percent in 1993 to less than 25 percent in 2006.

### External sector, reserves, and capital flows
- Official reserves rose from $11.5 billion at end-2006 to $19 billion (3½ months of next year’s imports of goods and services) in May 2007.
- Import growth picked up to 30 percent (y/y) during the first seven months of 2007.
- Current account: high oil prices and booming non-oil exports helped to restrain the current account deficit despite faster import growth.
- FDI and portfolio inflows have been buoyant, contributing to a decline in domestic-currency bond yields and a stock market boom.
- Vietnam: Gross international reserves comparisons (May 2007) indicate reserves are still modest by regional standards (figures and charts in text).

### Inflation and demand pressures
- Headline inflation: 8.4 percent (y/y) as of July 2007.
- Headline inflation by year/period: 2003 2.9; 2004 9.7; 2005 8.8; 2006 6.6; 2006 Mar-07 6.8; Jun-07 7.8; Jul-07 8.4.
- Food inflation and components (end-of-period, annual percentage change): Food 2003 2.8; 2004 15.6; 2005 11.1; 2006 7.9; Mar-07 8.1; Jun-07 9.9; Jul-07 11.1.
  - Staples: 2003 2.9; 2004 13.6; 2005 7.9; 2006 14.1; Mar-07 14.7; Jun-07 14.9; Jul-07 15.0.
  - Foodstuff: 2003 2.8; 2004 17.2; 2005 12.1; 2006 5.5; Mar-07 5.5; Jun-07 8.1; Jul-07 10.1.
- Core inflation (nonfood component of CPI net of fuel and fuel-related items): 2003 2.6; 2004 1.4; 2005 3.0; 2006 4.3; Mar-07 4.6; Jun-07 4.6; Jul-07 4.6.
- Drivers of inflation: rising food and world commodity prices, overdue adjustments in administered prices (electricity tariff raised by 8 percent in January 2007; gasoline prices liberalized in May), shortages of skilled labor, increases in the minimum wage, strong demand for housing and construction materials.
- Fuel inflation: 2003 6.0; 2004 22.1; 2005 27.0; 2006 8.0; Mar-07 8.6; Jun-07 9.3; Jul-07 8.5.

### Financial markets and banking sector
- Vietnam’s stock market experienced a boom: HCMC Stock Market Price Index rose by 144.5 percent in 2006, and by another 51 percent in early 2007, before receding by about 20 percent during March–July 2007.
- Credit growth picked up from 25 percent in 2006 to 35 percent (y/y) as of end-May 2007; joint-stock banks recorded the fastest credit growth.
- Reserve requirements on bank deposits were virtually doubled from June 2007 (to a range of 4 to 10 percent).
- Despite increased sterilization, bank liquidity remained ample; interbank rates rose only briefly in June and subsequently reverted to low levels.
- Monetary conditions:
  - Policy rates have been on hold since December 2005 while the OMO rate has fallen markedly.
  - Interbank rates have turned negative in real terms, while deposit rates have remained barely positive.
  - Broad and reserve money growth remained high (charts and series in text).
- The authorities plan to step up equitization of state-owned commercial banks (SOCBs) and state-owned enterprises (SOEs), but emergence of SOE-dominated financial-industrial groups could pose challenges for bank regulation and supervision.

### Fiscal position
- Overall fiscal deficit: contained to 3.8 percent of GDP in 2006.
- Fiscal outlook: fiscal stance appears set to be eased in 2007; if the government fully implements its plans for 2007, the fiscal deficit could widen to well over 7 percent of GDP in 2007, with the non-oil deficit rising by at least 1–1½ percentage points of GDP.
- A better-than-expected revenue outturn and slow implementation of off-budget investment plans helped compress the 2006 deficit.

### Exchange rate and monetary policy framework
- Vietnam officially maintains a managed floating exchange rate regime; the dong has been pegged de facto to the U.S. dollar over the last few years.
- Dong/U.S. dollar rate: depreciated by 1.3 percent in 2006, and by another 0.3 percent during the first seven months of 2007.
- In January 2007 the trading band around the SBV’s daily reference rate was widened from ±0.25 percent to ±0.5 percent; the dong was allowed to appreciate modestly, but this appreciation was more than reversed since March.
- Nominal effective exchange rate (NEER) of the dong has depreciated by about 8 percent since end-2005; the real effective exchange rate (REER) has been broadly stable and remains close to its long-run average.

### Key risks and vulnerabilities
- Demand pressures could undermine sustainability of growth and complicate disinflation.
- Volatile portfolio capital inflows and rapid credit expansion raise risks of financial instability and a possible stock price bubble.
- Growing exposure to global markets increases urgency of reform in state-controlled industries.
- Emergence of SOE-dominated financial-industrial groups could complicate bank regulation and supervision.
- External vulnerability: while reserves have risen substantially, reserves remain modest by regional standards (charts and comparisons in text).

### Staff recommendations and policy priorities
- Contain demand pressures to promote sustainable growth; rein in credit growth.
  - Recent increase in reserve requirements should be supported by strong efforts to absorb excess bank liquidity.
- Consider a more flexible exchange rate to improve monetary policy effectiveness and buffer the economy from volatile capital flows.
- Fiscal consolidation is essential to promote disinflation, medium-term debt sustainability, and to create space for countercyclical fiscal policies in the future.
- Accelerate reforms to improve governance of SOEs to improve the quality of investment and growth and to facilitate fiscal consolidation.
- Strengthen bank supervision and transparency requirements in the stock market to protect financial stability.

*Source: Executive Summary, IMF staff report (text as provided).*

### 4.      The near-term outlook remains favorable. GDP is projected to expand by about

### 4.      The near-term outlook remains favorable. GDP is projected to expand by about

### Near-term outlook and projections (2006–12)
- Real GDP (Annual growth rate)  
  - 2006: 8.2  
  - 2007: 8.3  
  - 2008: 8.2  
  - 2009: 8.0  
  - 2010: 8.0  
  - 2011: 7.8  
  - 2012: 7.8
- CPI Inflation (period average)  
  - 2006: 7.5  
  - 2007: 7.3  
  - 2008: 7.7  
  - 2009: 6.9  
  - 2010: 6.5  
  - 2011: 5.8  
  - 2012: 4.8
- Saving-investment balance (In percent of GDP)  
  - 2006: -0.3  
  - 2007: -3.2  
  - 2008: -3.2  
  - 2009: -3.5  
  - 2010: -3.6  
  - 2011: -3.5  
  - 2012: -3.4
- Saving (In percent of GDP)  
  - 2006: 35.0  
  - 2007: 32.5  
  - 2008: 32.6  
  - 2009: 31.9  
  - 2010: 32.0  
  - 2011: 31.7  
  - 2012: 32.0
- Investment (In percent of GDP)  
  - 2006: 35.3  
  - 2007: 35.7  
  - 2008: 35.8  
  - 2009: 35.5  
  - 2010: 35.6  
  - 2011: 35.2  
  - 2012: 35.4
- Overall fiscal balance (In percent of GDP)  
  - 2006: -3.8  
  - 2007: -6.9  
  - 2008: -6.6  
  - 2009: -5.8  
  - 2010: -5.6  
  - 2011: -5.6  
  - 2012: -5.6
- Non-oil fiscal balance (In percent of GDP)  
  - 2006: -13.5  
  - 2007: -14.8  
  - 2008: -14.5  
  - 2009: -12.8  
  - 2010: -11.7  
  - 2011: -11.0  
  - 2012: -10.5
- Total public debt (In percent of GDP)  
  - 2006: 43.3  
  - 2007: 43.4  
  - 2008: 44.9  
  - 2009: 46.0  
  - 2010: 46.8  
  - 2011: 47.7  
  - 2012: 48.7
- Key near-term summary bullets:
  - GDP is projected to expand by about 8¼ percent in 2007–08, underpinned by strong growth in exports, investment, and private consumption.
  - The average rate of inflation would rise to 7½–8 percent, as higher food prices and nonfuel commodity prices compound tightening capacity constraints.
  - The current account deficit would widen to 3¼ percent of GDP, but would be more than financed by ODA and private capital inflows.

### Medium-term scenario and outlook
- Preconditions for a soft landing (staff’s medium-term scenario):  
  - SBV slows credit growth in line with stated official objectives.  
  - The real effective exchange rate of the dong is placed on a path of slow appreciation.  
  - The overall fiscal deficit declines slowly from 7 percent of GDP, in line with official projections.  
  - The non-oil deficit peaks at 14¾ percent of GDP in 2007–08, and falls to 10¾ percent of GDP by 2012.
- Projections under these assumptions:
  - GDP growth would edge down to slightly below 8 percent in 2011–12.
  - Inflation could be placed on a declining trend from 2008 onwards, aided by WTO-mandated tariff reductions.
  - The current account deficit would edge up to around 3½ percent of GDP over the medium term, and continue to be more than financed by FDI and other private inflows.

### Debt sustainability and public debt dynamics
- Staff’s updated Debt Sustainability Analysis (DSA) findings:
  - External debt-to-GDP ratio would fall below 30 percent over the medium term under the baseline, provided external borrowing policies remain prudent.
  - Debt service-to-exports ratio would remain below 5 percent.
  - Stock of total public debt would rise from 43½ percent of GDP in 2006 to 48½ percent of GDP in 2012.
  - Debt service-to-revenue ratio would be contained to 14–15 percent.

### Downside risks and adverse scenarios
- Risks from large capital inflows and exchange rate policy:
  - Large capital inflows with a de facto peg could prevent effective monetary tightening; inflation could remain on an upward trend and possibly rise to double-digits by 2009–10.
  - More rapid appreciation of the real exchange rate could lead to competitiveness losses and a larger current account deficit, threatening external sustainability and investor confidence.
  - Delayed adjustments could lead to sharp falls in investment and growth.
- Risks from unchecked credit growth and financial vulnerabilities:
  - Unchecked credit growth and weak regulation could threaten financial system stability; risks from stock price volatility and reversal of portfolio inflows remain.
  - Borrowers with stock market-related risks and unhedged foreign-currency loans could cause fall-out on bank soundness.
- Fiscal risks:
  - Large increases in public wages and pensions, heavy on-lending to SOEs, and/or falling oil-related revenues could undermine fiscal sustainability.
  - DSA alternative scenario A2: if the primary balance remained unchanged, the debt-to-GDP ratio, the debt-to-revenue ratio, and the debt service-to-revenue ratio would all rise sharply, potentially forcing curtailment of investment or social outlays.
- Structural and governance risks:
  - Insufficient improvement in banking sector and SOE governance, and continued state-sector dominance could weaken investment efficiency and increase future budget burdens.

### Key policy challenges
- Adapting monetary and exchange rate policies to contain inflation and protect external stability.
- Strengthening the regulatory framework in the financial system to utilize the developing capital market while reducing risks and vulnerabilities.
- Advancing banking system reforms to foster competition and efficiency, while reinforcing prudential supervision to ensure bank soundness.
- Pursuing fiscal consolidation to counter potential adverse effects of capital inflows, contain the current account deficit, and promote medium-term debt sustainability.
- Accelerating SOE reforms to enable SOEs to meet global competition and decrease reliance on the budget.

### Policy recommendations and measures
A. Monetary and exchange rate policies
- Authorities have tightened monetary conditions: doubling reserve requirements on bank deposits from June 2007 and increasing sales of SBV bills.
- Staff view: move toward a more flexible exchange rate regime to stem inflationary pressures, reduce intervention and sterilization needs, foster derivatives markets, encourage hedging, and allow the exchange rate to act as a shock absorber.
- Authorities’ stance: progressive increase in exchange rate flexibility while building reserve cushions and maintaining a cautious pace of change.

B. Financial sector measures
- Securities market:
  - Prudential steps: phase-out of banks’ lending to securities company affiliates within one year (from January), increase of risk weight of securities-related loans from 100 percent to 150 percent, cap securities-related credit at less than 3 percent of total loans outstanding (compliance by end-2007).
  - Recommendation: assess weaknesses in highly-exposed banks, apply standards to manage foreign exchange, interest rate, and liquidity risks, and monitor smaller joint-stock banks where exposures are concentrated.
  - SSC improvements needed: capacity constraints, weak penalties against insider trading, and money-laundering concerns.
- Banking sector reform and supervision:
  - WTO-related liberalization: decree in April clarified foreign participation; maximum share of individual strategic investors raised from 10 percent to 15 percent (20 percent with PM permission); since mid-June 2007 foreign banks can apply to establish wholly owned subsidiaries.
  - SOCBs equitization and recapitalization: government injecting VND 11 trillion (US$0.7 billion or about 1 percent of GDP) to SOCBs set for listing; IPOs slated for late 2007 or early 2008; need to ensure foreign strategic investors have adequate scope to improve corporate governance.
  - Transition plans: transfer of government ownership rights on SOCBs from SBV to SCIC after equitization to remove conflict of interest; draft laws on SBV, Credit Institutions, Deposit Insurance, and Bank Supervision to be submitted beginning in 2008.
  - Interim measures: improve SBV coordination, track transactions among banks, securities affiliates, and issuers; monitor related-party transactions within SOE groups.

C. Fiscal consolidation and debt sustainability
- Fiscal caution recommended given inflation risk: save unanticipated additional revenue in 2007 and postpone funding of SOE projects through sovereign bond issuance.
- Authorities decided to postpone planned wage increases for October.
- Recommendations to protect revenues and curb spending:
  - Revisit existing tax reform plans and strengthen tax administration, including expediting establishment of a Large Taxpayer Unit.
  - Discontinue indexation of public wages and pensions to the common minimum wage; adopt more differentiated and merit-based salary structure.
  - Screen projects funded through investment bond issues or on-lending more rigorously; strengthen loan appraisal and risk management capacities of the Vietnam Development Bank (VDB).

D. SOE reform, data, and AML
- Accelerate equitization of SOEs, including strategic industrial sectors and public services; role of foreign strategic investors to be determined case-by-case.
- Improve macroeconomic and financial statistics: compile and monitor FSIs, improve coverage of external debt, portfolio flows, and government and SOE bond issues.
- Improve coordination and information-sharing among SBV, SSC, and MOF.
- Move ahead with implementing regulations for Vietnam’s Anti-Money Laundering Decree.

### Staff appraisal summary
- Vietnam’s economic performance has been impressive over the last decade: Real GDP increased on average by 7½ percent a year and poverty has fallen sharply.
- Following WTO accession, Vietnam has emerged as an attractive investment destination.

*Source: IMF staff report (Vietnam), selected text and projections from the document.*

### 25.      The near-term outlook remains favorable, but medium-term prospects are

### The near-term outlook remains favorable, but medium-term prospects are clouded by gathering demand pressures

### Near-term macroeconomic outlook and external position
- Growth is projected to remain above 8 percent in 2007–08, underpinned by rapid export growth, strong foreign and domestic investment, and rising consumption.
- Inflation has "crept up again in recent months," and "remains stubbornly high relative to major trading partners."
- Demand pressures have been reflected in a widening current account deficit.
- The current account deficit is being more than financed by ODA and private capital inflows, and the SBV’s cushion of reserves is being built up.
- Vietnam’s ongoing financial integration in the context of its relatively rigid exchange rate makes the external position vulnerable.
- Overheating in the stock market could pose additional risks to financial stability.

### Monetary and exchange rate policy recommendations
- A more effective mix of monetary and exchange rate policies, vigilant financial system supervision, and a prudent fiscal stance are needed to promote sustainable growth and safeguard external stability.
- Staff supports the authorities’ recent steps to tighten monetary conditions.
- Authorities are urged to issue sufficient amounts of SBV bills, as needed, to absorb excess bank liquidity and slow credit growth on a sustained basis.
- Staff welcomes the authorities’ plan to introduce greater flexibility in the exchange rate regime, but urges them to accelerate its implementation.
  - The de facto peg of the dong to the U.S. dollar has played a useful role as a nominal anchor and its level currently seems consistent with the maintenance of external stability, but continuation would not meet current and future needs.
  - A more flexible exchange rate could facilitate the tightening of monetary policy, decrease the need for intervention and sterilization, foster development of hedging instruments, encourage better hedging of exchange rate risks, and protect external financial stability in the event of abrupt reversals of capital inflows.

### Financial sector and securities market
- The growing securities market offers promising opportunities for cost-effective financing of Vietnam’s investment needs, but has also created new risks.
- Staff supports measures to tighten prudential controls on banks’ exposures to securities-related lending.
- Improved securities market regulation is essential, including additional steps to discourage inappropriate trading practices, insider trading, and money laundering, to protect stability and integrity of the capital market.
- Overheating in the stock market identified as a potential source of financial instability.

### Banking system reform and institutional coordination
- New financing possibilities through the capital market, JSBs, and foreign-owned banks increase the urgency of banking system reform.
- Staff welcomes government plans to accelerate the equitization of the main SOCBs, and urges offering adequate scope and incentives for participation by foreign strategic investors.
- Authorities’ medium-term plans to grant the SBV adequate authority and independence to carry out an anti-inflationary monetary policy and more effective bank supervision are welcomed.
- In the meantime, the SBV, the SSC, and the Ministry of Finance are urged to better coordinate efforts to track vulnerabilities associated with transactions among banks, their securities company affiliates, and the domestic and foreign buyers of securities.
- Extra care should be taken to prevent related-party lending within new SOE groups or strategic partnerships involved in a mix of industrial operations and financial services.

### Fiscal policy and public finance recommendations
- A more prudent fiscal policy is appropriate given limited room for maneuver in monetary policy in the short run and the need to create space for possible countercyclical fiscal policy in the future.
- The non-oil fiscal deficit needs to be placed on a declining path as soon as possible.
- Staff welcomes the government’s decision to reconsider earlier plans for further large increases in public wages.
- Any revenue windfalls should be saved.
- Funding of SOE projects through the issuance of sovereign bonds should be postponed.
- Over the medium term, a concerted effort to boost revenues and curb expenditure growth will be required to protect debt sustainability.
  - Efforts to bolster non-oil revenues need to be intensified, including carefully considering the revenue impact of planned tax reforms and strengthening tax administration.
  - The indexation of public wages and pensions to the minimum wage will need to be reviewed, and a more differentiated, merit-based salary structure adopted.
  - Reforms to rationalize civil service employment and restrain future growth of the wage bill are required.
  - Increased efforts could be made to improve screening and quality of public projects, and allow FDI participation in commercially-viable infrastructure projects.

### State-owned enterprises (SOEs) and governance
- Faster progress toward improving the governance of SOEs is a central element of the strategy to improve the quality of growth and investment and facilitate fiscal consolidation.
- Government plans to expand and expedite equitization of SOEs are welcome.
- To ensure meaningful corporate governance improvements from equitization, efforts should be made to encourage broad-based participation by foreign strategic investors.
- Use of public funds for financing SOE projects should be discontinued as soon as possible.

### Data, statistics, and monitoring
- The quality, timeliness, and dissemination of macroeconomic and financial statistics need improvement to support informed policy decisions and build investor confidence.
- Staff strongly supports plans to develop FSIs and improve the transparency of budgetary data, and stands ready to provide technical assistance.
- Authorities are urged to improve monitoring of data on external debt, portfolio capital flows, and government and SOE bond issues.

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

### WTO accession: challenges and opportunities (Box 1)
- WTO accession is expected to further global integration and improve Vietnamese exporters’ access to foreign markets, particularly benefiting textile and footwear industries.
- Vietnam has committed to bound tariff rates on most products ranging from zero to 35 percent, although tariffs on cars and motorbikes are to remain somewhat higher.
- Reductions in most bound rates—from 17.2 percent on average in 2007 to 13.4 percent by 2019—are to be phased-in over periods of up to 12 years.
- Staff estimates:
  - Reduction in import tariffs can be expected to lower annual import duty receipts by as much as 0.5 percent of GDP over the medium term.
  - Net welfare gains from trade liberalization on the order of 1–1.2 percent of GDP a year over the medium term.
- Accession is likely to yield productivity gains and spur reforms (including restructuring of SOCBs); FDI approvals reached a record $10 billion last year.
- However, heavily-protected and/or uncompetitive industries and SOE sectors (including auto-assembly and motorbike plants, and the financial sector) need significant reforms to remain viable; adjustment may include compression of profit margins, and possibly labor-shedding or bankruptcies in loss-making SOEs and declining industries.

*IMF staff assessment and recommendations as presented in the cited chapter.*

### Box 2. Assessing the Level of the Exchange Rate

### Box 2. Assessing the Level of the Exchange Rate

### Overall assessment
- Based on available data as of mid-2007, the level of Vietnam’s exchange rate seems broadly appropriate.
- The CPI-based real effective exchange rate (REER) of the dong has remained around its long-term average during the first half of 2007.
- While the REER depreciated significantly during 2002–03, that depreciation has since been largely reversed.

### Macroeconomic indicators and external sustainability
- Developments so far in 2007 point to a current account deficit over the full year of about 3 percent of GDP, a level that is broadly consistent with the maintenance of external balance and debt sustainability.
- Preliminary staff estimates based on the macro-balance approach used by the Consultative Group on Exchange Rate Issues (CGER) suggest that the level of the current account deficit consistent with external balance over the medium term (the so-called current account norm) may be on the order of 2 percent to 3 percent of GDP. These estimates are subject to a large margin of error.
- As elaborated in the staff’s medium-term baseline scenario, on current trends:
  - the current account deficit would remain in a range of 3–3½ percent of GDP;
  - the stock of external debt would be contained to 30 percent of GDP;
  - official reserves would level off at about 3½ months of imports.
- Although import growth has picked up in recent months, continued rapid export growth has helped contain the current account deficit to a level that is more than financed by inflows of ODA, FDI, and portfolio capital.

### External competitiveness and trade performance
- Available indicators suggest that Vietnam’s external competitiveness is currently adequate.
- Non-oil exports, including labor-intensive manufacturing products such as textiles and footwear, have:
  - grown at a robust pace of over 20 percent a year during 2002–2006; and
  - non-oil export growth has picked up to 28 percent (y/y) during the first seven months of 2007.
- As a result, the market share of Vietnamese exports has recorded a sustained increase in relation to both world exports and exports from Asian countries.
- Adequacy of competitiveness is further evidenced by the ongoing strong expansion of FDI and other private capital inflows.

### Firm-level constraints and structural considerations
- Cross-country survey data compiled by the Japan External Trade Organization indicate that, despite a large pool of relatively low-cost labor, the following factors weaken Vietnam’s comparative advantage:
  - inadequate infrastructure (especially power, ports, and roads);
  - shortages of skilled managerial and professional staff;
  - a nontransparent legal and regulatory system.
- Continued structural reforms and improved infrastructure will be required to preserve Vietnam’s competitive edge.

*Source: Staff report text in Box 2, "Assessing the Level of the Exchange Rate."*

### ANNEX                                                                I

### ANNEX I — Vietnam—Fund Relations (As of July 31, 2007)

### Membership and Quota
- Joined: 09/21/1956
- Article VIII: November 8, 2005
- Quota: SDR 329.10 Million (Percent 100.00)
- Fund Holdings of Currency: 329.10 (Percent 100.00)
- Reserve position in Fund: 0.01 (Percent 0.00)

### SDR Department
- Net cumulative allocation: SDR 47.66 Million (Percent 100.00)
- Holdings: SDR 1.52 Million (Percent 3.18)

### Outstanding Purchases and Loans
- PRGF arrangements outstanding: SDR 111.78 Million (Percent of Quota 33.97)

### Latest Financial Arrangements (dates and SDR amounts)
- PRGF: Date of Arrangement Apr. 13, 2001; Expiration Date Apr. 12, 2004; Amount Approved 290.00 (SDR Million); Amount Drawn 124.20 (SDR Million)
- ESAF: Date of Arrangement Nov. 11, 1994; Expiration Date Nov. 10, 1997; Amount Approved 362.40 (SDR Million); Amount Drawn 241.60 (SDR Million)
- Stand-by: Date of Arrangement Oct. 6, 1993; Expiration Date Nov. 11, 1994; Amount Approved 145.00 (SDR Million); Amount Drawn 108.80 (SDR Million)

### Projected Payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
- Principal:
  - 2007: 8.28
  - 2008–2009: 24.84
  - 2010: 24.84
  - 2011: 24.84
  - Forthcoming: 20.70
- Charges/Interest:
  - 2007: 1.27
  - 2008–2009: 2.45
  - 2010: 2.33
  - 2011: 2.20
  - Forthcoming: 2.08
- Total:
  - 2007: 9.55
  - 2008–2009: 27.29
  - 2010: 27.17
  - 2011: 27.04
  - Forthcoming: 22.78

### Exchange Rate Arrangement and Exchange Restrictions
- Interbank FX market operation revised by SBV: February 25, 1999
- Daily fluctuation band allowed: maximum of ±0.25 percent a day (effective July 2002)
- Trading band widened in January 2007 from ±0.25 percent to ±0.5 percent
- De facto peg: pegged to the U.S. dollar since August 2004
- SBV announcements: limited annual exchange rate depreciation to one percent (announcements in August 2004 and January 2005)
- Actual depreciation: 2004: 1 percent vis-à-vis the U.S. dollar; 2005: 0.8 percent vis-à-vis the U.S. dollar
- Dong/U.S. dollar rate: virtually unchanged during January–April 2006
- Fund classification: conventional fixed peg (based on de facto policies)
- Article VIII obligations accepted: sections 2, 3, and 4
- Exchange system: free of restrictions on payments and transfers for current international transactions, except for security-related exchange restrictions notified pursuant to Executive Board Decision No. 144-(52/51)

### Article IV Consultations
- Consultation cycle: 12-month consultation cycle, subject to Board Decision No. 12794-(02/76) of July 15, 2002
- Last Article IV Consultation concluded: October 25, 2006

### Technical Assistance (selected activities and timeline)
- Resident Advisor: Tax Computerization (FAD) through April 1998
- In-Country Training/Outreach (selected):
  - Conference on Compilation and Use of Core Inflation (APD/OAP), April 2007
  - 4-session seminar for MPI on the Fundamentals of Macroeconomic Analysis, May 2006
  - Conference on SBV Reforming (APD/MFD), March 2006
  - STI Regional Course on Financial Programming and Policies, March 2005
  - Workshop on Macroeconomic Policies for Parliamentarians (EXR/APD/INS), March 2004
  - 10-session Seminar for Parliamentarians on the Fundamentals of Macroeconomics (APD), October-December 2003
  - 10-session Seminar on Topics in Financial Programming for State Bank of Vietnam and related Government Agencies (APD), January–May 2002
- Summary of technical assistance, 2002–07 (selected entries, department and date preserved):
  - FAD: Tax self-assessment pilot preparations June-July 2002; November-December 2002; March-April 2003; May/03; August/03; September/03; November/03; February-March 2004; April/04; June-July 2004; August/04; October-November 2004; November/04; May/05; July/05; November-December 2005; March-April 2006; June-July 2006; November 2006; December 2006; March 2007
  - FAD: Tax policy and administration reform February-March/02; July/02; November/02; May-June/03; May-June/04; November/04; March/05; July-August/05
  - MFD/MFD-related: SOCB Restructuring September/02; November/02; June/03; September/04 (SOCB equitization); March/06 (Banking restructuring and foreign exchange management at the SBV)
  - MFD/LEG: Article VIII and Forex Control Ordinance February/05; Drafting Foreign Exchange Ordinance June/05
  - MFD: Banking supervision strengthening August/04; November/04; April/05; November/05; March-April/06
  - MFD/OIA: Safeguards-related T.A September/02
  - FIN/MFD: Strengthening SBV audit capacity in the SAO December/02; June/03; December/03
  - MFD/STA/MCM: Monetary and exchange operation and CPI/core inflation activities (various dates: February/04; November/04; April/05; September/06; April/07; April-May/07)
  - MFD/LEG: TA program for anti-money laundering and combating the financing of terrorism December/03; March/05; June/07
  - STA: National Income Account and Statistics August-September/02; May-June/03; Feb-March/04; September/04
  - STA: BOP statistics and development of international investment position statistics September/03; BOP statistics February-March/06
  - STA/MFD: CPI statistics and core inflation primary understanding April/05
  - PDR: Debt sustainable analysis October/02
  - LEG: Tax law February/04; Tax administration law November-December 04; Tax legislation August/05
  - ICM: Capital Markets Development May-June/04
  - MCM: Foreign reserve management November-December/06

### Other Visits and Resident Representation
- Deputy Managing Director, Mr. Kato: visited Vietnam in May 2005 and May 2007
- Managing Director, Mr. de Rato: visited in June 2004
- Senior Resident Representative: Mr. Il Houng Lee since August 2005

---

### ANNEX II — Vietnam—Relations with the Asian Development Bank (AsDB)

### AsDB Strategy and Operations in Vietnam
- AsDB resumed operations in Vietnam in October 1993
- Country Strategy and Program (CSP) endorsed January 2002 focusing on four pillars:
  - (i) sustainable growth through rural development and private sector development, focus on small and medium enterprise development
  - (ii) inclusive social development, mainstreaming poverty, gender, and ethnic dimensions, emphasis on human capital through secondary education and health
  - (iii) good governance, emphasis on public administration and civil service reform
  - (iv) geographic focus on the impoverished central region
- New CSP under preparation for 2007–2010, aligned with SEDP preparation schedule
- From October 1993 to end-2005: AsDB approved 55 public sector loans totaling about US$ 3.5 billion
  - Nearly US$ 3.0 billion from the concessional Asian Development Fund (ADF)
  - US$ 520 million from Ordinary Capital Resources (OCR)
- AsDB classification: Vietnam classified as a B-1 country since December 1998 (eligible to supplement ADF with limited OCR borrowing)
- AsDB technical assistance: US$ 123.7 million for 185 projects
- AsDB private sector loans: US$ 168.5 million for 7 private sector loans
- Participation in Greater Mekong Subregion (GMS) initiatives and substantial support provided

### Policy and Capacity Support
- AsDB support for policy and structural reforms to improve public sector efficiency and encourage private sector development
- Eleven policy-based program loans approved in sectors including agriculture, financial sector, SOE reform and corporate governance, public administration reform, SME development, and poverty reduction implementation
- Policy dialogue is integral across AsDB loan projects, including tariff/rate reform for state-owned utilities to increase cost recovery and strengthen financial management, policy analysis, and planning
- Japan Fund for Public Policy Training (JFPPT) provides high level capacity building funded by Government of Japan
- AsDB reorganized as of 1 May 2006: Vietnam part of the Southeast Asia Regional Department
- Resident mission strengthened and performs programming functions and administration of portion of loan projects
- AsDB and IMF cooperation: staff participate in Fund missions, exchange information, consult on policy matters, and resident missions cooperate closely

### AsDB Lending Statistics (October 1993–July 2006, Table 1)
- Lending: Number 55; Approved Amount US$ 3,519.3 million
- Agriculture and Natural Resources: Number 11; Approved Amount US$ 671.0 million
- Education: Number 5; Approved Amount US$ 239.0 million
- Energy: Number 4; Approved Amount US$ 660.0 million
- Finance: Number 6; Approved Amount US$ 335.0 million
- Health, Nutrition, and Social Protection: Number 4; Approved Amount US$ 159.2 million
- Industry and Trade: Number 2; Approved Amount US$ 68.5 million
- Law, Economic Management & Public Policy: Number 4; Approved Amount US$ 151.4 million
- Transportation and communication: Number 9; Approved Amount US$ 695.5 million
- Water Supply, Sanitation & Waste Management: Number 5; Approved Amount US$ 304.0 million
- Multi-sector: Number 5; Approved Amount US$ 235.7 million
- Technical assistance: Number 185; Approved Amount US$ 123.7 million
  - Advisory and operational purposes: Number 132; Amount US$ 83.5 million
  - Project preparation: Number 53; Amount US$ 40.2 million

### Loan Approvals and Disbursements, 1997–2006 (Table 2)
- Loan approvals (1997–2006):
  - 1997: 359.60
  - 1998: 284.00
  - 1999: 220.00
  - 2000: 188.50
  - 2001: 243.10
  - 2002: 233.50
  - 2003: 179.00
  - 2004: 296.40
  - 2005: 577.70
  - 2006: -
- Loan disbursements:
  - 1997: 149.3
  - 1998: 127.8
  - 1999: 191.2
  - 2000: 218.9
  - 2001: 176.2
  - 2002: 231.7
  - 2003: 233.2
  - 2004: 182.4
  - 2005: 223.7
  - 2006: 69.7
- Undisbursed balance at the beginning of the year:
  - 1997: 842.42
  - 1998: 997.48
  - 1999: 1,191.56
  - 2000: 1,190.38
  - 2001: 1,086.15
  - 2002: 1,118.80
  - 2003: 1,198.10
  - 2004: 1,191.59
  - 2005: 1,313.69
  - 2006: 1,560.87
- Memorandum item: Technical assistance approvals
  - 1997: 9.51
  - 1998: 5.93
  - 1999: 10.34
  - 2000: 9.12
  - 2001: 8.42
  - 2002: 9.28
  - 2003: 8.61
  - 2004: 7.68
  - 2005: 12.25
  - 2006: 3.04

*Source: _cr07387 - ANNEX (Vietnam—Fund Relations; Vietnam—Relations with the Asian Development Bank).*

### ANNEX III

### ANNEX III  Vietnam—Relations with the World Bank Group

### Partnership in Vietnam’s Development Strategy
- A new Country Partnership Strategy (CPS) was presented to the World Bank Board in February 2007.
- The CPS is fully aligned to Vietnam’s Socio-Economic Development Plan (SEDP) 2006–2010 and sets out the planned World Bank support between FY07 and FY11.
- The objectives of the SEDP map onto four broad pillars and the CPS organizing principles:
  - (i) improving the business environment;
  - (ii) preserving social inclusion;
  - (iii) strengthening environmental and natural resource management;
  - (iv) improving governance.
- Common theme: need to complete remaining first-generation structural reforms (transition to a market economy and state sector restructuring) and move forward on ambitious second-generation reforms (institutional underpinnings for a more complex economy as Vietnam becomes a middle-income country).
- Expected transformation of the Government’s role: from direct producer of goods and services to regulator and provider of foundations for a well-functioning, equitable, modern market economy.

- Improving the Business Environment — emphasis shift from design to implementation; focuses include:
  - banking reform and overall financial sector development;
  - improved competitiveness with fuller integration with the world economy;
  - a more level playing field for businesses regardless of ownership;
  - laying a better foundation for knowledge-based growth and enhancing agricultural competitiveness;
  - building up more efficient and reliable infrastructure.

- Preserving Social Inclusion — World Bank Group priorities:
  - better understanding of poverty and piloting new instruments to reach the poor;
  - mainstreaming gender issues across the portfolio and including people with disabilities;
  - increasing access to quality, basic infrastructure services for the rural poor;
  - increasing access to affordable and better quality education and health care services;
  - including and empowering ethnic minorities;
  - improving policies and services to address needs of urban poor and migrants and reducing vulnerability to adverse shocks.

- Strengthening Environmental and Natural Resource Management — focus areas:
  - livelihood-supporting roles and public benefits of better managed environment and natural resources;
  - regional planning; land, forestry, water resources and integrated river basin management;
  - introduction of modern tools for environmental protection.

- Improving Governance — Bank support thrusts:
  - strengthening public financial management;
  - simplification of administrative procedures;
  - assisting with the Government’s fight against corruption;
  - greater accountability of public service providers;
  - modernizing planning with a focus on development outcomes and more participatory approaches.

### World Bank Group Strategy and Lending
- Instruments employed: analytical and advisory activities; IDA investment projects; Poverty Reduction Support Credits (PRSCs); IFC equity, loan and TA participations; Mekong Private Sector Development Facility (MPDF); Multilateral Investment Guarantee Agency (MIGA) activities; donor partnerships and ODA coordination.
- IDA credits provide policy, institutional and physical investment support; PRSCs used as vehicles for policy dialogue.

- Scale of Bank Group Activities:
  - CPS operational program calibrated on assumption of annual IDA lending envelopes in the order of US$900 million.
  - Actual allocations depend on Vietnam’s performance relative to other potential IDA recipients and on the overall resource envelope.
  - During the CPS period, Vietnam’s GNI per capita is projected to move steadily towards the IDA graduation threshold.
  - The Vietnamese government has expressed desire to seek an opportunity for blending IDA and IBRD resources.
  - The World Bank has scheduled a creditworthiness review in FY08 to this effect.
  - The IFC and MIGA programs are also expected to grow in the coming years.

- Poverty Reduction Support Credits (PRSCs):
  - A sixth PRSC operation for US$175 million equivalent was approved by the Board in June 2007.
  - PRSCs 6-10: a proposed series of five operations to support reforms envisaged chiefly in the SEDP 2006–2010 (also serves as the Poverty Reduction Strategy for Vietnam).
  - Prior series: PRSC 1 was a two-tranche operation for US$250 million approved in June 2001 (focused on trade liberalization, financial sector and SOE reforms, and private sector development).
  - PRSCs 2-5: each for US$100 million; broader coverage including health, social protection, education, environmental protection and natural resource management, and building modern governance systems (public financial management, public administration reform, modernizing planning, fighting corruption).
  - PRSCs have served as an effective donor coordination device: number of co-financiers increased from 4 at PRSC 1 to 11 for PRSC 6; contribution of co-financiers exceeded US$150 million for PRSC 5.
  - PRSCs serve as a single unified platform for policy dialogue between about 16 donors and the Government.

- Knowledge Products:
  - Annual Vietnam Development Reports (VDR) coordinate with donors, summarize accumulated knowledge in specific policy areas, and foster policy and institutional reform agenda.
  - Recent VDR focuses: poverty, governance, business development.
  - VDR 2007 was cross sectoral and based on SEDP 2006–2010, laying out a roadmap for the next five years.
  - A forthcoming VDR will focus on social protection.
  - Upcoming reports over the CPS period will include: Skills for Growth and Tertiary Education, Investment Climate Assessment, Capital Market Monitoring and Assistance, Country Social Analysis, Health Issues Paper, Country Environmental Analysis, Land Policy Dialogues, Public Expenditure Review/Integrated Fiduciary Assessment and Country Financial Assessment Update.

### FY04–07 Actual Deliveries (table summarized as project line items with IDA amounts)
- Fiscal Year 2004 — Total $706
  - Vietnam PRSC III $100
  - VN-Road Network Improvement $225
  - VN-Urban Upgrading $222
  - Vietnam Water Resources Assistance $158
- Fiscal Year 2005 — Total $699
  - Vietnam PRSC IV $100
  - VN-HIV/AIDS Prevention Project $35
  - VN-Targeted Budget Support for EFA $50
  - VN-Road Safety $32
  - VN-Water Supply Development $113
  - VN-Rural Energy 2 $220
  - VN-Forest Sector Development Project $40
  - VN-Avian Influenza Emergency Recovery Project $5
  - Payment System and Bank Modernization 2 $105
- Fiscal Year 2006 — Total $768
  - Vietnam PRSC V $100
  - VN-ICT Development $94
  - Mekong Health Support $70
  - Customs Modernization Project $66
  - VN-RRD Rural Water and Sanitation $46
  - VN-Transmission and Distribution 2 $200
  - Rural Transport 3 $106
  - VN-Natural Disaster Risk Management Project $86
- Fiscal Year 2007 — Total $712
  - Vietnam PRSC VI $175
  - VN-Second Higher Education Project $60
  - VN-Program 135 Phase 2 (DPL) $50
  - VN-Avian and Human Influenza Control $20
  - VN-Mekong Transport Infrastructure Development $207
  - Mekong Transport/Flood Protection (Supplementary) $25
  - VN-Ho Chi Minh City Infrastructure Fund (HIFU) $50
  - VN-Coastal Cities Environment and Sanitation Project $125

### IMF-World Bank Collaboration in Specific Areas
- The World Bank and the IMF collaborated to launch the PRSC-PRGF program in 2001; preparatory work began in 1998.
- Lead agency by policy area identified in the Policy Framework Paper and Structural and Sectoral Policy Matrix for 1999–2001.
- IMF direct involvement justified in structural areas with potential impact on macroeconomic stability: financial sector, SOE, and trade reform.
- Post-PRGF (expired April 2004) collaboration:
  - Close collaboration in discussion of PRSC prior actions and triggers in areas previously covered by the PRGF.
  - IMF provided Letters of Assessment in support of the last three PRSC operations.
  - World Bank following up on IMF-provided technical assistance in tax reform and revenue management (public financial management).
  - Joint work to support establishment of a modern central bank: IMF provides technical assistance on monetary policies and banking supervision; World Bank set up an investment credit to reorganize the State Bank of Vietnam and develop appropriate information management systems.
- From 2005 onwards, the World Bank and the IMF have jointly prepared an annual Debt Sustainability Assessment.
- Joint comment on SEDP 2006–2010, including a Joint Staff Advisory Note submitted to the World Bank Board in December 2006.
- Collaboration on economic statistics:
  - IMF focus: improving balance of payments, national accounts, and price statistics.
  - World Bank focus: production of high-quality household and enterprise surveys and developing broader access to data in Vietnam.

*Source: ANNEX III — Vietnam—Relations with the World Bank Group*

### ANNEX IV

### ANNEX IV — Vietnam—Statistical Issues

### Overview
- Data provision to the Fund is broadly adequate for surveillance, but reliability and coverage of macroeconomic statistics have significant deficiencies that hamper economic analysis.
- Compilation and dissemination need substantial improvement so that data properly reflect economic developments and assist policy formulation, implementation, and monitoring.
- Work is hampered in some areas by the lack of authorization to release data.
- Vietnam has few official statistical publications that provide coverage beyond the real sector.
- Vietnam page introduced in the GFS Yearbook in 1999 (data last reported for fiscal year 2004) and in the IFS in 2001.
- Vietnam has participated in the GDDS since September 2003; metadata are posted on the Fund’s Dissemination Standards Bulletin Board.

### Fund technical assistance and missions
- STA multisector statistics/GDDS mission in July 2001 found deficiencies and recommended an action plan.
- Follow-up STA mission in December 2001 agreed on a program to improve national accounts and price statistics.
- STA peripatetic expert assigned to assist the General Statistics Office (GSO) under a five-year project commencing January 2002; a series of four follow-up missions was fielded.
- Follow-up missions in balance of payments statistics in September 2003 and 2006.
- Mission on core inflation measurement and inflation forecasting took place in April 2007.

### National accounts — findings and issues
- GSO provides quarterly and annual data on GDP by type of economic activity and annual data by expenditure (both in current and constant prices).
- Monthly and annual data provided on external trade, industrial output, retail sales, and prices.
- Annual constant price GDP estimates have 1994 as the base year and are in need of updating.
- National accounts methodology broadly consistent with the System of National Accounts 1993, but compilation suffers from poor data collection practices and lack of coordination and communication between data collection agencies.
- In 2001 GSO introduced new methodology for calculating GDP; in 2003 published two revised handbooks on sources and methods in Vietnamese.
- Note: "GDP by type of expenditure was calculated from 2002Q1 to 2003Q2 but discontinued due to lack of resources."

### Prices — findings and recommendations
- CPI methodology largely in line with international standards.
- GSO released a revised CPI in May 2006 based on data from the 2004 Vietnam Household Living Standards Survey (VHLSS).
  - Basket now includes about 500 items, compared with about 400 for the previous index (based on the 1998 VHLSS).
  - Weight of food decreased from 47 percent to 42 percent.
- Only a notional inclusion of owner-occupied and rental housing in CPI.
- Need to adopt a geometric mean of price relatives at the lower level of aggregation, instead of the upward biased arithmetic mean.
- Producer price index planned in late 2001 was delayed for technical reasons.
- Trade price indices are compiled but not used in national accounts because sample size is deemed too small.
- Authorities are working on a core inflation index.

### Government finance statistics — coverage and shortcomings
- Ministry of Finance’s (MoF) State Budget Department produces provisional monthly, quarterly, and annual data shortly after period end; final fiscal (calendar) year data produced after about eighteen months.
- Data reflect consolidated operations of the state budget covering central, provincial, district, and commune levels.
- Exclusions: off-budget investment expenditure, quasi-fiscal activities of SOEs, and extrabudgetary funds, among which are the Social Security Fund, Enterprise Restructuring Fund, Development Assistance Fund, Export Support Fund, local development funds, and the Sinking Fund — data for these are not compiled on a regular basis.
- Compilation is on a cash basis for final annual data; provisional data compilation basis varies depending on source.
- Government financing data, particularly domestic bank financing, cannot be reconciled between fiscal and monetary accounts.
- Provisional data are compiled before period end and involve a projected component; quarterly data are only revised when data are compiled for the same quarter of the following year.
- MoF’s External Finance Department maintains centralized record of all general government external debt, excluding guarantees issued on behalf of state-owned enterprises.
- With UNDP support, MoF implemented an external debt management system for recording disbursements and multiple currency loans; as of May 2006 it was in the testing phase.
- Progress on fiscal transparency includes implementation of improved budget management law and adoption of a 1986 GFS-consistent budget classification at all government levels.
- MoF began posting annual budget outturns and plans on its external website starting late 2001, including by major revenue and expenditure items.
- Actions remaining: gazetting and publishing the annual national budget; preparing commune-level budgets; implementing GFS-based functional budget classification; initiating revision of government accounting standards; preparing a medium-term expenditure framework; introducing an integrated financial management system (IFMS) to improve treasury management and fiscal reporting.
- 2001 STA mission found functional classification not fully aligned with international classification standards.
- IFMS expected to allow detailed classification of provisional and final budget accounts and permit incorporation of extrabudgetary funds into the Treasury database.
- Annual GFS data through 2004 (excluding extrabudgetary funds and social security funds) reported for publication in the GFS Yearbook using the 1986 GFS format.
- No sub-annual fiscal data reported for publication in IFS since 2001.

### Monetary and financial statistics — reporting and gaps
- State Bank of Vietnam (SBV) reports monetary and financial data to the Fund, including:
  - (i) the monetary survey (monthly basis with a ten-week lag);
  - (ii) the central bank balance sheet (monthly basis and typically with a twelve-week lag);
  - (iii) detailed consolidated balance sheets (“derivation tables”) for six state-owned and 77 non-state deposit money banks and individual balance sheets for the four large state-owned commercial banks (since beginning of 2001 on a monthly basis and typically with a twelve-week lag);
  - (iv) deposit and lending rates of the large SOCBs (monthly basis and for various maturities);
  - (v) data on reserve requirement on a monthly basis with a twelve-week lag;
  - (vi) data on open market operations on a daily basis with a twelve-week lag.
- Since December 2005 the consolidated balance sheets of deposit money banks additionally cover five financial companies.
- Recently, monetary data and foreign reserves data (gross and net official international reserves and net foreign assets of the banking system) have been submitted to the APD mission team with a lag of 8–9 weeks.
- January 1999: SBV and commercial banks began implementing new charts of accounts for compiling money and banking data (developed with STA assistance).
- Current charts do not adequately sectorize credit for monetary programming purposes, failing to distinguish bank credit to SOEs and other nonstate sectors.
- SBV designed a new monthly report form for the four large SOCBs for submitting sectorized credit data.
- July 2001 STA mission encouraged the SBV to develop reporting scheme for comprehensive breakdown of banks’ credit by borrowing sectors, subsectors, and ownership.
- April 14-28, 2005 follow-up mission recommended changes to bank report forms to allow greater sectorization of bank credit; recommended distribution of list of privatized SOEs to banks to guide classification; reclassification of funds for on-lending out of banks’ “unclassified liabilities” to “other deposits”; and presentation of how Fund accounts should be compiled in monetary statistics.
- Further cooperation needed to resolve data discrepancies involving credit data for a state-owned bank; discrepancies may reflect noncoverage/omission of certain loans and financial leases offset by lower deposits and other liabilities.

### External sector statistics — BOP, trade, FDI, and debt data issues
- SBV compiles quarterly and annual balance of payments (BOP) statistics with a one- to two-month lag; data reported to the Fund for publication are less timely (August 2007 IFS published data for 2006Q2).
- SBV does not compile international investment position statistics.
- Since 1995, monthly and annual trade data compiled using customs reports, but coverage and accuracy need improvement.
  - Commodity breakdown unknown for approximately 17 percent of reported exports and 27 percent of reported imports in 2006.
- Invisibles data largely based on banking records, providing incomplete coverage and identification of transaction types; improvements needed for tourism revenue and workers’ remittances.
- Improvements in BOP statistics, particularly FDI, hampered by interagency coordination problems.
  - SBV compiles FDI based on quarterly and semi-annual survey reports from foreign enterprises and SBV branch reports.
  - Ministry of Planning and Investment (MPI) also collects administrative FDI data.
  - Problems persist with survey response rate; not all FDI enterprises provide requested information.
  - 2001 STA GDDS mission noted no effort to distinguish head office and other nonresident liabilities in reported data.
  - 2003 and 2006 BOP missions recommended MPI, GSO, and SBV work jointly to improve FDI questionnaires and processes, including collecting data on both stocks and flows.
- SBV maintains data on contracting of commercial debt (by SOEs and privately owned firms); some loans reported after extended delay; reporting of disbursements and repayments remains poor.
- MoF maintains data on contracting, disbursement, and service of official debt; MPI reports loan obligations of foreign investors.
- Overlapping responsibility for debt statistics has resulted in deficiencies in coverage, including lack of monitoring certain leasing arrangements (e.g., for aircraft).
- 2006 mission recommended creation of a line item for portfolio capital flows to capture the 2005 sovereign bond issuance and expected future portfolio inflows; a draft report form was left with the authorities.
- Recent SBV data reflect the recommended breakdown for portfolio inflows.

### Table of Common Indicators Required for Surveillance (as of August 10, 2007) — selected entries and frequencies
- Exchange Rates: Date of Latest Observation 8/07/07; Date Received 8/09/07; Frequency of Data D; Frequency of Reporting M; Frequency of Publication W.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 5/31/07; Date Received 6/27/07; Frequency of Data M; Frequency of Reporting I; Frequency of Publication NA.
- Reserve/Base Money: Date of Latest Observation 5/31/07; Date Received 7/11/07; Frequency of Data M; Frequency of Reporting I; Frequency of Publication NA.
- Broad Money: Date of Latest Observation 5/31/07; Date Received 7/11/07; Frequency of Data M; Frequency of Reporting I; Frequency of Publication NA.
- Central Bank Balance Sheet: Date of Latest Observation 5/31/07; Date Received 7/19/07; Frequency of Data M; Frequency of Reporting I; Frequency of Publication NA.
- Consolidated Balance Sheet of the Banking System: Date of Latest Observation 5/31/07; Date Received 7/19/07; Frequency of Data M; Frequency of Reporting I; Frequency of Publication NA.
- Interest Rates: Date of Latest Observation 7/31/07; Date Received 7/31/07; Frequency of Data M; Frequency of Reporting I; Frequency of Publication NA.
- Consumer Price Index: Date of Latest Observation 7/15/07; Date Received 7/24/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of Latest Observation 6/30/07; Date Received 8/1/07; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication A.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of Latest Observation 2006; Date Received 6/26/07; Frequency of Data I; Frequency of Reporting I; Frequency of Publication NA.
- External Current Account Balance: Date of Latest Observation 2005 and 2006; Date Received 8/7/07; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A.
- Exports and Imports of Goods and Services: Date of Latest Observation 7/31/07; Date Received 7/25/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- GDP/GNP: Date of Latest Observation 7/31/06; Date Received 7/23/07; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Gross External Debt: Date of Latest Observation 2006; Date Received 8/3/07; Frequency of Data I; Frequency of Reporting A; Frequency of Publication NA.

### Joint IMF/World Bank Debt Sustainability Analysis (extracts)
- Vietnam remains at low risk of external debt distress over the medium term, provided external borrowing continues to be guided by the prudence that has characterized government policies over the last few years.
- Inclusion of domestic debt in the analysis paints a more nuanced picture: prolonged maintenance of an expansionary fiscal policy or a permanently lower GDP growth rate could pose risks to long-run fiscal sustainability.
- These considerations reinforce the need for:
  - adoption of a more restrained fiscal stance over the medium term, and
  - accelerated reform and equitization of SOEs.
- The DSA updates Country Report No. 06/421 (Annex VII, pp. 48–59) and uses the joint framework approved by the Bank and Fund Boards in April 2005.
- Baseline scenario consistent with policies and public investment program in Vietnam’s Socio-Economic Development Plan (SEDP) for 2006–10 and the government’s Poverty Reduction strategy (PRS).
- Key baseline assumptions:
  - GDP growth at 8 percent on average during 2007–12 and 7.1 percent thereafter.
  - Consumer price inflation picking up to 8 percent in 2007; declining to 4½ percent by 2012, and 2.8 percent over the long run.
  - Exchange rate of the dong continuing to depreciate by 1–1½ percent a year vis-à-vis the U.S. dollar over the medium term, and stabilizing over the long run.
  - Oil revenues declining from a peak of 9¾ percent of GDP in 2006 to around 8 percent of GDP in 2007–08 and 5 percent of GDP from 2012 onward.
  - Non-oil revenues increasing from around 17¼ percent of GDP in 2007 to 18¼ percent of GDP by 2012.
  - Total primary (non-interest) expenditure declining: non-interest current expenditure declining from 18¾ percent of GDP in 2007 to about 17½ percent of GDP by 2010 and about 15½ percent of GDP over the long run.
  - Total public investment (including on-lending for SOE projects) declining from about 12½ percent of GDP in 2007 to 10½ percent of GDP by 2012.
  - Composition of new borrowing shifting toward less concessional terms; average interest rate on external debt increasing from historical average of 3 percent to about 5½ percent during 2013-27.
  - No further liabilities incurred in connection with SOCB reform, and no contingent liabilities arising from the SOE sector, given SOCB capital replenishment through an injection of public funds equivalent to around 1 percent of GDP; government intends to meet any further SOCB or SOE recapitalization needs through recourse to the government’s equitization fund.

*Source: _cr07387 - ANNEX IV (Vietnam—Statistical Issues) — IMF staff report content provided in the PDF chapter.*

### 4. Under the above assumptions, the non-oil fiscal deficit would fall from 14¾ percent

### _cr07387 - 4. Under the above assumptions, the non-oil fiscal deficit would fall from 14¾ percent

### Fiscal outlook and key fiscal projections
- Non-oil fiscal deficit:
  - 14¾ percent of GDP in 2007–08
  - 10½ percent of GDP by 2012
  - Levels off at about 9 percent of GDP over the long run
- Overall fiscal deficit:
  - About 7 percent of GDP in 2007
  - 5½ percent of GDP by 2012
  - Levels off at about 4 percent of GDP in the long run
- Primary deficit:
  - 5½ percent of GDP in 2007
  - 3¾ percent of GDP in 2012
  - Falls to 1 percent of GDP by 2027

### C. Public Sector Debt Sustainability — baseline and sensitivities
- Baseline public debt path:
  - Total public debt stock: 43½ percent of GDP in 2007
  - Breaches authorities’ notional ceiling of 50 percent of GDP in 2014
  - Peaks at about 51 percent of GDP in 2016
  - Falls to 46½ percent of GDP by 2027
- NPV and servicing ratios (baseline):
  - NPV of debt to GDP ratio reaches a high of 47½ percent
  - NPV of debt to revenue ratio would exceed 200 percent in 2017, then decline rapidly over the long run
  - Debt service to revenue ratio remains manageable throughout the projection period
- Main sensitivities (stress tests):
  - Failure to adjust the primary balance (alternative scenario A2; primary balance remains at -5.5 percent of GDP):
    - NPV of debt to GDP ratio: 81 percent by 2027
    - NPV of debt to revenue ratio: 351 percent by 2027
    - Debt service to revenue ratio: 30 percent by 2027
  - Permanently lower GDP growth rate (alternative scenario A3):
    - NPV of debt to GDP ratio: 54 percent by 2027
    - NPV of debt to revenue ratio: 233 percent by 2027
    - Debt service to revenue ratio: 16 percent by 2027

### D. External Debt Sustainability — baseline assumptions and projections
- Baseline policy assumptions:
  - Annual external borrowing limit for the public sector continued
  - Prudent sovereign bond issuance; no foreign holdings of domestic-currency bonds incorporated
  - Specific financing assumptions:
    - IDA financing: 2.3 percent of GDP in 2007 → about 1.8 percent of GDP in 2010 → slow move to blended multilateral/bilateral finance thereafter
    - Gradual decline in ODA-financed on-lending
    - Decline in SOE external debt with government guarantee as SOEs gain market access
    - Continued robust growth in FDI
    - Net annual issuance of commercial sovereign bonds rising to 1.3 percent of GDP in 2008 and leveling off at 1 percent of GDP long run
    - Private debt increases from 5.2 percent of GDP in 2007 to 8.7 percent of GDP in 2027
- Baseline external debt projections:
  - Total external debt: 31 percent of GDP in 2007 → 26½ percent of GDP in 2012 → 22 percent of GDP by 2027
  - NPV of PPG debt to GDP ratio: levels off at about 17 percent of GDP during 2010–2012 → 11½ percent of GDP by 2027
  - NPV of PPG debt to exports ratio: 24 percent in 2007 → 20 percent in 2012 → 14 percent by 2027
  - NPV of PPG debt to revenue ratio: edges up to 74 percent in 2012 → falls to 50 percent by 2027
  - Debt service-to-export ratio: about 4 percent throughout the projection period
  - Debt service-to-revenue ratio: 10 percent in 2007 → 15 percent by 2017 → levels off and declines to 13 percent by 2027
- External-debt sensitivity (terms of new debt; alternative scenario A2):
  - NPV of debt-to-exports ratio could remain at 24 percent over the long run
  - NPV of debt-to-revenue ratio would rise to 97 percent by 2017
- Additional external risks highlighted:
  - Postponed or absent fiscal adjustment could necessitate more external borrowing and worsen public external debt dynamics
  - Increased issuance of sovereign or SOE domestic-currency bonds abroad (including on-lending) could raise external debt faster than projected

### E. Public Sector Debt Sustainability — contingent liabilities scenarios
- Rationale:
  - Two scenarios developed to reflect contingent government liabilities from SOCBs and SOEs
  - Assumed contingent liabilities scaled to 4 percent–8 percent of GDP in this DSA (reduced from prior ranges), reflecting expected SOCB equitizations and slower SOCB lending growth
- Alternative Scenario 1 (contingent liabilities = 4 percent of GDP; recapitalization costs):
  - Recapitalization costs to raise SOCB capital to 8 percent of assets estimated at 4 percent of GDP
  - Government absorbs contingent liabilities in four equal installments over 2008–11 (1 percent of GDP a year)
  - Outcome: NPV of public debt rises slightly faster than baseline over the medium term but follows a declining long-run trend and remains below the authorities’ notional debt ceiling of 50 percent of GDP throughout the projection period
- Alternative Scenario 2 (contingent liabilities = 8 percent of GDP; weaker SOE equitization and greater SOE borrowing):
  - Government incurs contingent liabilities equivalent to 8 percent of GDP, spread evenly over 2008–11
  - Outcome: NPV debt stock breaches the authorities’ notional debt ceiling of 50 percent by 2012; peaks at around 51½ percent of GDP in 2015; declines to about 45 percent in 2027
- Implications:
  - Contingent liabilities can materially influence public debt dynamics
  - Delays in SOE reforms and increased SOE borrowing could increase contingent liabilities and threaten medium-term debt sustainability, potentially requiring larger and more abrupt fiscal adjustments and crowding out investment and social spending

### F. Staff assessment
- External debt distress risk:
  - Staff consider Vietnam to be at low risk of external debt distress over the period 2007–12 under the baseline
- Conditions and robustness:
  - External debt ratios remain below applicable policy-based debt thresholds provided external borrowing policies remain prudent
  - External debt dynamics are robust to most standardized shocks; exchange rate shock is most impactful but debt levels still remain well below applicable thresholds
  - A gradual decline in the NPV of external debt-to-GDP ratio occurs under various shocks, consistent with the baseline

*Source: IMF staff analysis in the referenced DSA section of the country report.*

### 17. However, the inclusion of domestic debt paints a somewhat more nuanced picture.

### _cr07387 - 17. However, the inclusion of domestic debt paints a somewhat more nuanced picture.

### Baseline projections (including domestic debt)
- NPV of domestic debt: rises from 19.4 percent of GDP in 2007 to 27 percent of GDP by 2012.
- NPV of debt-to-revenue ratio: rises above 200 percent by 2017.
- Under the baseline, if the substantial long-run fiscal adjustment envisioned does not materialize:
  - NPV of total public debt would rise to about 350 percent of revenue by 2027.
  - Debt service-to-revenue ratio would rise to 30 percent by 2027.
- Public and publicly guaranteed (PPG) debt in NPV (selected series from the baseline table): 37.6 (est. 2006), 37.9 (2007), 39.7 (2008), 40.8 (2009), 41.7 (2010), 43.0 (2011), 44.2 (2012), 47.3 (2013), 43.3 (2017).
- Memo: Public and publicly guaranteed debt in percent of GDP (selected series from the baseline table): 43.3 (2006), 43.4 (2007), 44.9 (2008), 46.0 (2009), 46.8 (2010), 47.7 (2011), 48.7 (2012), 50.5 (2013), 46.4 (2017).

### Stress tests, alternative scenarios, and contingent liabilities
- Stress tests indicate that an expansionary fiscal policy or a permanently lower GDP growth rate could pose risks to long-run fiscal sustainability.
- Scenario if baseline fiscal adjustment fails: NPV of total public debt ≈ 350 percent of revenue by 2027; debt service-to-revenue ≈ 30 percent by 2027.
- Contingent liabilities scenarios (Table 1):
  - Scenario 1: Contingent liabilities equivalent to 4 percent of GDP (assumes capital injection equal to 4 percent of GDP, spread over 2008-11).
  - Scenario 2: Contingent liabilities equivalent to 8 percent of GDP (assumes capital injection equal to 8 percent of GDP, spread over 2008-11).
- Alternative scenario examples (selected outcomes from sensitivity tables):
  - A1 (Real GDP growth and primary balance at historical averages) shows higher NPV and debt-to-revenue outcomes relative to baseline in some years.
  - A2 (Primary balance unchanged from 2006) and A3 (Permanently lower GDP growth) produce materially worse debt indicators in projection years.
- Bound tests include shocks such as:
  - Real GDP growth at historical average minus one standard deviation.
  - Primary balance at historical average minus one standard deviation.
  - One-time 30 percent real depreciation in 2007.
  - 10 percent of GDP increase in other debt-creating flows in 2007.

### Key debt sustainability metrics and fiscal dynamics (selected figures)
- NPV of public sector debt (NPV of public sector debt row): 37.6 (2004), 37.9 (2005), 39.7 (2006), 40.8 (2007), 41.7 (2008), 43.0 (2009), 44.2 (2010), 47.3 (2011), 43.3 (2012).
- NPV of public sector debt-to-revenue ratio (selected): 140.5 (2007), 150.1 (2008), 154.8 (2009), 164.2 (2010), 173.5 (2011), 182.6 (2012), 191.8 (2013), 205.1 (2017), 188.6 (2027).
- Debt service-to-revenue ratio (selected): 3.8 (2004), 3.2 (2005), 3.4 (2006), 5.5 (2007), 5.9 (2008), 6.4 (2009), 6.9 (2010), 7.3 (2011), 7.6 (2012), 9.3 (2017), 11.5 (2027).
- Public sector debt (percent of GDP) (selected): 42.4 (2004), 43.8 (2005), 43.3 (2006), 43.4 (2007), 44.9 (2008), 46.0 (2009), 46.8 (2010), 47.7 (2011), 48.7 (2012), 50.9 (2013), 46.4 (2017).
- Gross financing need (billions of U.S. dollars, selected): total gross financing need series shows increases across projections, with total gross financing need rising in projections (Table 3a shows Total gross financing need (billions of U.S. dollars): 2.0 (2004), 1.2 (2005), 0.7 (2006), 2.9 (2007), 3.6 (2008), 4.2 (2009), 5.0 (2010), 5.9 (2011), 6.7 (2012), 11.6 (2017), 29.8 (2027)).
- Key macro assumptions (selected):
  - Real GDP growth (in percent): 7.8 (2004), 8.4 (2005), 8.2 (2006), baseline projections include 8.3, 8.2, 8.0, 8.0 in near-term years; long-run averages and later years show 7.1, 7.1, 7.1.
  - Inflation rate (CPI, in percent) (selected): 9.7 (2004), 8.8 (2005), 6.6 (2006), projected path includes 8.0, 7.3, 6.5, 6.5, 5.0, 4.5, 6.3 in various projection years.
  - Average nominal interest rate on forex debt (in percent) (selected): 1.8 (2004), 2.1 (2005), 2.1 (2006), projected series includes 2.4, 2.7, 2.7, 2.5, 2.5, 2.5.

### Policy implications and recommendations
- Continued close monitoring of Vietnam’s public debt dynamics is underscored by the analysis.
- Reinforce the need for the adoption of a more restrained fiscal stance over the medium term.
- Accelerate the pace of reform and equitization of SOEs to reduce contingent liabilities and improve fiscal sustainability.

*Sources: Vietnamese authorities; and Fund staff estimates and projections.*

### 1.      Most indicators suggest that economic activity has remained buoyant over the last

### 1.      Most indicators suggest that economic activity has remained buoyant over the last

### Economic activity and growth
- Real GDP growth picked up to 8.2 percent (year-on-year (yoy)) during the first nine months of 2007.
- Growth drivers: continued rapid growth of domestic demand and non-oil exports; brisk retail sales growth; continued boom in foreign direct investment (FDI).
- Authorities’ revised target for GDP growth for the full year: 8.5 percent (likely to be achieved if recent trends continue).
- Vietnam relatively unscathed by global market turmoil triggered by the subprime mortgage crisis in the United States.

### Inflation and administered prices
- Inflation reached 9.3 percent (yoy) in October 2007.
- Drivers: continuing cost-push pressures on food and commodity prices (local supply shocks and global market conditions) compounded by demand pressures.
- Policy response: Prime Minister issued Directive 18/2007 in August instructing ministries and the SBV to adopt urgent measures to curb inflation.
- Fiscal/administrative actions:
  - MOF temporarily reduced import tariffs on a number of food and foodstuff products and construction materials; permanently reduced tariffs on some other consumption goods by advancing WTO commitments.
  - Postponement of previously-planned steps to ease controls on key administered prices.
  - August directive: oil trading enterprises asked to reduce gasoline retail prices by VND 500 per liter (i.e., by about 4¼ percent).
  - Effective freeze imposed on prices of: electricity, oil products, coal sold to electricity, cement, fertilizer, and paper producers, clean water, postal services, and bus tickets.

### Monetary conditions and credit
- Despite doubling of reserve requirements from June 2007, growth of total liquidity (M2) and credit continued to accelerate through end-August 2007: M2 growth to 42 percent and credit to the economy to 40 percent.
- SBV instructed in August to adopt measures to control growth of monetary and credit aggregates.
- Monetary program targets for end-2007 set at:
  - M2 growth: 25–28 percent
  - Credit growth: 26–28 percent
- SBV measures to achieve targets: continue to absorb excess bank liquidity through open market operations.
- Recent developments: preliminary data suggest some tightening of money market conditions in recent weeks, although interbank deposit rates have remained negative in real terms.
- From broader summary data:
  - Growth of overall credit to the economy picked up from 25 percent in 2006 to 35 percent (y/y) as of end-May 2007.
  - Reserve requirements on bank deposits virtually doubled from June 2007 (to a range of 4 to 10 percent); banks’ securities-related lending capped at 3 percent of total loans.
  - Interbank rates and real time deposit rates have remained low.

### Fiscal developments
- Fiscal trends broadly in line with staff report projections.
- Preliminary first nine months of 2007: revenues slightly below budget target; disbursements of capital expenditure also fell short, helping contain overall deficit so far in 2007.
- Expenditures likely to be boosted in remainder of year as implementation of planned capital projects is stepped up.
- Budget-related indicators and risks (from staff summary):
  - Overall fiscal deficit was lower than budgeted in 2006; compressed to 3.8 percent of GDP in 2006.
  - If government fully implements 2007 plans, fiscal deficit could widen to well over 7 percent of GDP in 2007, with the non-oil deficit rising by at least 1–1½ percentage points of GDP.
  - Directors recommended that any revenue windfalls be saved and welcomed decision to postpone further large increases in public sector wages.
  - Directors urged that SOE projects not be funded through issuance of new sovereign bonds.

### Financial sector, equity market, and structural reforms
- Equitisation of Vietcombank (VCB):
  - On September 26, Prime Minister approved equitisation plan for VCB.
  - Plan: private sector participation gradually to a maximum of 49 percent; up to 20 percent initially allocated to foreign strategic investors; another 15 percent to be subsequently issued and listed abroad.
  - VCB to select no more than two foreign strategic investors and submit names to Prime Minister for approval before launching IPO.
  - Following IPO, VCB may reserve part of any accrued surplus capital for investment in key public infrastructure projects subject to Prime Minister’s decision.
- Legal and regulatory progress:
  - Implementing regulations issued for the Unified Enterprise Law, the Common Investment Law, and the new Commercial Law.
  - Decree 139 dated September 5 provides detailed guidelines on establishment, management structure, operation modalities, restructuring and dissolution of enterprises; expected to facilitate issuance of business registration certificates.
- Stock market developments:
  - Ho Chi Minh City Stock Market Price Index rose by 144.5 percent in 2006, and by another 51 percent in early 2007, before receding by about 20 percent during March–July.
  - Stock market capitalization soared from US$0.5 billion at end-2005 to around US$18 billion (25 percent of GDP) as of end-July 2007.
  - Directors expressed concern about risks from possible overheating in the stock market and supported tightening prudential controls on banks’ securities-related lending; called for improved securities market regulation to discourage insider trading and money laundering.
- Governance and institutional reforms:
  - Directors encouraged equitization of main SOCBs and welcomed VCB equitisation approval.
  - Directors recommended allowing scope for foreign strategic investors to strengthen SOCB governance.
  - Encouraged authorities to expedite plans to grant SBV adequate autonomy and authority for monetary policy and effective bank supervision.
  - Supported requests for technical assistance to build financial sector institutional capacity.
  - Directors called for faster SOE reform, expansion of equitization, prohibition of related-party lending within new SOE groups involved in both industrial and financial operations.

### Balance of payments, reserves, and external position
- Balance of payments remained sound:
  - Import growth picked up to 30 percent (y/y) during first seven months of 2007.
  - High oil prices, booming non-oil exports, buoyant remittances helped restrain current account deficit.
  - Gross official reserves: rose from US$11½ billion at end-2006 to around US$19 billion (3½ months of imports) as of end-May 2007.
  - Surge in reserves contributed to easing of monetary conditions.
- Exchange rate and competitiveness:
  - Dong/U.S. dollar rate depreciating by about 1 percent a year; trading band widened in January 2007 from +/-0.25 percent to +/-0.5 percent around daily reference rate; temporary modest appreciation allowed but reversed since March.
  - Nominal effective exchange rate (NEER) depreciated by about 8 percent since end-2005; real effective exchange rate (REER) broadly stable and close to long-run average.
- Outlook for external balances:
  - Increase in domestic demand projected to widen current account deficit to 3–3½ percent of GDP in 2007–08, but deficit expected to be comfortably financed with official development assistance, FDI, and other private capital inflows.
- Transparency:
  - MOF published first semi-annual external debt bulletin on its website containing statistics on government and government-guaranteed external debt and detailed information on coverage, methodology, sources, and definition of data.
  - Directors welcomed publication and encouraged further transparency improvements including reporting on external debt of SOEs, portfolio capital flows, and government and SOE bond issues.

### Near-term outlook, projections, and risks
- IMF staff projections:
  - GDP projected to expand by about 8–8¼ percent in 2007–08, underpinned by continued strong growth in exports, investment, and private consumption.
  - Balance of payments: current account deficit likely to widen to 3–3½ percent of GDP but remain comfortably financed.
- Key risks identified by staff and Directors:
  - Large foreign exchange inflows could prevent effective tightening of monetary policy.
  - Continued rapid credit growth, together with a weak regulatory environment, could threaten domestic financial stability.
  - Fiscal risks: large increases in public wages and pensions, and heavy on-lending to SOEs, could compound inflationary pressures and lead to rapid accumulation of public debt.
  - Insufficient banking sector and SOE governance improvements and continued state-sector dominance could lead to sub-optimal lending and investment, weakening investment efficiency and placing future burdens on the budget.
- Policy recommendations from Executive Directors:
  - Continue and strengthen monetary restraint; slow significantly growth of monetary and credit aggregates.
  - Continue sterilization of foreign currency inflows as needed; support transition to an inflation-targeting framework with technical assistance.
  - Introduce greater exchange rate flexibility as institutional and operational infrastructure is set in place to facilitate disinflation and de-dollarization and reduce need for intervention and sterilization.
  - Maintain a prudent and restrained fiscal policy; place non-oil fiscal deficit on a declining path as soon as possible.
  - Save any revenue windfalls; complete pass-through of higher oil prices to domestic administered prices while ensuring adequate social safety net for low-income groups.
  - Boost revenues and curb expenditure growth over medium term to protect debt sustainability; continue tax reforms and strengthen tax administration.
  - Pursue civil service administrative reforms including differentiated, merit-based wage structure and rationalization of employment.
  - Improve screening of public projects and encourage private investment in commercially viable infrastructure projects.
  - Expedite banking system reform, equitize SOCBs with foreign strategic investor participation, strengthen SBV autonomy, and seek technical assistance to build financial sector capacity.
  - Strengthen securities market regulation and prudential controls on banks’ securities-related lending.
  - Accelerate SOE reform and equitization; be open to foreign strategic investor participation and prohibit related-party lending within new SOE groups.
  - Implement ahead of schedule WTO-mandated tariff reductions to enhance efficiency.
  - Improve transparency of external debt and other capital flow reporting.

*IMF Executive Board Concludes 2007 Article IV Consultation with Vietnam; Public Information Notice (PIN) No. 07/136; November 21, 2007.*

### 1. On behalf of the Vietnamese authorities, we would like to thank staff for constructive

### On behalf of the Vietnamese authorities, we would like to thank staff for constructive

### Latest Economic Developments and Policy Stance
- Real GDP growth in the first nine months of 2007 was 8.2 percent; authorities expect to achieve a growth rate of 8.4–8.5 percent for the year, exceeding the 8.2 percent growth experienced in 2006.
- Growth was broad-based across all sectors, most notably industry and services; agriculture recovered after earlier disease-related difficulties.
- External sector performance to September 2007:
  - Export turnover increased of 19.4% compared to the same period a year ago.
  - Foreign direct investment increased to US$9.6 billion.
  - Commitment for official development assistance rose to US$4.5 billion.
  - Investment funds attracted to capital markets amounted to US$6.2 billion in 2007.
- Monetary policy actions in 2007:
  - SBV maintained reserve requirement ratio in the first five months; in June the SBV doubled the ratio as credit growth accelerated.
  - SBV stepped up sterilization of large capital inflows, particularly short-term funds tied to equity market performance.
  - Authorities emphasize close coordination between monetary and fiscal policy.
- Supply-side measures to address price pressures:
  - Reduced import tariffs and infrastructure improvements to alleviate supply bottlenecks.
  - Authorities favor targeted solutions over broad monetary tightening when inflation is supply-driven.
- Monetary management challenges noted:
  - Strong credit growth (including lending for equity market investment) and rapid financial-sector structural change.
  - Some credit growth related to funds to complete government projects, expected to subside as projects complete.
- Request for IMF technical assistance:
  - Authorities proposed additional work on developing tools for adopting an inflation-targeting framework.
  - They seek Fund assessments of proposed core inflation measures, public communication of these assessments, and guidance on communicating SBV’s monetary stance.

### Fiscal Policy and Transparency
- Authorities dispute staff’s characterization that fiscal stance in 2007 will be eased; they report fiscal deficit contained below budgeted levels.
- No additional expenditure plans or extraordinary revenue shortfalls envisaged in the budget.
- Commitment to expanding revenue sources, pursuing a prudent and transparent fiscal stance, and broadening the tax base.
- Ministry of Finance has announced and provided full disclosure of off-balance sheet fiscal items on its website.
- The Law on Tax Administration, effective July 1, 2007, enhances transparency and increases powers of tax administration agencies; implementing regulations are being developed.
- Wage restraint highlighted as an example of fiscal restraint that will be built upon.

### External Position and Exchange Rate Policy
- Authorities concur that Vietnam’s external position is sustainable and consistent with fundamentals; reserves strengthened due to sustained long-term private investment inflows.
- Authorities agree with staff that the Vietnamese dong is appropriately valued and acknowledge the call for more exchange rate flexibility.
- SBV is drafting implementing regulations under the new Foreign Exchange Ordinance to allow greater exchange rate flexibility and a less-rigid management regime.
- Authorities caution that the speed (not direction) of greater flexibility must take prevailing market conditions into account.
- SBV plans to increase dong convertibility and accelerate de-dollarization while reducing short-term risks and building financial-sector capacity for greater flexibility.

### Outlook and Structural Policies
- Authorities agree with staff that strong growth will be sustained in 2008; they concur that the external sector will strengthen while inflationary pressures would ease somewhat.
- Macroeconomic policy for 2008 expected to follow similar approach as 2007: appropriate monetary stance and prudent fiscal management.
- Structural reform program:
  - Government’s Post-WTO Plan of Action requires each ministry to issue its own Plan of Action to implement WTO commitments.
  - Progress made in combating corruption following passage of the Anti-Corruption Law; a Plan of Action enacted and Steering Committees on Anti-corruption set up at central and local levels.
- SOE reform:
  - Progress in regularizing SOE status, financial reporting, asset valuation, partial privatization/equitization, and listing.
  - Authorities state Vietnam does not have a policy of concessional public financing for SOEs; public recapitalization funds come from government as current owner when needed, but public funds are no longer earmarked for SOE projects.
  - Export assistance fund abolished; Development Assistance Fund converted into Vietnam Development Bank to be run as a normal bank.
  - SOEs needing project finance expected to borrow on commercial terms.
- SME development:
  - Active implementation of the Master Plan for SME Development, 2006-10.
  - Some localities have developed SME development plans and implementing units.

### Financial Sector: Developments in the Regulatory Framework and Structural Reforms
- Financial sector growth mirrors overall economic expansion and supports rapid real GDP growth; balancing rapid development with adequate regulatory and risk management capacity is a main task.
- Regulatory measures in 2007:
  - April: SBV issued revised regulations on loan classification and provision to improve credit quality and control credit risks.
  - May: Directive issued to control scope and quality of credit to securities investment to ensure orderly equity market development and macroeconomic stability.
  - Ongoing work to develop risk warning and assessment instruments, risk-based supervisory procedures, and minimum risk management requirements for credit institutions.
  - Authorities requested and welcome technical assistance from Fund on risk-based supervision.
- Structural reforms in banking:
  - Large state-owned commercial banks (SOCBs) are at various stages of equitization; a number have completed the process and will be listed, with the first initial public offering to take place in the near term.
  - Reform will allow substantial foreign participation; foreign financial institutions can take substantial stakes in reformed SOCBs of up to 15 percent (increased from previous limit of 10 percent).
  - Flexibility to raise foreign ownership exists on a case-by-case basis.
  - Financial liberalization is progressing expeditiously.

### Conclusion
- Vietnam is transitioning from low-income to middle-income status in the very near future; outward orientation, international trade, and investment are central to this success.
- Authorities emphasize the need to balance opportunities from globalization with structural reforms and capacity building: legal and regulatory frameworks, deeper financial markets, and human resource improvements.
- Authorities reaffirm belief that there is no long-term trade-off between stability and growth; stability is necessary to sustain growth.
- Authorities express appreciation for the Fund’s role, especially during the year’s Consultations focused on institutional capacities amid strong growth and relative stability.

*Source: _cr07387 - 1. On behalf of the Vietnamese authorities, we would like to thank staff for constructive*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07387.pdf_