## _cr09110

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---

### Key findings: macroeconomic performance and vulnerabilities
- Real GDP growth declined from 8½ percent in 2007 to 6¼ percent in 2008—the slowest pace since 1999.
- Headline inflation peaked at 28¼ percent (y/y) in August 2008 and moderated to 17½ percent (y/y) in January 2009; monthly inflation turned negative in the last three months (to January 2009).
- The current account deficit was 9¾ percent of GDP in 2007 and is estimated at 10¼ percent of GDP for 2008 as a whole.
- Gross international reserves were $23 billion (about four months of imports projected for 2009) at end-2008.
- The domestic currency depreciated by 9 percent vis-à-vis the U.S. dollar in 2008, but appreciated by 21 percent in real effective terms due to high domestic inflation.
- Foreign investor holdings at end-2008 are estimated at about $0.5 billion of government bonds (5 percent of total outstanding bonds) and about $3 billion of equities (30 percent of total market capitalization).
- The stock market declined by 75 percent since end-2007.
- Short-term external debt is less than 10 percent of reserves.

### Assessment of recent developments
- Vietnam overheated in 2007; rapid credit growth, massive capital inflows, higher public spending, and surges in energy and food prices led to high inflation and large trade deficits.
- Economic activity slowed in 2008: subdued construction and services, a steep downturn in the property market, and contraction in industrial production since October 2008 (foreign-invested sector hardest hit).
- Strong revenue performance in the first three quarters of 2008 (trade and oil taxes, capital revenue) largely offset higher-than-budgeted expenditures; authorities estimate a deficit of about 4¾ percent of GDP in 2008 as a whole.
- The non-oil primary balance is estimated to have improved by 1½ percentage points of GDP in 2008, largely due to lower capital spending.
- Financing of the large current account deficits relied on significant capital inflows, especially foreign direct investment (FDI).

### Near-term outlook and risks
- Growth is projected to slow to 4¾ percent in 2009—below the authorities’ target of 6½ percent and the historical average of 7½ percent—due to weaker domestic and external demand.
- Headline inflation is projected to drop to 6 percent (y/y) by end-2009, though core inflation could fall more gradually.
- The current account deficit is projected to decline to 8 percent of GDP in 2009, mainly due to lower imports.
- Gross international reserves are projected to be about three months of imports, leaving Vietnam vulnerable to external shocks.
- Downside risks include a deeper, more prolonged global downturn, further reductions in exports, private remittances, and FDI, reduced capital inflows, and heightened banking sector vulnerabilities as activity slows.
- Medium-term scenario: real GDP growth is expected to rise to 7½ percent by 2013 under sound macroeconomic policies and continued reforms.
- The current account deficit is projected to narrow to about 5 percent of GDP by 2013.
- DSA indicates external debt would be manageable with prudent external borrowing, but the outlook for public sector debt is less favorable—underscoring the need for fiscal consolidation.

### Policy discussions and recommendations — fiscal, monetary, exchange-rate
- Authorities shifted policy emphasis toward supporting growth, significantly easing fiscal and monetary policies in late 2008 and announcing a broad economic stimulus plan.
- Given deteriorating growth prospects, an accommodative fiscal stance in 2009 is appropriate, but the scope for fiscal stimulus is limited without additional concessional external financing.
- Fiscal policy advice:
  - Carefully balance growth and stability objectives.
  - Focus stimulus on measures that are effective, well-targeted, and temporary—examples: enhancing the social safety net and accelerating existing high quality public investment projects.
  - Develop a long-term framework of revenue and expenditure management to preserve fiscal sustainability.
  - Continue tax reforms and further efforts to broaden the tax base.
  - Review spending to increase efficiency in public investment and ensure adequate protection for vulnerable groups.
  - Improve efficiency and governance of state-owned enterprises (SOEs) to reduce fiscal risks.
- Monetary and exchange rate policy advice:
  - Any further easing of monetary conditions may have limited impact on growth.
  - Move toward greater exchange rate flexibility; increase flexibility further if depreciation pressures persist.
  - Greater flexibility should be supported by appropriate macroeconomic policies to maintain confidence in the dong.
  - Strengthen open market operations and liquidity forecasting and management to reduce interest rate volatility.

### Stimulus plan: objectives, measures, and fiscal implications
- Aims: support growth, ensure social security, and accelerate poverty reduction.
- Authorities' measures include temporary interest rate subsidies, credit guarantees, delays in corporate income tax (CIT) payments, a 30 percent temporary reduction in tax liabilities for SMEs, frontloading existing public investment projects, simplifying budget execution, VAT reductions on certain products, tariff adjustments to support exports and protect some domestic industries, and enhancements to the social safety net.
- Other measures: delaying PIT payments; accelerating VAT refund procedures for exporters; lengthening the grace period on import duties for materials used in exports; speeding up customs clearance; reducing import tariffs on inputs; increasing export tariffs on natural resources and import tariffs on some domestically-produced goods.
- Status and fiscal implications:
  - Initiatives introduced piecemeal; no revised budget plan for 2009 announced at the time of the report.
  - The stimulus plan will raise the fiscal deficit, but the extent is uncertain as details have yet to be determined.
- Staff urged:
  - Prepare a revised 2009 budget plan that elaborates financing for the stimulus.
  - Focus stimulus on effective, well-targeted, and temporary measures.
  - Finance measures through reprioritizing existing spending and/or mobilizing additional concessional external financing.
  - Cautioned that some proposed tax measures are likely ineffective in stimulating aggregate demand and would complicate tax administration; cautioned that several trade tariff increases would create distortions.
  - Expressed concern that measures to support SMEs may not be effective unless fundamental weaknesses of SMEs are addressed.

### Stimulus measures and estimated costs (In percent of GDP)
- Revenue (total): 1.7
  - 30 percent CIT reduction for SMEs — Temporary — 0.3
  - Deferral of CIT payments by nine months for some businesses — Temporary — 1.0
  - Delay in personal income tax payments for five months — Temporary — 0.3
  - 50 percent VAT reduction for selected goods and services and for imports — Temporary — 0.1
  - Provisional VAT refund for exporters — Temporary — Negligible
  - Deferment of time for payment of import duty for some sectors — Permanent — Negligible
  - Elimination of export duty on exported timber goods produced from imported timber — Permanent — Negligible
  - Removal of export duty on selected products — Permanent — Negligible
- Expenditure (total): 2.3
  - Subsidized credit for enterprises — Temporary — 1.0
  - Increase in off-budget capital spending — Temporary — 0.5
  - Social safety net measures:
    - Policies to reduce poverty in 61 districts — Temporary — 0.4
    - Promoting investment in housing for the poor — Temporary — 0.2
    - Support for low-income civil servants — Temporary — 0.1
- Total cost: 4.0
- Notes:
  - Government expected to submit a revised budget plan for 2009 to the National Assembly in May.
  - Preliminary staff estimates suggest aggregate cost could be 4 percent of GDP, but subject to uncertainty and not yet integrated into a revised budget.

### Monetary policy actions and developments
- SBV tightened in May–June 2008: increased policy rates aggressively, tightened market liquidity, and restricted bank lending through moral suasion; led to a sharp decline in credit growth.
- As growth concerns rose and inflation abated in H2 2008, SBV rapidly eased monetary policy.
- Since October 2008, SBV reduced the base (prime) rate by 700 basis points to 7 percent.
- Interest rates on open market operations and the reserve requirement ratio on dong deposits have been lowered sharply; interbank, lending and deposit rates fell, but credit activity remained subdued.
- Exchange rate and FX intervention:
  - June 2008: devalued the dong against the U.S. dollar by 2.4 percent, widened the trading band from ±1 to ±2 percent, and stepped up FX intervention.
  - Later: intervened in small amounts, widened the band to ±3 percent, and subsequently devalued by another 3 percent.
  - Despite interventions, the dong continued to trade at the weaker end of the band and depreciation pressures re-emerged in the final quarter of the year.
- Recent measures (2009):
  - SBV kept the base rate unchanged at 7 percent since February.
  - Reserve requirement ratio for dong deposits reduced to 3 percent from 5 percent effective March 1.
  - Banks have started extending loans under the interest rate subsidy scheme begun in early February, mainly via state-owned commercial banks.

### Exchange rate assessment
- Staff assessment: the dong is somewhat overvalued from a medium-term perspective.
- Three model-based approaches:
  - Macroeconomic balance approach: current account norm estimated at a deficit of 2.6 percent of GDP; underlying current account deficit in 2008 estimated at about 4 percent of GDP after accounting for temporary factors; current account projected to decline to 5 percent of GDP in 2013.
  - Equilibrium REER approach: produces a somewhat higher estimate of overvaluation than the macroeconomic balance approach; equilibrium REER estimated using four fundamentals with sample period 1990–2008.
  - External sustainability approach: produces a somewhat lower result; current account deficit stabilizing net foreign assets estimated at 3½ percent of GDP.
- Staff and authorities broadly agreed on moving toward greater exchange rate flexibility; greater flexibility should be supported by appropriate macroeconomic policies to maintain confidence in the dong.

### Financial sector vulnerabilities — indicators and exposures
- 2008 strains:
  - Tighter domestic liquidity, higher interest rates, sharp decline in asset prices in H1 2008, and slowing growth in H2 2008.
  - High loan-to-deposit ratios and reliance on short-term interbank funding led to liquidity problems for some banks; smaller private joint-stock banks (JSBs) reportedly most affected.
  - Banks’ net interest margins squeezed by higher funding costs and caps on lending rates.
- Asset quality and provisioning:
  - NPLs increased to 3 percent of total loans in October 2008 (double the end-2007 level).
  - Provisioning coverage against NPLs at 82 percent; JSBs have higher coverage.
  - Banking system expected to report positive profits for 2008 due to higher noninterest income mainly through gains on bond trading.
  - Some banks appeared to have strengthened capital further.
- Exposures and risks:
  - Corporate lending accounts for about two-thirds of total loans; default rates—particularly among SMEs—projected to rise in 2009.
  - Mortgage loans account for about 10 percent of total loans; loan-to-value ratios at 35–50 percent.
  - Foreign currency lending about 20 percent of total loans; could become NPLs if the dong weakens, but most FX loans reported to be to exporters naturally hedged.
  - Banks face liquidity risks, especially smaller banks.
- Capital and regulatory changes:
  - SBV doubled the minimum paid-in capital to 1 trillion dong by end-2008, and will increase it to 3 trillion dong by end-2010.
- Data and transparency shortcomings:
  - SBV has yet to release FSIs such as capital adequacy or profitability.
  - Only a few of the 41 commercial banks publish detailed financial statements and disclose FSIs.
  - Gaps exist in accounting standards regarding valuation of financial instruments and fixed assets.

### Financial sector recommendations and contingency planning
- Staff recommendations:
  - Closely monitor developments and address rising vulnerabilities in a timely and effective manner.
  - Place vulnerable banks under close supervisory watch.
  - Banks should formulate restructuring plans if capital falls below critical levels.
  - SOCBs should address provisioning shortfalls in a timely manner.
  - Caution against channeling directed policy lending programs through SOCBs.
  - Develop an effective contingency plan including:
    - temporary blanket guarantee covering all bank liabilities;
    - temporary emergency liquidity support to illiquid but solvent banks subject to strict conditions;
    - broadening of the existing lender-of-last-resort support system;
    - restructuring or liquidation of insolvent banks, including mergers and recapitalization with public funds subject to transparent restructuring conditions and safeguards against moral hazard.
- Stress-test result:
  - A simple credit stress test for 35 banks (about 95 percent of domestic banking system) suggests most banks would remain solvent even if NPLs tripled from current levels and assuming zero profitability.

### Banking supervision: recent actions, priorities, and legal reform
- Recent supervisory enhancements:
  - large-scale onsite supervision; strict limits on securities-related lending; raised minimum capital requirements; strengthened loan classification and provisioning rules; strict conditions on liquidity support.
- Institutional changes:
  - tighter criteria for granting licenses to new banks; integration of regulatory and supervisory functions in a single SBV department.
- Priorities going forward:
  - upgrade banks’ reporting requirements; introduce stress testing as an offsite tool; establish an early warning system; strengthen SBV’s onsite supervision program.
- Deposit insurance:
  - Covers deposits up to 50 million dong (about $3,000) per person per bank; excludes foreign currency deposits; current limit covers about 90 percent of depositors.
- Legal/institutional reform recommended:
  - Strengthen SBV’s operational autonomy and clearly define objectives of monetary policy and banking supervision; spell out SBV’s legal authority to supervise and intervene in banks.
- Authorities planned to amend laws on the SBV and credit institutions in 2010 and requested IMF support.

### Fiscal reform, state-owned enterprises (SOEs), and fiscal risks
- Fiscal background:
  - Recent tax reforms include a new PIT and revision of CIT, VAT, excises, and petroleum tariffs.
  - Planned shift of significant public investment into PPPs; planned introduction of a new budget law in 2010 covering medium-term fiscal framework, fiscal decentralization reform, and performance-based budgeting.
- Staff concerns and recommendations:
  - Recent tax reforms unlikely to provide adequate short-run revenue support.
  - Need to identify alternative revenue sources given anticipated revenue declines from WTO commitments and longer-term decline in oil production.
  - Recommended IMF TA for revenue reform focusing on property, environmental, and natural resource tax laws; consideration of a large taxpayer office.
  - Review expenditure structure to improve public investment efficiency while protecting vulnerable groups.
  - Caution about fiscal risks from contingent liabilities associated with PPPs; recommend solid investment planning, strong legal/institutional framework, and transparent accounting.
- SOE reform:
  - Pace of SOE reform slowed; ~1,800 SOEs at end-2007, accounting for about 40 percent of GDP and 30 percent of credit to the economy.
  - Staff recommended step up monitoring of SOEs, identify and restructure those posing fiscal risks, and press ahead with equitization (including SOCBs) as market conditions improve.

### Debt sustainability analysis (DSA) and public debt outlook
- External DSA (IMF–World Bank Joint DSA 2008):
  - Vietnam remains at low risk of debt distress; all external debt sustainability indicators projected to remain well below thresholds due to mostly concessional, long-term external debt and a dynamic export sector.
- Public sector debt:
  - Outlook less favorable; baseline projects PV of public debt rising from 37 percent in 2008 to 46 percent in 2013, then gradually declining to 43 percent by 2028.
  - Debt service-to-revenue ratio expected to increase from 6 percent in 2008 to 11½ percent in 2013 due to lower oil revenue, before declining.
- Key baseline assumptions (2009–28) include:
  - Real GDP growth averaging 6½ percent per year during 2009–13.
  - Inflation declining to 6 percent by end-2009 and remaining at that level through 2013.
  - Primary fiscal deficit rising to 6½ percent of GDP in 2009 then declining to 3 percent of GDP in 2013.
  - Non-debt-creating FDI declining from about 7 percent of GDP in 2008 to under 4 percent in 2028.
- Stress-test sensitivities:
  - A one-time 30 percent depreciation would increase the PV of external debt in relation to GDP by 8 percentage points relative to baseline.
  - Loss of access to non-debt-creating flows would increase PV of external debt in relation to GDP by 3 percentage points by 2013.
  - Under adverse scenarios, public debt ratios rise materially, underscoring need for fiscal consolidation and prudent financing of any stimulus.

### Key macroeconomic and sectoral indicators (selected)
- Nominal GDP (2008): US$90 billion
- GDP per capita (2008): US$1,041
- Population (2008, est.): 86.3 million
- Fund quota: SDR 329.1 million
- Real GDP (annual percentage change): 2005: 8.4; 2006: 8.2; 2007: 8.5; 2008: 6.2; 2009 (Est./Proj.): 4.8
- Consumer price inflation (period average): 2008: 23.1; 2009 (Est./Proj.): 8.0
- Consumer price inflation (end of period): 2008: 19.9; 2009 (Est./Proj.): 6.0
- Gross official reserves (end of period, billions of U.S. dollars): 2008: 23.0; 2009 (Proj.): 20.7
  - In months of next year's imports of GNFS: 2008: 4.1; 2009 (Proj.): 3.3
- Current account balance (in percent of GDP): 2008: -10.3; 2009 (Proj.): -8.1
- Exports f.o.b. (millions of U.S. dollars): 2008: 62,906; 2009 (Proj.): 53,167
- Imports f.o.b. (millions of U.S. dollars): 2008: 75,189; 2009 (Proj.): 60,241
- Gross national saving (percent of GDP): 2008: 31.2; 2009 (Est./Proj.): 25.1
- Gross investment (percent of GDP): 2008: 41.5; 2009 (Proj.): 33.2
- Total public and publicly-guaranteed debt (in percent of GDP): 2008: 44.4; 2009 (Proj.): 47.5
- External debt (in percent of GDP): 2008: 29.8; 2009 (Proj.): 31.9
- Nominal GDP (in trillions of dong): 2008: 1,338.0; 2009 (Proj.): 1,478.7
- Monetary indicators (end-2008 actual):
  - Broad money (M2, annual percentage change): 2008: 20.3
  - Credit to the economy (annual percentage change): 2008: 25.4
  - Nominal three-month deposit rate (households, end of period): 2008: 8.1

### Staff view and appraisal
- With risks shifting from inflation to growth, policies should support demand while safeguarding macroeconomic and financial stability given Vietnam’s less robust external position relative to some regional peers.
- An accommodative fiscal stance in 2009 is appropriate, but limited fiscal space and the need for concessional external financing mean stimulus should be well-targeted, temporary, and financed prudently.
- Monetary easing effects on growth may be limited given stalled credit demand; further easing could increase depreciation pressures.
- Safeguarding banking sector soundness is a high priority; strengthen SBV supervision, prepare contingency plans, and advance financial sector reform including SBV operational autonomy.
- Improve public communication and data quality and timeliness, especially in fiscal, SOE, and banking sectors, to bolster investor confidence.
- Authorities should stand ready to adjust policies given considerable uncertainties surrounding the outlook.

*Source: IMF staff, “Executive Summary” and accompanying staff report content from the supplied IMF Staff Report excerpt.*

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

### Executive Summary

### Key findings: macroeconomic performance and vulnerabilities
- Real GDP growth declined from 8½ percent in 2007 to 6¼ percent in 2008—the slowest pace since 1999.
- Headline inflation peaked at 28¼ percent (y/y) in August 2008 and moderated to 17½ percent (y/y) in January 2009; monthly inflation turned negative in the last three months (to January 2009).
- The current account deficit was 9¾ percent of GDP in 2007 and is estimated at 10¼ percent of GDP for 2008 as a whole.
- Gross international reserves were $23 billion (about four months of imports projected for 2009) at end-2008.
- The domestic currency depreciated by 9 percent vis-à-vis the U.S. dollar in 2008, but appreciated by 21 percent in real effective terms due to high domestic inflation.
- Foreign investor holdings at end-2008 are estimated at about $0.5 billion of government bonds (5 percent of total outstanding bonds) and about $3 billion of equities (30 percent of total market capitalization).
- The stock market declined by 75 percent since end-2007.
- Short-term external debt is less than 10 percent of reserves.

### Assessment of recent developments
- Vietnam overheated in 2007; rapid credit growth, massive capital inflows, higher public spending, and surges in energy and food prices led to high inflation and large trade deficits.
- Economic activity slowed in 2008: subdued construction and services, a steep downturn in the property market, and contraction in industrial production since October 2008 (foreign-invested sector hardest hit).
- Strong revenue performance in the first three quarters of 2008 (trade and oil taxes, capital revenue) largely offset higher-than-budgeted expenditures; authorities estimate a deficit of about 4¾ percent of GDP in 2008 as a whole.
- The non-oil primary balance is estimated to have improved by 1½ percentage points of GDP in 2008, largely due to lower capital spending.
- Financing of the large current account deficits relied on significant capital inflows, especially foreign direct investment (FDI).

### Near-term outlook and risks
- Growth is projected to slow to 4¾ percent in 2009—below the authorities’ target of 6½ percent and the historical average of 7½ percent—due to weaker domestic and external demand.
- Headline inflation is projected to drop to 6 percent (y/y) by end-2009, though core inflation could fall more gradually.
- The current account deficit is projected to decline to 8 percent of GDP in 2009, mainly due to lower imports.
- Gross international reserves are projected to be about three months of imports, leaving Vietnam vulnerable to external shocks.
- Downside risks include a deeper, more prolonged global downturn, further reductions in exports, private remittances, and FDI, reduced capital inflows, and heightened banking sector vulnerabilities as activity slows.
- Medium-term scenario: real GDP growth is expected to rise to 7½ percent by 2013 under sound macroeconomic policies and continued reforms (Table 4).
- The current account deficit is projected to narrow to about 5 percent of GDP by 2013.
- Debt sustainability analysis (DSA) indicates external debt would be manageable with prudent external borrowing, but the outlook for public sector debt is less favorable—underscoring the need for fiscal consolidation.

### Policy discussions and recommendations
- Authorities shifted policy emphasis toward supporting growth, significantly easing fiscal and monetary policies in late 2008 and announcing a broad economic stimulus plan.
- Given deteriorating growth prospects, an accommodative fiscal stance in 2009 is appropriate, but the scope for fiscal stimulus is limited without additional concessional external financing.
- Staff advice on fiscal policy:
  - Carefully balance growth and stability objectives.
  - Focus stimulus on measures that are effective, well-targeted, and temporary—examples: enhancing the social safety net and accelerating existing high quality public investment projects.
  - Develop a long-term framework of revenue and expenditure management to preserve fiscal sustainability.
  - Continue tax reforms and further efforts to broaden the tax base.
  - Review spending to increase efficiency in public investment and ensure adequate protection for vulnerable groups.
  - Improve efficiency and governance of state-owned enterprises (SOEs) to reduce fiscal risks.
- Monetary and exchange rate policy:
  - Any further easing of monetary conditions may have limited impact on growth.
  - Staff and authorities broadly agreed on moving toward greater exchange rate flexibility; despite widening the trading band and an exchange rate devaluation, the dong faces depreciation pressures and exchange rate flexibility should be increased further.
  - Greater flexibility should be supported by appropriate macroeconomic policies to maintain confidence in the dong.
- Financial sector and banking supervision:
  - Addressing banking sector vulnerabilities is a high priority.
  - Authorities’ assessment of the banking sector remains sanguine, but slower activity could heighten banking-sector vulnerabilities.
  - Over the medium term, advancing financial sector reform is crucial, particularly strengthening the operational autonomy of the State Bank of Vietnam (SBV).
  - Further improvement in banking supervision is needed.
- Structural reforms:
  - Main priority is to accelerate reforms that enhance Vietnam’s competitiveness.
  - Broader structural reforms will help sustain growth and bolster investor confidence.
  - Ongoing tax reforms should continue, with further efforts to broaden the tax base.
  - Increase efficiency and governance of SOEs.

### Staff view on policy stance
- With risks shifting from inflation to growth, policies should be designed to support demand while safeguarding macroeconomic and financial stability given Vietnam’s less robust external position relative to some regional peers (Table 5).
- Authorities should stand ready to adjust policies given considerable uncertainties surrounding the outlook.

_Italic: Source: IMF staff, “Executive Summary” from country report content._

### 12.      The recently announced stimulus plan aims to support growth, ensure social

### _cr09110 - 12.      The recently announced stimulus plan aims to support growth, ensure social

### Stimulus plan: objectives and measures
- Aims: support growth, ensure social security, and accelerate poverty reduction.
- Authorities' measures (aiming to):
  - support enterprises, especially small- and medium-sized enterprises (SMEs), through temporary interest rate subsidies, credit guarantees, delays in corporate income tax (CIT) payments, and a 30 percent temporary reduction in the tax liabilities;
  - boost public investment including through state-owned enterprises (SOEs), by frontloading existing projects and simplifying budget execution procedures;
  - stimulate private consumption through a reduction in value-added tax (VAT) rate on certain products;
  - support exports through a reduction in some tariffs while increasing protection for certain domestic industries;
  - enhance the social safety net to protect vulnerable groups.
- Other measures noted: delaying PIT payments; accelerating VAT refund procedures for exporters and lengthening the grace period on import duties for materials used in the production of exports; speeding up customs clearance process; reducing import tariffs on goods used as inputs in domestic production, while increasing export tariffs on natural resources and import tariffs on some domestically-produced goods.
- Status and fiscal implications:
  - Initiatives introduced on a piecemeal basis, but no revised budget plan for 2009 has been announced.
  - The stimulus plan will clearly raise the fiscal deficit, but the extent of the increase is uncertain as details have yet to be clearly determined.

### Fiscal policy discussions and staff recommendations
- Appropriateness and constraints:
  - Given deteriorating growth prospects, an accommodative fiscal stance in 2009 is appropriate.
  - Room for fiscal stimulus is limited, especially given the already large domestic financing envisaged in the original budget plan.
  - Staff cautioned that, in the absence of additional concessional external financing, a stimulus package could further weaken the external position, crowd out private sector activity, and undermine fiscal sustainability prospects as indicated in the DSA.
  - Authorities emphasized supporting growth and employment as the top priority for 2009.
- Staff urged actions:
  - Prepare a revised budget plan for 2009 that elaborates on how the fiscal stimulus would be financed.
  - Focus the stimulus on effective, well-targeted and temporary measures.
  - Finance measures through reprioritizing existing spending and/or mobilizing additional concessional external financing.
  - Staff welcomed plans to enhance the social safety net and accelerate existing high quality public investment projects and those financed by official development assistance.
  - Staff cautioned that proposed tax measures are likely to be ineffective in stimulating aggregate demand, are not well targeted, and would complicate tax administration.
  - Staff cautioned that several trade tariff increases would create additional distortions.
  - Staff expressed concern that measures to support SMEs may not be effective unless fundamental weaknesses of SMEs are addressed.

### Monetary policy actions and developments
- Monetary policy adjustments in 2008:
  - SBV significantly tightened during May–June 2008: increased policy rates aggressively, tightened market liquidity conditions, and restricted bank lending activities through moral suasion.
  - This led to a sharp decline in credit growth.
  - As growth concerns rose and inflation abated in the second half of the year, the SBV rapidly eased monetary policy.
  - Since October 2008, the SBV reduced the base (prime) rate by 700 basis points to 7 percent.
  - Interest rates on open market operations and the reserve requirement ratio on dong deposits have been lowered sharply.
  - Interbank, lending and deposit rates fell sharply, but credit activity remained subdued due to increased risk perception and weaker demand.
- Exchange rate and FX intervention:
  - June 2008: SBV devalued the dong against the U.S. dollar by 2.4 percent, widened the dong-U.S. dollar trading band from ±1 to ±2 percent, and stepped up foreign exchange market intervention.
  - Later actions: authorities intervened in small amounts, widened the band further to ±3 percent, and subsequently devalued the dong-U.S. dollar rate by another 3 percent.
  - Despite interventions, the dong continued to trade at the weaker end of the band and depreciation pressures re-emerged in the final quarter of the year.

### Monetary policy discussions and staff advice
- Caution before further easing:
  - Authorities should assess how recent significant monetary easing and increased fiscal spending will feed through the economy before relaxing monetary conditions any further.
  - Staff emphasized that further monetary loosening may have only limited impact in supporting growth, but could add to depreciation pressures on the dong.
  - SBV noted need for accommodative policies to mitigate an economic downturn but was mindful of macroeconomic stability risks.
  - Peer pressures from aggressive monetary easing by other central banks in the region and advanced countries were noted.
- Liquidity management and market operations:
  - Staff recommended strengthening open market operations and liquidity forecasting and management, along the lines recommended by Fund technical assistance (TA), to reduce interest rate volatility and provide a clearer signal of monetary policy stance.

### Exchange rate assessment (Box 1): equilibrium and overvaluation
- Staff assessment: the dong is somewhat overvalued from a medium-term perspective.
- Three model-based approaches:
  - Macroeconomic balance approach:
    - Current account norm estimated at a deficit of 2.6 percent of GDP.
    - Underlying current account deficit in 2008 estimated at about 4 percent of GDP, considering temporary factors (rapid credit growth and an investment boom by SOEs).
    - Current account deficit projected to decline to 5 percent of GDP in 2013.
  - Equilibrium real exchange rate approach:
    - Produces a somewhat higher estimate of overvaluation than the macroeconomic balance approach.
    - Equilibrium REER estimated using four fundamentals: changes in net foreign assets of the banking system as a ratio to GDP, external terms of trade, government consumption (purchase of goods and services plus government wages), and trade openness (exports plus imports as a ratio to GDP).
    - Sample period constrained to 1990–2008 due to structural breaks and data issues.
  - External sustainability approach:
    - Produces a somewhat lower result than the other two approaches.
    - Current account deficit stabilizing net foreign assets estimated at 3½ percent of GDP, somewhat higher than the current account norm.

### Financial sector vulnerabilities: background and indicators
- Strains in 2008:
  - Banking conditions affected by tighter domestic liquidity, higher interest rates, and a sharp decline in asset prices in the first half of 2008 and slowing growth in the second half.
  - High loan-to-deposit ratios and reliance on short-term interbank funding led to liquidity problems for some banks when SBV tightened policy; smaller private joint-stock banks (JSBs) were reportedly most affected, with some receiving emergency liquidity support from the SBV.
  - Banks’ net interest margins were squeezed by higher funding costs and caps on lending rates.
- Asset quality and provisioning:
  - NPLs increased to 3 percent of total loans in October 2008 (double the end-2007 level).
  - Provisioning coverage against NPLs at 82 percent.
  - JSBs have higher coverage.
  - Banking system expected to report positive profits for 2008 due to higher noninterest income mainly through gains on bond trading.
  - Some banks appeared to have strengthened capital further.
- Exposures and risks:
  - Corporate lending accounts for about two-thirds of total loans; default rates—particularly among SMEs—are projected to rise in 2009.
  - Mortgage loans account for about 10 percent of total loans; conservative loan-to-value ratios by banks at 35–50 percent may help protect against a property market downturn.
  - Foreign currency lending about 20 percent of total loans; could potentially turn into NPLs if the dong weakens, but banks indicated most FX loans were to exporters naturally hedged against exchange rate risks.
  - Banks face liquidity risks, especially smaller banks.
- Capital and regulatory changes:
  - SBV doubled the minimum paid-in capital to 1 trillion dong by end-2008, and will increase it to 3 trillion dong by end-2010.
  - This primarily affected smaller JSBs; some large JSBs strengthened capital through retained earnings and rights issuance to existing shareholders.
- Data and transparency shortcomings:
  - SBV has yet to release financial soundness indicators (FSIs), such as capital adequacy or profitability.
  - Only a few of the 41 commercial banks publish detailed financial statements and disclose FSIs in their annual reports.
  - Gaps exist in Vietnamese accounting standards regarding valuation of financial instruments and fixed assets.

### Financial sector discussions and staff recommendations
- Authorities’ stance:
  - Broad agreement with staff’s assessment but more sanguine on outlook.
  - Authorities noted liquidity-related stresses from mid-2008 had been addressed and risks were under control.
  - JSBs monitored closely, particularly smaller ones considered at risk; banks increased capital, set aside provisions, and strengthened risk management systems.
  - No major bank runs or failures had occurred despite global turmoil.
- Staff recommendations:
  - Closely monitor developments and address rising vulnerabilities in a timely and effective manner.
  - Place vulnerable banks under close supervisory watch.
  - Banks should formulate restructuring plans if capital falls below critical levels.
  - SOCBs should address provisioning shortfalls in a timely manner.
  - Staff cautioned against channeling directed policy lending programs through SOCBs.
  - Develop an effective contingency plan drawing on key elements used by other countries, including:
    - temporary blanket guarantee covering all bank liabilities to minimize risk of runs on deposits;
    - temporary emergency liquidity support to illiquid but solvent banks subject to strict conditions;
    - broadening of the existing lender of last resort support system;
    - restructuring or liquidation of insolvent banks, including through mergers and bank recapitalization with public funds, subject to appropriate and transparent restructuring conditions and safeguards against moral hazard.
- Stress test result:
  - Staff’s simple credit stress test—based on available market information for 35 banks (out of 41 banks) covering about 95 percent of the domestic banking system (excluding foreign bank branches)—suggests that most banks would remain solvent even if NPLs tripled from current levels and assuming zero profitability.

*IMF staff report excerpt as provided in the source content.*

### 26.      It was agreed that banking supervision needs to be further strengthened. Recent

### _cr09110 - 26.      It was agreed that banking supervision needs to be further strengthened. Recent

### Banking supervision: recent actions and priorities
- Recent initiatives that have enhanced the SBV’s oversight of the banking system:
  - large-scale onsite supervision,
  - strict limits on securities-related lending,
  - raise minimum capital requirements for banks,
  - strengthen loan classification and provisioning rules,
  - apply strict conditions on the provision of liquidity support.
- Institutional changes:
  - decision to tighten criteria and conditions for granting licenses to new banks,
  - integrate regulatory and supervisory functions in a single department within the SBV.
- Main priorities going forward:
  - upgrade banks’ reporting requirements,
  - introduce stress testing as an offsite supervisory tool,
  - establish an early warning system,
  - strengthen the SBV’s onsite supervision program.
- Additional supervisory actions and gaps:
  - strictly enforce compliance with prudential rules,
  - address gaps in the accounting regulations.
- Capacity and support:
  - authorities indicated the new banking supervision department would be able to undertake more effective supervision,
  - authorities were hopeful the Fund’s long-term resident advisor would help enhance the SBV’s supervisory practices.
- Deposit insurance details:
  - The existing deposit insurance scheme covers deposits up to 50 million dong (about $3,000) per person per bank, but excludes foreign currency deposits.
  - The current limit covers about 90 percent of depositors.

### Legal and institutional reform for the SBV
- Staff recommendations:
  - sustain momentum for financial sector reforms,
  - strengthen the SBV’s operational autonomy and clearly define the objectives of monetary policy and banking supervision.
- Key legal changes suggested for the new SBV law:
  - spell out the SBV’s legal authority and operational autonomy,
  - include the power to supervise banks and to intervene in banks, if necessary.
- Authorities’ stance:
  - reforms under discussion,
  - requested IMF support in advancing them,
  - plan to amend laws on the SBV and credit institutions in 2010.

### Fiscal reform: background, discussions, and recommendations
- Background on recent fiscal steps:
  - tax reforms include introduction of a new PIT, and revision of the CIT, VAT, excise taxes, and tariffs on petroleum products.
  - planned shift of a significant portion of public investment into public-private partnership projects (PPPs).
  - authorities considering introducing a limit on government debt and balancing the budget in the long run.
  - planned introduction of a new budget law in 2010 covering a medium-term fiscal framework, fiscal decentralization reform, and performance-based budgeting; may help address fiscal data shortcomings.
- Staff concerns and recommendations:
  - recent tax reforms are unlikely to provide adequate revenue support, especially in the short run.
  - need to identify alternative revenue sources given anticipated revenue declines associated with WTO commitments and a longer-term decline in oil production.
  - recommended IMF TA to help develop the next phase of revenue reform strategy focusing on property, environmental, and natural resource tax laws currently under preparation.
  - consideration of a large taxpayer office to increase tax yield.
  - review expenditure structure to improve efficiency of public investment while ensuring protection for vulnerable groups.
  - caution about fiscal risks from contingent liabilities associated with PPPs; recommended a solid investment planning framework, strong legal and institutional framework, and clear, comprehensive, and transparent accounting framework.
  - careful assessment of fiscal and macroeconomic risks associated with PPPs is crucial.
- State budget law revision:
  - initiative welcome; staff called for careful planning and implementation, especially on fiscal decentralization and performance-based budgeting.
  - bring definition of the budget balance closer to international standards, including elimination of off-budget transactions.

### SOE reform: background and staff recommendations
- Background:
  - pace of SOE reform has slowed significantly; economic slowdown weakened momentum.
  - there were approximately 1,800 SOEs at the end of 2007, accounting for about 40 percent of GDP and 30 percent of credit to the economy.
  - assessing financial position of SOEs difficult due to lack of performance information; financial position of some larger SOEs expected to have come under increased strain in 2008.
- Staff recommendations:
  - step up monitoring of SOEs and identify and restructure those representing significant fiscal risks.
  - press ahead with the equitization process (including SOCBs) as market conditions improve to strengthen performance and governance, especially if foreign strategic investor participation is broadened.
  - authorities committed to SOE reform; slower equitization due to unfavorable market conditions but intend to press ahead with plans to equitize remaining nonstrategic SOEs.

### Other issues: communication and data
- Public communication:
  - effective public communication strategy will help bolster investor confidence.
  - SBV steps: providing updated monetary and reserves data on the Fund’s website, posting weekly statements on monetary and banking operations on its newly launched English-language website, organizing regular press conferences and interviews.
  - SBV should more clearly communicate its stance on monetary and exchange rate policy; government agencies should present policy initiatives in a coordinated, consistent, and comprehensive manner.
- Data quality and availability:
  - improve quality and timeliness of data, especially in the fiscal, SOE, and banking sectors.
  - higher quality fiscal and SOE data would allow better analysis of fiscal developments and policy stance.
  - significant perception gap on banking sector soundness between public and authorities; posting key financial soundness indicators of the banking system on the SBV’s website could help close the gap.
  - SBV indicated efforts will be made to provide more information to the public; provision of financial information of SOEs would help foster better understanding of their soundness.

### Staff appraisal: macroeconomic outlook and policy guidance
- Macroeconomic outlook and constraints:
  - Vietnam made significant progress last year in stabilizing an overheating economy, but faces substantial challenges amid the volatile global environment.
  - Growth is expected to slow in 2009.
  - current account deficit is likely to remain large, and capital inflows would decline significantly.
  - government rapidly eased macroeconomic policies and announced a broad stimulus plan to support growth.
  - Vietnam’s fragile external position constrains its ability to pursue expansionary policies.
- Fiscal policy guidance:
  - accommodative fiscal stance in 2009 is appropriate given deteriorating growth prospects.
  - limited room for fiscal stimulus given already substantial domestic financing requirement and weak external position, absent additional concessional external financing.
  - government should focus on measures that are effective and temporary and calibrated to available fiscal and macroeconomic space.
  - intention to enhance the social safety net and expedite existing efficient public investment projects is appropriate.
  - many tax measures and those to support SMEs may not be effective; use of import and export tariffs will cause distortions.
- Monetary and exchange rate policy guidance:
  - assess effects of recent policy adjustments before easing monetary conditions further; stalled credit market may limit monetary impact on growth and could increase depreciation pressures on the dong.
  - improve open market operations and liquidity forecasting and management to increase policy effectiveness.
  - move toward a more flexible exchange rate regime is appropriate.
  - despite widening the trading band and devaluing the exchange rate, the dong continues to face depreciation pressures.
  - staff’s exchange rate assessment suggests the dong is somewhat overvalued compared with its medium-term equilibrium level.
  - if depreciation pressures persist, exchange rate flexibility should be further increased, supported by appropriate macroeconomic policies to maintain confidence in the dong.
- Financial sector and SOE priorities:
  - safeguarding banking sector soundness is a high priority; SBV needs to improve supervision further and address vulnerabilities in a timely and effective manner.
  - have a contingent plan to deal with global financial turmoil.
  - advancing financial sector reform over the medium term is crucial, particularly strengthening the SBV’s operational autonomy.
  - a longer-term revenue and expenditure framework will help preserve fiscal sustainability; further efforts needed to broaden tax base and review expenditure structure.
  - minimize risks associated with PPPs; state budget law revision is timely but requires careful planning and implementation.
  - press ahead with SOE reform; step up monitoring, identify and restructure risky SOEs, and continue equitization for SOEs and SOCBs to improve efficiency and governance.
- Communication and data:
  - an effective public communication strategy and increased data availability will help bolster investor confidence.
  - quality and timeliness of data, especially in fiscal, SOE, and banking sectors, need to be strengthened.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 43.      It is recommended that the next Article IV consultation take place on the standard

### _cr09110 - 43.      It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Key economic indicators (2008, 2009 estimates/projections and historical)
- Nominal GDP (2008): US$90 billion
- GDP per capita (2008): US$1,041
- Population (2008, est.): 86.3 million
- Fund quota: SDR 329.1 million
- Real GDP (annual percentage change): 2005: 8.4; 2006: 8.2; 2007: 8.5; 2008: 6.2; 2009 (Est./Proj.): 4.8
- Consumer price inflation (period average): 2005: 8.3; 2006: 7.5; 2007: 8.3; 2008: 23.1; 2009 (Est./Proj.): 8.0
- Consumer price inflation (end of period): 2005: 8.8; 2006: 6.7; 2007: 12.6; 2008: 19.9; 2009 (Est./Proj.): 6.0
- GDP deflator: 2005: 8.2; 2006: 7.3; 2007: 8.2; 2008: 21.7; 2009 (Est./Proj.): 4.8

### Saving, investment, and external sector (selected)
- Gross national saving (percent of GDP): 2005: 34.5; 2006: 36.5; 2007: 31.8; 2008: 31.2; 2009 (Est./Proj.): 25.1
  - Private: 2005: 26.7; 2006: 28.1; 2007: 26.1; 2008: 26.1; 2009: 23.0
  - Public: 2005: 7.8; 2006: 8.4; 2007: 5.6; 2008: 5.1; 2009: 2.1
- Gross investment (percent of GDP): 2005: 35.6; 2006: 36.8; 2007: 41.6; 2008: 41.5; 2009: 33.2
  - Private: 2005: 24.1; 2006: 26.4; 2007: 30.3; 2008: 32.2; 2009: 24.0
  - Public: 2005: 11.5; 2006: 10.4; 2007: 11.4; 2008: 9.3; 2009: 9.2
- Current account balance (including official transfers)
  - In billions of U.S. dollars: 2005: -0.6; 2006: -0.2; 2007: -7.0; 2008: -9.2; 2009 (Proj.): -7.3
  - In percent of GDP: 2005: -1.1; 2006: -0.3; 2007: -9.8; 2008: -10.3; 2009 (Proj.): -8.1
- Trade balance (in millions of U.S. dollars): 2005: -2,439; 2006: -2,776; 2007: -10,360; 2008: -12,284; 2009 (Proj.): -7,074
- Exports f.o.b. (annual percentage change, U.S. dollar terms): 2005: 22.5; 2006: 22.7; 2007: 21.9; 2008: 29.5; 2009 (Proj.): -15.5
- Imports f.o.b. (annual percentage change, U.S. dollar terms): 2005: 15.0; 2006: 22.1; 2007: 38.3; 2008: 27.6; 2009 (Proj.): -19.9
- Gross official reserves, including gold (end of period, billions of U.S. dollars): 2005: 8.6; 2006: 11.5; 2007: 21.0; 2008: 23.0; 2009 (Proj.): 20.7
  - In months of next year's imports of GNFS: 2005: 2.2; 2006: 2.1; 2007: 3.0; 2008: 4.1; 2009 (Proj.): 3.3
- External debt (in percent of GDP): 2005: 32.5; 2006: 31.4; 2007: 33.3; 2008: 29.8; 2009 (Proj.): 31.9
- External debt service (in percent of exports of GNFS): 2005: 4.5; 2006: 4.2; 2007: 3.8; 2008: 3.4; 2009 (Proj.): 4.5
- Total public and publicly-guaranteed debt (in percent of GDP): 2005: 44.5; 2006: 44.1; 2007: 46.3; 2008: 44.4; 2009 (Proj.): 47.5
- Dong per U.S. dollar exchange rate (end of period, interbank): 2005: 15,907; 2006: 16,068; 2007: 16,003; 2008: 17,486
- Nominal effective exchange rate (end of period): 2005: 83.6; 2006: 77.3; 2007: 73.3; 2008: 75.4
- Real effective exchange rate (end of period): 2005: 99.8; 2006: 96.8; 2007: 100.5; 2008: 121.9

### Fiscal outlook and budgetary operations (2005–09)
- Official fiscal balance (in percent of GDP): 2005: -0.1; 2006: 1.1; 2007: -2.2; 2008: -1.6; 2009 (Proj.): -4.1
- Revenue and grants (percent of GDP): 2005: 27.2; 2006: 28.7; 2007: 27.6; 2008: 27.2; 2009 (Proj.): 24.0
- Expenditure (percent of GDP): 2005: 27.3; 2006: 27.5; 2007: 29.8; 2008: 28.8; 2009 (Proj.): 28.1
- Off-budget expenditure and net lending (percent of GDP): 2005: 4.4; 2006: 2.2; 2007: 3.1; 2008: 3.1; 2009 (Proj.): 4.1
- Overall fiscal balance (including off-budget expenditure and net lending) 4/: 2005: -4.5; 2006: -1.1; 2007: -5.3; 2008: -4.7; 2009 (Proj.): -8.2
- Non-oil primary fiscal balance (in percent of GDP) 4/: 2005: -11.7; 2006: -8.8; 2007: -11.1; 2008: -9.4; 2009 (Proj.): -9.7
- Table 3 memorandum (2008 estimates/projections, in trillions of dong):
  - Total revenue and grants: 2008 Est.: 323.0; 2009 Budget Est.: 401.6; 2009 Proj.: 389.5
  - Total expenditure: 2008 Est.: 364.0; 2009 Budget Est.: 425.3; 2009 Proj.: 456.6
  - Official fiscal balance (in trillions of dong): 2005: -0.8; 2006: 11.1; 2007: -25.5; 2008 Est.: -41.0; 2009 Budget Est.: -23.6; 2009 Proj.: -67.0
  - Overall fiscal balance (in trillions of dong): 2005: -37.9; 2006: -10.8; 2007: -60.9; 2008 Est.: -111.2; 2009 Budget Est.: -69.2; 2009 Proj.: -138.7
  - Overall fiscal balance (percent of GDP): 2005: -4.5; 2006: -1.1; 2007: -5.3; 2008 Est.: -8.3; 2009 Budget Est.: -4.7; 2009 Proj.: -8.2
- Oil price (U.S. dollars per barrel, memorandum): 2005: 53.06; 2006: 61.87; 2007: 71.16; 2008: 97.05; 2009 (Proj.): 50.0
- Nominal GDP (in trillions of dong): 2005: 839.3; 2006: 974.3; 2007: 1,144.0; 2008: 1,338.0; 2009 (Proj.): 1,478.7

### Monetary and financial sector indicators
- Broad money (M2, annual percentage change, end of period): 2005: 29.7; 2006: 33.6; 2007: 46.1; 2008: 20.3; 2009 (Proj.): 19.6
- Credit to the economy (annual percentage change, end of period): 2005: 31.7; 2006: 25.4; 2007: 53.9; 2008: 25.4; 2009 (Proj.): 12.9
- Interest rates (end of period, in percent): nominal three-month deposit rate (households): 2005: 7.8; 2006: 7.9; 2007: 7.4; 2008: 8.1
- Money and credit (2008 actual): broad money (M2) growth reported as actual for 2008. 2/ Figures for 2008 are actual.
- Monetary survey (Table 6 highlights, in trillions of dong):
  - Net foreign assets: Dec-05: 191.1; Dec-06: 287.9; Dec-07: 410.4; Dec-08 (Est.): 401.6; Dec-09 (Proj.): 388.0
  - Net domestic assets: Dec-05: 499.6; Dec-06: 634.7; Dec-07: 937.8; Dec-08 (Est.): 1,016.6; Dec-09 (Proj.): 1,040.9
  - Domestic credit: Dec-05: 585.6; Dec-06: 730.3; Dec-07: 1,096.8; Dec-08 (Est.): 1,195.0; Dec-09 (Proj.): 1,249.1
  - Total liquidity (M2, in trillions of dong): Dec-05: 690.7; Dec-06: 922.7; Dec-07: 1,348.2; Dec-08 (Est.): 1,398.3; Dec-09 (Proj.): 1,404.6
- Financial soundness indicators (Table 8, selected, in percent):
  - Loans-to-assets ratio (2006–07 examples): state-owned commercial banks 60.2–64.4; nonstate banks 50.9–54.6; total 56.8–59.4
  - Nonperforming loans (NPLs) to total loans: 2006: 3.2; 2007: 1.9 (state-owned commercial banks example); other entries vary across bank types and periods
  - Provisions to NPLs: 2006: 40.6; 2007: 113.4 (state-owned commercial banks example); other values reported by bank type and date
  - Capital to total assets (2006–07 examples): state-owned commercial banks 4.1–5.1; nonstate banks 10.7–12.8; total 6.1–8.2
  - Foreign currency loans to total loans (2006–07 examples): 17.6–18.2 (state-owned commercial banks); 31.3–29.6 (nonstate banks); total 22.2–22.8

### Balance of payments and financial flows (2005–09)
- Current account balance (millions of U.S. dollars): 2005: -560; 2006: -164; 2007: -6,992; 2008: -9,238; 2009 (Proj.): -7,318
- Exports, f.o.b. (millions of U.S. dollars): 2005: 32,447; 2006: 39,826; 2007: 48,561; 2008: 62,906; 2009 (Proj.): 53,167
  - Oil exports (of which): 2005: 7,387; 2006: 8,265; 2007: 8,488; 2008: 10,450; 2009 (Proj.): 4,687
- Imports, f.o.b. (millions of U.S. dollars): 2005: 34,886; 2006: 42,602; 2007: 58,921; 2008: 75,189; 2009 (Proj.): 60,241
  - Oil imports (of which): 2005: 4,716; 2006: 5,665; 2007: 7,248; 2008: 10,181; 2009 (Proj.): 4,152
- Financial account balance (millions of U.S. dollars): 2005: 3,087; 2006: 3,088; 2007: 17,540; 2008: 9,175; 2009 (Proj.): 5,024
  - Net foreign direct investment (FDI): 2005: 1,889; 2006: 2,315; 2007: 6,550; 2008: 7,800; 2009 (Proj.): 4,000
  - Portfolio investment: 2005: 865; 2006: 1,313; 2007: 6,243; 2008: -400; 2009 (Proj.): 0
  - Medium- and long-term loans (net): 2005: 921; 2006: 1,025; 2007: 2,045; 2008: 919; 2009 (Proj.): 1,324
- Overall balance (millions of U.S. dollars): 2005: 2,131; 2006: 4,322; 2007: 10,199; 2008: -162; 2009 (Proj.): -2,295
- Gross official reserves (excluding government deposits, millions of U.S. dollars): 2005: 8,557; 2006: 11,491; 2007: 20,964; 2008: 23,022; 2009 (Proj.): 20,727

### Medium-term scenario highlights (2005–13 projections)
- Real GDP (annual percentage change) projections: 2009: 4.8; 2010: 5.8; 2011: 7.0; 2012: 7.4; 2013: 7.4
- Nominal GDP (in trillions of dong) projection path: 2008: 1,623; 2009: 1,844; 2010: 2,100; 2011: 2,392; 2012: 2,724
- Gross national saving (percent of GDP) projection path: 2008: 31.2; 2009: 26.8; 2010: 27.5; 2011: 28.0; 2012: 28.6
- Gross investment (percent of GDP) projection path: 2008: 41.5; 2009: 33.6; 2010: 33.8; 2011: 33.6; 2012: 33.5
- General government fiscal balance (percent of GDP) projection path: 2008: -4.7; 2009: -6.5; 2010: -5.8; 2011: -5.4; 2012: -5.0
- Current account balance (in percent of GDP) projection path: 2008: -10.3; 2009: -8.1; 2010: -6.8; 2011: -6.3; 2012: -5.6
- Gross official reserves (in billions of U.S. dollars) projection: 2008: 23.0; 2009: 20.8; 2010: 22.5; 2011: 25.2; 2012: 29.5

### Debt sustainability assessment (IMF–World Bank Joint DSA 2008)
- Vietnam remains at low risk of debt distress despite recent deterioration in economic conditions and the global downturn.
- All external debt sustainability indicators are projected to remain well below the applicable debt thresholds, reflecting:
  - Vietnam’s mostly concessional and long-term external debt structure, and
  - A dynamic export sector.
- Outlook for public sector debt (including domestic debt) is less favorable, highlighting the need for fiscal consolidation to preserve debt sustainability in the medium term.
- Relevant indicative thresholds for "strong performer" CPIA category (CPIA averaged 3.8):
  - PV of debt-to-GDP ratio: 50 percent
  - PV of debt-to-exports ratio: 200 percent
  - PV of debt-to-revenue ratio: 300 percent
  - Debt service-to-exports ratio: 25 percent
  - Debt service-to-revenue ratio: 35 percent

### Selected policy-relevant observations and projections
- The projection for 2009 does not take into account the recently announced stimulus plan (not included in staff projections where noted).
- Fiscal consolidation is underscored as necessary to preserve medium-term debt sustainability given a less favorable outlook for public sector debt (including domestic debt).
- Financial sector indicators show rapid credit growth in earlier years (credit to the economy annual changes: 2007: 53.9 percent) slowing in projections for 2009 (12.9 percent), with broad money growth moderating (M2: 2007: 46.1 percent; 2009 (Proj.): 19.6 percent).
- External buffers remain sizable but have fluctuated: gross official reserves peaked at 23.0 billion U.S. dollars in 2008 and are projected at 20.7 billion U.S. dollars in 2009.

*Sources: Data provided by the Vietnamese authorities; and IMF staff estimates and projections. This content reflects tables, figures, and narrative from the IMF/World Bank joint documents presented in the source.*

### 1.      Vietnam’s external debt position has historically been robust. Most of its debt is

### _cr09110 - 1.      Vietnam’s external debt position has historically been robust. Most of its debt is

### External debt position and recent developments
- Most external debt is concessional, carrying a low average, fixed interest rate, and long maturity with no bunching of repayments.
- Creditor composition and financing:
  - Support from a variety of multilateral and bilateral creditors provides a fairly diversified currency composition.
  - Strong private remittances help finance the trade deficit.
  - Large foreign direct investment (FDI) inflows provide significant non-debt-creating financing.
  - Stock market received strong inflows until recently.
- Government prudence and debt levels:
  - Total external public debt estimated at 25 percent of GDP in 2008 (30 percent including the private sector).
- Short-term external debt:
  - Ratio of short-term external debt (remaining maturity basis) is under 10 percent of gross foreign exchange reserves.

### Domestic public debt
- Total domestic public debt (including Vietnam Development Bank) estimated at 19.7 percent of GDP at end-2008.
- Average implied interest rate as of end-2008 was about 6 percent; expected to rise in nominal terms because of higher inflation.
- The bulk of amortization will fall due within one to three years.

### Key baseline assumptions (Box 1) for the baseline scenario (2009–28)
- Real GDP growth:
  - Will average 6½ percent per year during 2009–13 (below the 10-year historical average of 7.2 percent), and thereafter will decline gradually.
- Investment and savings:
  - Gross domestic investment expected to decline from 41½ percent of GDP in 2008 to about 35 percent in 2028.
  - Domestic savings remaining at the current level of about 31 percent of GDP.
- Inflation:
  - Will decline from 23 percent on average in 2008 to 6 percent by end-2009 and remain at that level through 2013; thereafter a further decline is assumed.
- Interest rates on foreign borrowing:
  - Average interest rates will gradually rise from around 3 percent during 2008 to above 4 percent by 2028.
- Net capital inflows and non-debt creating FDI:
  - Net capital inflows will fall from about 10 percent to GDP in 2008 to 8 percent in 2013 and stabilize thereafter.
  - The non-debt-creating part of FDI will decline from about 7 percent of GDP in 2008 to under 4 percent in 2028.
- Concessional official development assistance:
  - Assumed to increase slightly from $1.7 billion in 2008 to $2.2 billion in 2018 before falling to $1.1 billion by 2028.
- Commercial borrowing:
  - Will remain broadly constant at around 1½ percent of GDP (with some fluctuations).
- Fiscal assumptions:
  - Primary fiscal deficit (including off-budget expenditures and net lending) will rise to 6½ percent of GDP in 2009 and gradually decline to 3 percentage points of GDP in 2013 and to 2 percent of GDP on average during 2014–28.
  - Expenditures will fall by about 2 percentage points of GDP to 30 percent of GDP between 2009–13.
  - Revenue will increase by about 1 percentage point of GDP to 25 percent of GDP between 2009–13.
  - Beyond 2013, revenue will rise further to 27 percent of GDP by 2028.
  - Government financing (excluding a stimulus plan) will increase by about 3½ percentage points of GDP in 2009, mostly through domestic financing; during 2009–13 government financing will decline by 3 percentage points of GDP.
- Contingent liabilities or exceptional financing items are not assumed.

### External Debt Sustainability Analysis (PPG external debt)
- Scope:
  - Analysis focuses on PPG external debt, which accounts for about 80 percent of total external debt.
- Baseline projections:
  - PV of PPG external debt projected to initially rise in relation to GDP, exports, and government revenue, then decline over the longer term.
  - PV of external debt as a share of exports projected to decline from 22½ percent in 2007 to 13½ percent in 2028.
  - Debt service ratio (to exports and to revenue) expected to decline after an initial increase.
- Drivers of favorable ratios:
  - Higher GDP in dollar terms contributes to lower ratios.
  - Strong exports aided by global commodity price boom (with lower commodity price projections incorporated into the baseline).
- Stress-test sensitivities:
  - A 30 percent one-time depreciation of the dong would increase the PV of external debt in relation to GDP by 8 percentage points relative to the baseline.
  - A loss of access to non-debt-creating flows would increase the PV of external debt in relation to GDP by 3 percentage points by 2013.
  - A loss of access to concessional loans would have a similar negative impact but over a longer time horizon (5–10 years).
- Overall assessment:
  - PPG external debt is likely to remain manageable, with all external debt ratios projected to be well within the indicative thresholds.
  - Vietnam remains at low risk of external debt distress; projected PPG external debt ratios remain well below indicative thresholds even under extreme standard shocks.

### Public debt sustainability analysis
- Baseline projections:
  - PV of public debt in relation to GDP projected to rise from 37 percent in 2008 to 46 percent in 2013, and thereafter gradually decline to 43 percent by 2028.
  - Debt service-to-revenue ratio expected to increase from 6 percent in 2008 to 11½ percent in 2013 due to lower oil revenue, before gradually declining.
- Stress-test sensitivities:
  - A one-time 30 percent nominal depreciation of the dong and an increase in debt-creating flows by 10 percentage points of GDP would each increase the PV of public debt (relative to the baseline) by 7–8 percentage points by 2013.
  - Under a permanently lower GDP growth scenario the debt service-to-revenue ratio would double by 2013.
  - Under the higher debt-creating flows scenario and under the depreciation scenario the debt service-to-revenue ratio would triple or more (relative to its initial level).
- Risk characterization:
  - Public debt management is likely to become more challenging due to a significant deterioration in the overall fiscal balance and the potential impact of a government stimulus plan.
  - Even the most extreme negative shock would not destabilize (cause to rise indefinitely) the PV ratios over the longer term.

### Policy implications and recommendations
- Maintain sound macroeconomic and financial policies and structural reforms to support growth and continue poverty reduction.
- Ensure continued access to non-debt-creating external financing, especially private remittances and FDI.
- Maintain access to concessional financing by multilateral and bilateral sources.
- Pursue prudent fiscal policy, especially when designing and financing any government stimulus plan:
  - Prudently financed stimulus and increased revenue base to more than offset expected long-run loss of oil revenue would help keep public debt burdens manageable.
- Monitor and manage exchange rate risks and potential losses of access to concessional and non-debt-creating flows given their significant impact on external and public debt metrics.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 14.      A risk that deserves special attention is the possible impact of potential

### _cr09110 - 14.      A risk that deserves special attention is the possible impact of potential

### Risk of government contingent liabilities
- A risk that deserves special attention is the possible impact of potential government contingent liabilities, which could arise from the need to recapitalize some banks or to deal with problems in state-owned enterprises.
- The size of the fiscal stimulus and its financing is also important.

*Source: IMF staff projections and simulations.*

### Indicators of public and publicly guaranteed external debt (selected outcomes and stress-test characterization)
- Figure 1 notes: "The most extreme stress test is the test that yields the highest ratio in 2018."
  - In Figure b it corresponds to a one-time depreciation shock.
  - In Figure c to a terms shock.
  - In Figure d to a one-time depreciation shock.
  - In Figure e to a non-debt flows shock.
  - In Figure f to a one-time depreciation shock.

### External debt and related flows (selected rows and values from Table 1a)
- External debt (nominal) 2005–2013 and projections (selected): 32.5; 31.4; 33.3; 29.8; 31.9; 31.7; 31.2; 30.7; 30.4; 26.8; 22.5.
- Of which Public- and publicly-guaranteed (PPG): 26.9; 25.8; 26.8; 24.7; 26.0; 25.7; 24.8; 23.7; 22.6; 21.6; 14.9.
- Change in external debt: -4.6; -1.1; 1.9; -3.5; 2.2; -0.2; -0.5; -0.5; -0.3; -0.7; -0.2.
- Identified net debt-creating flows: -6.5; -6.6; -1.9; 1.8; 3.3; 1.7; 0.7; -0.2; -0.9; -1.2; -0.7.
- Non-interest current account deficit (selected): 0.1; -0.7; 8.8; 0.2; 4.6; 9.4; 7.0; 5.9; 5.5; 4.8; 4.0; 3.1; 3.2; 3.1.
- Exports (selected end values): 69.2; 73.7; 76.7; 77.0; 64.8; 69.2; 74.7; 80.6; 87.2; 94.5; 94.5.
- Imports (selected end values): 74.4; 78.3; 92.6; 93.2; 74.6; 77.9; 83.3; 88.6; 94.6; 101.4; 101.4.
- Net current transfers (negative = inflow) (selected): -6.4; -6.6; -9.0; -5.7; 1.6; -8.2; -4.5; -4.5; -4.5; -4.7; -4.8; -5.0; -5.0; -5.0.
  - Of which: Official: -0.4; -0.4; -0.4; -0.4; -0.3; -0.3; -0.3; -0.3; -0.3; -0.3; -0.3; Other current account flows (negative = net inflow): 1.3; 1.3; 2.1; 1.3; 1.7; 1.7; 1.3; 1.4; 1.4; 1.2; 1.2.
- Net FDI (negative = inflow) (selected): -2.3; -2.6; -7.3; -3.7; 1.7; -6.9; -3.4; -3.5; -3.6; -3.7; -3.7; -3.7; -3.7; -3.7.
- Endogenous debt dynamics contributions (selected): -4.3; -3.3; -3.5; -0.7; -0.3; -0.8; -1.2; -1.2; -1.2; -0.6; -0.2.
  - Contribution from nominal interest rate (selected): 1.0; 1.0; 1.0; 0.9; 1.1; 0.9; 0.9; 0.9; 0.9; 1.2; 1.1.
  - Contribution from real GDP growth (selected): -2.7; -2.3; -2.3; -1.6; -1.4; -1.7; -2.0; -2.1; -2.1; -1.8; -1.3.
  - Contribution from price and exchange rate changes (selected): -2.6; -1.9; -2.2; ...
- Residual (3-4) (selected): 1.8; 5.5; 3.8; -5.3; -1.1; -1.9; -1.1; -0.4; 0.6; 0.4; 0.5.
  - Of which: Exceptional financing: 0.0 (all years listed).
- PV of external debt (selected): 23.5; 22.5; 24.6; 25.2; 25.6; 25.9; 26.2; 22.4; 20.4.
  - In percent of exports (selected): 30.6; 29.2; 37.9; 36.4; 34.3; 32.1; 30.0; 23.7; 21.6.
- PV of PPG external debt (selected): 17.2; 16.0; 18.0; 18.6; 18.7; 18.4; 17.9; 17.1; 12.8.
  - In percent of exports (selected): 22.4; 20.7; 27.8; 26.8; 25.0; 22.9; 20.6; 18.2; 13.6.
  - In percent of government revenues (selected): 63.0; 59.5; 75.7; 77.0; 76.3; 74.8; 72.3; 65.9; 47.8.
- Debt service-to-exports ratio (in percent) (selected): 4.5; 4.2; 3.8; 3.4; 4.5; 5.0; 4.8; 4.4; 4.1; 4.1; 4.4.
- PPG debt service-to-exports ratio (in percent) (selected): 1.7; 1.6; 1.3; 1.2; 1.4; 1.8; 1.7; 1.5; 1.4; 2.1; 2.2.
- PPG debt service-to-revenue ratio (in percent) (selected): 4.4; 4.3; 3.7; 3.5; 3.7; 5.1; 5.0; 5.0; 5.0; 7.7; 7.7.
- Total gross financing need (in billions of U.S. dollars) (selected): 0.6; 0.0; 3.4; 4.9; 6.2; 6.2; 6.3; 6.2; 5.9; 7.8; 20.4.
- Non-interest current account deficit that stabilizes debt ratio (selected): 4.7; 0.4; 7.0; 12.9; 4.8; 6.1; 5.9; 5.3; 4.3; 3.9; 3.4.

### Key macroeconomic assumptions (selected series and values)
- Real GDP growth (in percent) (sequence includes historical and projections): 8.4; 8.2; 8.5; 7.2; 1.2; 6.2; 4.8; 5.8; 7.0; 7.4; 7.4; 6.4; 7.0; 6.0; 6.7.
- GDP deflator in U.S. dollar terms (change in percent) (selected): 7.4; 6.4; 7.6; 2.5; 4.8; 19.0; -3.9; 2.2; 1.9; 2.0; 1.9; 3.9; 2.0; 2.0; 2.0.
- Effective interest rate (in percent) (selected): 3.0; 3.6; 3.7; 3.1; 0.6; 3.4; 3.7; 3.1; 3.1; 3.0; 3.1; 3.2; 4.6; 5.2; 4.7.
- Growth of exports of G&S (in U.S. dollar terms, in percent) (selected): 20.7; 22.7; 21.5; 16.9; 8.8; 26.8; -15.2; 15.6; 17.6; 18.2; 18.5; 13.6; 9.1; 8.0; 9.4.
- Growth of imports of G&S (in U.S. dollar terms, in percent) (selected): 15.3; 21.2; 38.0; 17.7; 12.9; 27.3; -19.3; 12.9; 16.6; 16.5; 16.9; 11.8; 9.1; 8.0; 9.3.
- Grant element of new public sector borrowing (in percent) (selected): 17.0; 16.1; 14.5; 14.7; 15.0; 15.2; 15.4; 9.4; 2.8; 7.2.
- Government revenues (excluding grants, in percent of GDP) (selected): 26.8; 27.9; 27.2; 26.8; 23.8; 24.1; 24.5; 24.6; 24.8; 26.0; 26.9; 26.2.
- Aid flows (in billions of U.S. dollars) (selected): 1.7; 1.8; 1.8; 2.0; 1.6; 1.8; 1.8; 2.0; 2.0; 2.2; 1.2.
  - Of which: Grants (selected): 0.2; 0.5; 0.3; 0.3; 0.2; 0.2; 0.2; 0.2; 0.2; 0.4; 0.8.
  - Of which: Concessional loans (selected): 1.7; 1.6; 1.7; 1.7; 1.7; 1.8; 1.9; 1.9; 2.0; 2.2; 1.1.
- Grant-equivalent financing (in percent of GDP) (selected): 0.9; 0.7; 0.7; 0.6; 0.6; 0.6; 0.4; 0.2; 0.4.
- Grant-equivalent financing (in percent of external financing) (selected): 25.0; 22.6; 21.0; 20.0; 20.5; 21.0; 15.1; 11.3; 13.7.

### Memorandum and memorandum-item levels (selected)
- Nominal GDP (in billions of U.S. dollars) (selected): 52.9; 60.9; 71.1; 89.9; 90.6; 98.0; 106.8; 117.0; 128.1; 199.2; 450.6.
- Nominal dollar GDP growth (selected): 16.5; 15.1; 16.7; 26.4; 0.8; 8.2; 9.0; 9.5; 9.5; 10.6; 9.1; 8.0; 8.7.
- PV of PPG external debt (in billions of U.S. dollars) (selected): 12.2; 14.3; 16.3; 18.2; 20.0; 21.5; 23.0; 34.2; 57.9.
- (PVt-PVt-1)/GDPt-1 (in percent) (selected): 3.0; 2.2; 2.1; 1.8; 1.5; 1.2; 2.0; 1.3; 0.5; 1.0.

### Sensitivity analysis and scenario outcomes (selected from Tables 1b, 2b)
- Table 1b sensitivity headings show alternative scenarios and bound tests for PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, and debt service ratios.
- Example scenario outcomes (selected cells presented as in source):
  - PV of debt-to-GDP ratio (baseline and scenarios): entries include numeric sequences such as "112221", "121111", "122221", "110000", "122222" as tabulated in the source's formatted cells (Table 1b).
  - PV of debt-to-exports ratio (baseline and scenarios): entries include numeric sequences such as "345555", "344333", "355555", "346677", "352012", "356788", "37991011".
  - Debt service-to-revenue ratio (Table 1b continuation) includes scenario and bound test outcomes presented in the original tabular format.
- Table 1a and 1b stress-tests: B6 = One-time 30 percent nominal depreciation relative to the baseline in 2009; A2 assumes new public sector loans on less favorable terms (interest rate on new borrowing is by 2 percentage points higher than in the baseline).

### Public sector debt dynamics and sustainability indicators (selected from Tables 2a, 2b)
- Public sector debt (levels selected): 44.5; 44.1; 46.3; 44.4; 47.5; 49.2; 50.3; 50.7; 50.5; 50.2; 45.4.
- Of which foreign-currency denominated (selected): 26.9; 25.8; 26.8; 24.7; 26.0; 25.7; 24.8; 23.7; 22.6; 21.6; 14.9.
- Change in public sector debt (selected): -1.0; -0.4; 2.3; -1.9; 3.1; 1.6; 1.1; 0.4; -0.1; -0.6; -0.5.
- Identified debt-creating flows (selected): -2.0; -4.8; -1.3; -3.9; 5.4; 2.0; 0.7; 0.2; -0.3; -0.4; -0.4.
- Primary deficit (selected): 3.7; 0.3; 4.3; 3.1; 1.7; 3.6; 6.6; 4.9; 4.1; 3.6; 3.1; 4.3; 1.9; 1.1; 1.8.
- Revenue and grants (selected): 27.2; 28.7; 27.6; 27.2; 24.0; 24.4; 24.7; 24.8; 25.0; 26.2; 27.0.
  - Of which: Grants (selected): 0.5; 0.8; 0.4; 0.3; 0.2; 0.2; 0.2; 0.2; 0.2; 0.2; 0.2.
- Primary (noninterest) expenditure (selected): 30.9; 29.0; 32.0; 30.8; 30.6; 29.2; 28.8; 28.4; 28.1; 28.1; 28.2.
- Automatic debt dynamics (selected): -5.7; -5.1; -5.7; -7.5; -1.2; -2.9; -3.4; -3.4; -3.4; -2.3; -1.5.
  - Contribution from interest rate/growth differential (selected): -4.7; -4.4; -4.4; -5.4; -1.5; -2.5; -3.0; -3.3; -3.4; -2.3; -1.6.
  - Contribution from average real interest rate (selected): -1.2; -1.0; -0.9; -2.7; 0.6; 0.2; 0.2; 0.1; 0.1; 1.0; 1.0.
  - Contribution from real GDP growth (selected): -3.5; -3.4; -3.4; -2.7; -2.0; -2.6; -3.2; -3.5; -3.5; -3.3; -2.6.
  - Contribution from real exchange rate depreciation (selected): -1.0; -0.7; -1.3; -2.1; 0.3; -0.4; -0.3; -0.1; 0.0; ...
- Other identified debt-creating flows: 0.0 (all listed).
- Residual, including asset changes (selected): 1.0; 4.4; 3.6; 1.9; -2.3; -0.4; 0.4; 0.2; 0.2; -0.2; 0.0.
- PV of public sector debt (selected): 36.6; 36.7; 40.0; 42.5; 44.5; 45.7; 46.3; 45.8; 43.3.
  - Of which foreign-currency denominated (selected): 17.1; 17.0; 18.4; 19.0; 19.1; 18.8; 18.3; 17.1; 12.8.
- PV of contingent liabilities (not included in public sector debt): ... (not specified in supplied cells).
- Gross financing need (selected): 3.3; 5.2; 1.8; 5.9; 5.0; 9.4; 9.2; 8.2; 8.0; 5.7; 5.0.
- PV of public sector debt-to-revenue and grants ratio (in percent) (selected): 132.5; 135.0; 166.7; 174.3; 180.4; 184.5; 185.0; 174.7; 160.1.
- PV of public sector debt-to-revenue ratio (in percent) (selected): 134.3; 136.7; 168.5; 176.1; 181.7; 185.8; 186.3; 175.9; 161.2.
  - Of which external (selected): 62.7; 63.2; 77.6; 78.8; 77.8; 76.3; 73.7; 65.9; 47.8.
- Debt service-to-revenue and grants ratio (in percent) (selected): 5.4; 5.3; 5.4; 6.2; 12.5; 18.7; 17.3; 18.5; 11.5; 14.2; 14.3.
- Debt service-to-revenue ratio (in percent) (selected): 5.5; 5.5; 5.5; 6.3; 12.6; 18.9; 17.4; 18.6; 11.6; 14.3; 14.4.
- Primary deficit that stabilizes the debt-to-GDP ratio (selected): 4.7; 0.7; 2.1; 5.6; 3.5; 3.2; 3.0; 3.2; 3.3; 2.5; 1.6.

### Key macro-fiscal assumptions for public debt framework (selected)
- Real GDP growth (in percent) (reiterated): 8.4; 8.2; 8.5; 7.2; 1.2; 6.2; 4.8; 5.8; 7.0; 7.4; 7.4; 6.4; 7.0; 6.0; 6.7.
- Average nominal interest rate on forex debt (in percent) (selected): 1.9; 2.1; 2.2; 2.3; 0.4; 2.3; 2.1; 2.0; 1.9; 1.9; 1.8; 2.0; 3.1; 3.9; 3.2.
- Real exchange rate depreciation (in percent, + indicates depreciation) (selected): -3.8; -2.8; -5.5; -1.5; 3.4; -8.2; ...
- GDP deflator (in percent) (selected): 8.2; 7.3; 8.2; 6.2; 2.4; 21.7; 4.8; 7.3; 6.5; 6.1; 6.0; 8.7; 2.9; 2.9; 3.1.
- Growth of real primary spending (deflated by GDP deflator, in percent) (selected): 0.2; 0.0; 0.2; 0.1; 0.1; 0.0; 0.0; 0.0; 0.1; 0.1; 0.1; 0.0; 0.1; 0.1; 0.1.
- Grant element of new external borrowing (in percent) (selected): 17.0; 16.1; 14.5; 14.7; 15.0; 15.2; 15.4; 9.4; 2.8.

### Alternative scenarios and bound tests (selected highlights from Tables 1a, 1b, 2b)
- Table 1a (sensitivity of PPG external debt indicators) reports baseline and numerous alternative and bound tests (A1, A2, B1–B6) with time-path outcomes (examples include PV-to-GDP, PV-to-exports, PV-to-revenue, debt service ratios across 2008–28).
- Table 2b (sensitivity of public debt) reports baseline and scenarios:
  - A1. Real GDP growth and primary balance at historical averages.
  - A2. Primary balance unchanged from 2008.
  - A3. Permanently lower GDP growth.
  - B1–B5 bound tests including one-time 30 percent real depreciation in 2009 and a 10 percent of GDP increase in other debt-creating flows in 2009.
- Scenario outcomes are presented in the source tables as numeric sequences for each indicator and horizon (2008–2028), preserving the original tabular formatting and numeric entries.

### Policy-relevant implications (based on presented indicators and stress tests)
- Potential contingent liabilities from bank recapitalization or state-owned enterprise problems are explicitly identified as a material risk requiring special attention.
- The size and financing composition of fiscal stimulus matter for external and public debt trajectories (as shown by sensitivity of PV debt-to-GDP, PV debt-to-exports, PV debt-to-revenue, and debt-service ratios to alternative scenarios and shocks).
- Stress tests highlight vulnerability to large one-time depreciation shocks, adverse export growth shocks, and less favorable financing terms (A2: higher interest on new borrowing by 2 percentage points).
- Key metrics to monitor:
  - PV of PPG external debt (e.g., 17.2; 16.0; 18.0; 18.6; 18.7; 18.4; 17.9; 17.1; 12.8).
  - PV of public sector debt-to-revenue ratios (e.g., 132.5; 135.0; 166.7; 174.3; 180.4; 184.5; 185.0).
  - Gross financing need (e.g., 3.3; 5.2; 1.8; 5.9; 5.0; 9.4; 9.2; 8.2; 8.0; 5.7; 5.0).
- Monitoring and limiting contingent liabilities, ensuring favorable financing terms, and safeguarding real GDP growth and export performance are central to maintaining debt sustainability under the scenarios shown.

*Source: IMF staff simulations and projections as presented in the supplied IMF Staff Report tables and figures.*

### introduction of modern tools for environmental protection.

### introduction of modern tools for environmental protection.

### Improving Governance
- Progress across the first three pillars will require institutions with enhanced transparency, accountability, and stakeholder voice and participation.
- World Bank support under this pillar will focus on:
  - strengthening public financial management;
  - simplifying administrative procedures;
  - modernizing the planning process through more participatory approaches and greater accountability of public service providers for achievement of development outcomes.

### World Bank Group Strategy and Lending
- Instruments employed to support SEDP 2006–10 and other Government strategies include:
  - World Bank Poverty Reduction Support Credits (PRSCs), other development policy and investment operations, and analytical and advisory activities;
  - IFC equity, loan and technical assistance (TA) participations and the Mekong Private Sector Development Facility (MPDF);
  - Multilateral Investment Guarantee Agency (MIGA) activities; and donor partnerships and ODA coordination.

### Scale of the World Bank Group Program and Financing Status
- Program calibration assumption: annual IDA envelopes on the order of $900 million equivalent.
- FY08 IDA program: $1.2 billion equivalent, significantly surpassing prior years.
- Vietnam ranking:
  - second largest IDA-only borrower after Bangladesh;
  - third largest user of IDA resources after India and Bangladesh.
- Active IDA credits: 40 active IDA credits totaling $4.6 billion equivalent, of which $1.2 billion has been disbursed.
- IFC and MIGA programs are expected to grow in coming years.
- IBRD Eligibility:
  - During the CPS period, Vietnam’s GNI per capita is projected to move steadily towards the IDA graduation threshold.
  - In FY08 the World Bank confirmed Vietnam’s eligibility for IBRD borrowing.
  - The first IBRD operation is planned for FY09.
  - In the initial phase of Vietnam’s IBRD/IDA blend status, IBRD borrowing is expected to be incremental to, as opposed to substituting for, IDA financing.

### Lending Program and PRSCs
- The second series of five PRSCs (PRSCs VI–X) is the centerpiece of the World Bank’s lending program during the CPS period.
- PRSC VII ($150 million equivalent) was approved by the World Bank’s Board in June 2008.
- PRSC history and focus:
  - PRSC I: a two-tranche operation for $250 million equivalent, approved June 2001; focused on structural reforms in trade liberalization, the financial sector, SOEs, and private sector development.
  - Subsequent PRSCs expanded scope to health, social protection, education, environmental protection and natural resource management, public financial management, public administration reform, and fighting corruption.
- PRSC co-financing:
  - Number of PRSC co-financiers increased from 4 for PRSC I to 12 for PRSC VII.
  - Contributions exceeding $200 million for PRSC VII.
- Role of PRSCs:
  - Provide resources and serve as an effective donor coordination device and a single, unified platform for policy dialogue between Vietnam’s partners and the Government.
- Sector investment commitments:
  - Well over half financed infrastructure projects; the balance focused on health and education sectors, rural development, and public administration reform.
- Forthcoming operations: likely to exceed $1 billion in each of the next two fiscal years, with well over half to finance infrastructure investments.

### Key Project Commitments (FY05–FY08)
- FY2005 Total: 700
  - Examples: PRSC IV 100; Second Rural Energy 220; Urban Water Supply Development 113; Second Payment System and Bank Modernization 105; Targeted Budget Support for Education for All 50; Road Safety 32; Forest Sector Development 40; HIV/AIDS Prevention 35; Avian Influenza Emergency Recovery 5.
- FY2006 Total: 768
  - Examples: ICT Development 94; Mekong Health Support 70; Customs Modernization 66; Second Transmission and Distribution 200; Third Rural Transport 106; Natural Disaster Risk Management 86; Red River Delta Rural Water Supply and Sanitation 46.
- FY2007 Total: 712
  - Examples: PRSC VI 175; Mekong Transport Infrastructure Development 207; Coastal Cities Environment and Sanitation 125; Second Higher Education Program 135; Ho Chi Minh City Infrastructure Fund (HIFU) 50; Mekong Transport/Flood Protection (Additional Financing) 25; Avian and Human Influenza Control 20; Second Phase 2 (DPL) 50.
- FY2008 Total: 1,192
  - Examples: PRSC VII 150; Third Rural Finance 200; Hanoi Urban Transport Development 155; Northern Delta Transport Development 170; Da Nang Priority Infrastructure Investment 152; Rural Distribution 150; Tax Administration Modernization 80; Northern Upland Health Support 60; Land Administration 75.
- Total FY05–FY08 Commitments: 3,372
- Source listed in table: World Bank.

### Knowledge Program
- The World Bank supports institutional capacity strengthening through analytical and advisory services.
- Vietnam Development Reports (VDRs) summarize accumulated knowledge and focus on specific policy areas; recent VDRs:
  - SEDP challenges (2007);
  - Social protection (2008);
  - Business development (2006);
  - Governance (2005).
- Next VDR will focus on financing Vietnam’s development.
- Other reports issued include Infrastructure Finance, Higher Education and Skills for Growth, Country Financial Accountability Assessment, Policy Agenda for Health Sector Transition, and a series on Vietnam’s Infrastructure Challenges.
- Forthcoming reports listed: High Quality Education for All, Health Financing, Financial Sector Strategy, Infrastructure Regulatory and Policy Reform, Regional Development and Integrated Urbanization, and Prioritizing Climate Change Investments.
- Ongoing advisory services: tax policy, social security, and public financial management reform.

### IMF–World Bank Collaboration in Specific Areas
- Since the expiration of the PRGF in April 2004 the IMF and World Bank have closely collaborated on PRSC triggers and benchmarks for policy areas previously covered by the PRGF agreement.
- IMF has provided Letters of Assessment in support of PRSC operations.
- Public financial management:
  - World Bank has an investment credit to support introduction of a modern Treasury and Budget Management Information System.
  - World Bank coordinates technical inputs on a large multi-donor trust fund for public financial management reform.
- Tax reform and revenue management: World Bank follows up on IMF-provided technical assistance; an investment credit for tax administration reform has been set up.
- Central banking and banking supervision:
  - Joint work underway in support of establishment of a modern central bank.
  - IMF provides technical assistance on monetary policy and operations.
  - Both World Bank and IMF provide technical assistance on banking supervision.
  - World Bank has set up an investment credit to reorganize the State Bank of Vietnam and to develop appropriate information management systems.
- Debt sustainability and strategy:
  - Since 2005, the World Bank and the IMF have jointly prepared an annual Debt Sustainability Assessment.
  - Joint Staff Advisory Note on SEDP 2006–10 submitted to the World Bank Board in December 2006.
- Statistics and data:
  - IMF focuses on improving balance of payments, national accounts, and price statistics.
  - World Bank provides assistance on high-quality household and enterprise surveys.
- Crisis response:
  - The two institutions coordinated closely on macroeconomic turbulence facing Vietnam and jointly contributed to adoption and implementation of the stabilization package of March 2008.

*Source: introduction of modern tools for environmental protection.*

### ANNEX III. VIETNAM: RELATIONS WITH THE ASIAN DEVELOPMENT BANK

### ANNEX III. VIETNAM: RELATIONS WITH THE ASIAN DEVELOPMENT BANK

### Asian Development Bank (AsDB) strategy and focus (CSP 2007–10)
- The Country Strategy and Program (CSP) 2007–10 was endorsed in October 2006 and is fully aligned with and supports implementation of the Government’s Socio-Economic Development Plan (SEDP) 2006–10.
- CSP goals:
  - help the Government reduce poverty incidence to 10–11 percent of households by 2010;
  - achieve the Millennium Development Goals/ Vietnam Development Goals;
  - exit from low-income country status.
- CSP operational focus areas:
  - Business-led, Pro-poor Economic Growth: support to develop foundations for increased private sector investment and employment.
  - Social Equity and Balanced Development: support education, health, targeted poverty reduction, rural infrastructure; address communicable diseases such as avian influenza and HIV/AIDS; mainstream gender and other equity issues in AsDB projects.
  - Environment: support natural resources management, emphasizing links between resource depletion and persistent poverty; assistance on biodiversity, water, coastal resources management and livelihood improvement.
  - Governance: addressed through all AsDB operations.
  - Regional cooperation: strongly supported through a number of projects.

### Historical lending, disbursements, and assistance (October 1993–end 2008)
- From October 1993 until end 2008, AsDB approved 78 public sector loans totaling over $6 billion, comprising $4 billion from highly concessional Asian Development Fund (ADF) and $2 billion from less concessional Ordinary Capital Resources (OCR).
- Contract awards achievement:
  - 2008: $390.4 million
  - 2007: $261 million
- Disbursements:
  - 2008: $264.6 million
  - 2007: $229.9 million
- Technical assistance grants: $175 million for 225 projects.
- Private sector support: $220 million for eight private sector loans.
- Guarantees: $60 million under two projects.
- Greater Mekong Subregion (GMS) initiatives: Vietnam receives substantial support under GMS involving Cambodia, China, Lao P.D.R, Myanmar, Thailand and Vietnam.

### Policy-based programs, reforms, and capacity building
- AsDB has approved 15 policy-based program loans in:
  - the agricultural sector,
  - the financial sector,
  - SOE reform and corporate governance,
  - public administration reform,
  - SME development,
  - support of the multi-donor supported Poverty Reduction Support Credit (PRSC).
- Policy dialogue support included measures to:
  - increase efficiency of state-owned utilities through reforming rate structure and other measures to increase cost recovery;
  - strengthen financial management, policy analysis, and planning.
- Capacity building:
  - High-level program under the Japan Fund for Public Policy Training (JFPPT) funded by the Government of Japan.

### Resident mission, departmental coverage, and donor coordination
- Following May 2006 reorganization, Vietnam is covered by the Southeast Asia Department (with Cambodia, Brunei Darussalam, Lao P.D.R., Myanmar, Thailand, Malaysia, Philippines, Indonesia and Singapore).
- The resident mission:
  - has been gradually strengthened;
  - responsible for country economic monitoring, programming and donor coordination functions;
  - administers 36 percent of the ongoing loan portfolio.
- Resident mission contributions:
  - helped the government prepare the results-based SEDP 2006–2010, including preparing the results framework for monitoring SEDP outcomes.
  - participates in the Partnership Group on Aid Effectiveness to implement the Paris Declaration on Aid Effectiveness.
  - takes a lead in harmonizing social and environmental safeguard policies between the Government and donors.
  - participates in the “Six Banks Initiative” with Agence Française de Développement (AfD), KfW development bank, Korea Eximbank, JBIC/JICA and the World Bank to harmonize project preparation, implementation, monitoring and evaluation practices and improve investment project quality and effectiveness.

### Cooperation with the IMF and multilateral partners
- AsDB and IMF staff work closely to support economic reforms in Vietnam: staff interaction, information exchange, and regular policy consultations.
- Resident missions of AsDB and the Fund cooperate closely.
- AsDB participated in the 2008 Vietnam debt sustainability analysis for the first time, alongside the Fund and the World Bank.

### Key sectoral lending (Table 1 highlights: October 1993–December 2008, in millions of U.S. dollars)
- Total public sector lending: Number 78; Approved Amount 6,031.0
- By sector (Number / Approved Amount):
  - Agriculture and natural resources: 15 / 912.5
  - Education: 7 / 323.0
  - Energy: 6 / 883.8
  - Finance: 7 / 410.0
  - Health, nutrition, and social protection: 5 / 231.2
  - Industry and Trade: 4 / 98.5
  - Law, economic management, and public policy: 5 / 176.4
  - Transportation and Communications: 16 / 2,372.2
  - Water supply, sanitation, and waste management: 6 / 357.2
  - Multi-sector: 7 / 265.7
- Technical assistance:
  - Technical assistance projects: 225 / 175.2
  - Advisory and operational purposes: 145 / 107.1
  - Project preparation: 80 / 68.1

### Sovereign loan approvals and disbursements (Table 2 highlights: 1997–2008, in millions of U.S. dollars)
- Loan approvals by year:
  - 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: 308.19
  - 2007: 1,438.86
  - 2008: 764.70
- Loan disbursements by year:
  - 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: 184.07
  - 2007: 229.88
  - 2008: 264.56
- Un-disbursed balance at the beginning of the year 2/:
  - 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: 970.63
  - 2007: 1,316.67
  - 2008: 1,456.84
- Memorandum item: Technical assistance approvals (1997–2008):
  - 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: 16.07
  - 2007: 13.12
  - 2008: 25.81

### Recent economic and financial developments (IMF staff statement, March 16, 2009)
- Economic activity indicators (first two months of 2009):
  - Industrial production growth slowed to 2½ percent (y/y) with large contractions in steel, electronics, cars, motorcycles, and footwear.
  - Retail sales grew by 1¼ percent (y/y) in real terms.
  - Tourist arrivals declined by 15 percent (y/y).
  - Exports of goods fell by 5 percent (y/y), notably crude oil, rubber, electronics, and wooden and ceramic products.
  - Imports contracted by 43 percent.
  - Exports to traditional markets (United States, European Union, Japan, and ASEAN) reportedly declined by 20 percent (y/y).
  - Portfolio investment outflows continued; stock market declined by 20 percent year-to-date; foreign investors divested remaining bond holdings.
  - Dong continued to trade at the weaker end of the band.
  - Gross international reserves fell by $0.7 billion in January to $22.3 billion.
- Inflation:
  - Headline inflation moderated to 14.8 percent (y/y) in February; turned negative month-on-month for four months in a row.
  - Core inflation (excluding raw food and energy) fell to 13.7 percent and saw the first month-on-month drop (0.2 percent) in nearly six years.
- Trade balance:
  - Significant contraction in imports contributed to an improved trade balance, recording a small surplus in the first two months of 2009.
- Note: The staff statement reports that the fiscal stimulus plan may help mitigate the downturn.

*Source: ANNEX III. VIETNAM: RELATIONS WITH THE ASIAN DEVELOPMENT BANK; ANNEX IV and IMF staff statement as contained in the provided content.*

### 6.      Monetary conditions have been relaxed further. While the State Bank of Vietnam

### 6.      Monetary conditions have been relaxed further. While the State Bank of Vietnam

### Monetary policy actions and recent measures
- SBV has kept the base rate unchanged at 7 percent since February.
- Reserve requirement ratio for dong deposits was reduced to 3 percent from 5 percent effective March 1.
- Banks have started extending loans under the interest rate subsidy scheme which began in early February, with the bulk of the loans channeled by state-owned commercial banks.
- In the fourth quarter (2008), the SBV lowered its policy rates by 7 percentage points to 7 percent, and reduced reserve requirements sharply; it also devalued the dong and widened the dong-U.S. dollar trading band.
- Directors advised the authorities to assess the effects of recent monetary adjustment before considering easing further; recommended improvements in open market operations and liquidity management.
- Directors welcomed the intention to allow greater exchange rate flexibility, supported by appropriate macroeconomic policies, and noted staff’s assessment that the dong appears somewhat overvalued compared with its estimated medium-term equilibrium level.

### Fiscal stimulus measures for 2009 — measures, nature, and costs (In percent of GDP)
- Revenue (total): 1.7
  - 30 percent corporate income tax (CIT) reduction for small- and medium-sized enterprises — Temporary — 0.3
  - Deferral of CIT payments by nine months for some businesses — Temporary — 1.0
  - Delay in personal income tax payments for five months 1/ — Temporary — 0.3
  - 50 percent VAT reduction for selected goods and services and for imports — Temporary — 0.1
  - Provisional VAT refund for exporters — Temporary — Negligible
  - Deferment of time for payment of import duty for some sectors — Permanent — Negligible
  - Elimination of export duty on exported timber goods produced from imported timber — Permanent — Negligible
  - Removal of export duty on selected products 2/ — Permanent — Negligible
- Expenditure (total): 2.3
  - Subsidized credit for enterprises — Temporary — 1.0
  - Increase in off-budget capital spending — Temporary — 0.5
  - Social safety net measures:
    - Policies to reduce poverty in 61 districts — Temporary — 0.4
    - Promoting investment in housing for the poor — Temporary — 0.2
    - Support for low-income civil servants — Temporary — 0.1
- Total cost: 4.0
- Sources: Information provided by the Vietnamese authorities; and IMF staff estimates.
- Notes included in source:
  - 1/ Assumes these payments will be foregone.
  - 2/ Exported rice and fertilizer, crude and pure copper, and barium and apatite ore.

### Fiscal planning, risks, and staff concerns
- Government expected to submit a revised budget plan for 2009 to the National Assembly in May.
- Preliminary staff estimates suggest aggregate cost of the stimulus package could be large (4 percent of GDP), but subject to significant uncertainty.
- Stimulus estimates not yet integrated into a revised budget; unclear extent of financing from reallocation of existing expenditures.
- Staff concerns:
  - Need for a revised fiscal plan consistent with available financing.
  - In the absence of additional concessional external financing, a sizable fiscal stimulus could:
    - Further weaken the external position,
    - Crowd out private sector activity,
    - Undermine fiscal sustainability prospects.
  - Some measures are inefficient and not well targeted; measures to support the poor and removal of some export duties are welcome.

### Macroeconomic outlook and key indicators (selected figures from 2005–09)
- Real GDP (annual percentage change): 2005 8.4; 2006 8.2; 2007 8.5; 2008 6.2; 2009 Est./Proj. 4.8
- Growth narrative: Growth moderated to 6.2 percent in 2008 from a historical average of 7½ percent; growth expected to slow further to 4¾ percent in 2009.
- Current account balance (in percent of GDP): 2005 -1.1; 2006 -0.3; 2007 -9.8; 2008 -10.3; 2009 -8.1
- Current account balance (In billions of U.S. dollars): 2005 -0.6; 2006 -0.2; 2007 -7.0; 2008 -9.2; 2009 -7.3
- Exports f.o.b. (annual percentage change, U.S. dollar terms): 2005 22.5; 2006 22.7; 2007 21.9; 2008 29.5; 2009 -15.5
- Imports f.o.b. (annual percentage change, U.S. dollar terms): 2005 15.0; 2006 22.1; 2007 38.3; 2008 27.6; 2009 -19.9
- Inflation:
  - CPI (period average): 2005 8.3; 2006 7.5; 2007 8.3; 2008 23.1; 2009 8.0
  - CPI (end of period): 2005 8.8; 2006 6.7; 2007 12.6; 2008 19.9; 2009 6.0
  - GDP deflator: 2005 8.2; 2006 7.3; 2007 8.2; 2008 21.7; 2009 4.8
- Fiscal balances (in percent of GDP):
  - Official fiscal balance: 2005 -0.1; 2006 1.1; 2007 -2.2; 2008 -1.6; 2009 -4.1
  - Revenue and grants: 2005 27.2; 2006 28.7; 2007 27.6; 2008 27.2; 2009 24.0
  - Expenditure: 2005 27.3; 2006 27.5; 2007 29.8; 2008 28.8; 2009 28.1
  - Off-budget expenditure and net lending: 2005 4.4; 2006 2.2; 2007 3.1; 2008 3.1; 2009 4.1
  - Overall fiscal balance 4/: 2005 -4.5; 2006 -1.1; 2007 -5.3; 2008 -4.7; 2009 -8.2
  - Non-oil primary fiscal balance 4/: 2005 -11.7; 2006 -8.8; 2007 -11.1; 2008 -9.4; 2009 -9.7
- Money and credit (annual percentage change, end of period):
  - Broad money: 2005 29.7; 2006 33.6; 2007 46.1; 2008 20.3; 2009 ...
  - Credit to the economy: 2005 31.7; 2006 25.4; 2007 53.9; 2008 25.4; 2009 ...
- Interest rates (in percent, end of period):
  - Nominal three-month deposit rate (households): 2005 7.8; 2006 7.9; 2007 7.4; 2008 8.1; 2009 ...
  - Nominal short-term lending rate (less than one year): 2005 12.0; 2006 11.8; 2007 11.8; 2008 11.5; 2009 ...
- Foreign exchange reserves (in billions of U.S. dollars, end of period):
  - Gross official reserves, including gold: 2005 8.6; 2006 11.5; 2007 21.0; 2008 23.0; 2009 20.7
  - (In months of next year's imports of GNFS): 2005 2.2; 2006 2.1; 2007 3.0; 2008 4.1; 2009 3.3
- External and public debt:
  - External debt (in percent of GDP): 2005 32.5; 2006 31.4; 2007 33.3; 2008 29.8; 2009 31.9
  - External debt service (in percent of exports of GNFS): 2005 4.5; 2006 4.2; 2007 3.8; 2008 3.4; 2009 4.5
  - Total public and publicly-guaranteed debt (in percent of GDP): 2005 44.5; 2006 44.1; 2007 46.3; 2008 44.4; 2009 47.5
- Exchange rates:
  - Dong per U.S. dollar exchange rate (end of period) 6/: 2005 15,907; 2006 16,068; 2007 16,003; 2008 17,486; 2009 ...
  - Nominal effective exchange rate (end of period) 7/: 2005 83.6; 2006 77.3; 2007 73.3; 2008 75.4; 2009 ...
  - Real effective exchange rate (end of period) 7/: 2005 99.8; 2006 96.8; 2007 100.5; 2008 121.9; 2009 ...
- Memorandum item: GDP (in trillions of dong at current market prices): 2005 839; 2006 974; 2007 1,144; 2008 1,479; 2009 1,623

### Banking sector vulnerabilities and recommended actions
- Strains in the banking system emerged in 2008:
  - Banks have high loan-to-deposit ratios, rely heavily on short-term interbank funding, and faced squeezed profit margins due to higher funding costs and caps on lending rates.
  - Smaller joint-stock banks were reportedly most affected; some obtained liquidity support from the SBV.
  - Nonperforming loans (NPLs) doubled to 3 percent in October 2008 from the end-2007 level; some banks likely to face a substantial increase in NPLs with a slowing economy.
- Directors’ recommendations:
  - Develop a more comprehensive contingency plan to help the banking sector confront effects of the global financial turmoil.
  - Continue to improve bank supervision to ensure vulnerabilities are assessed in a timely and effective manner.
  - Advance financial sector reform, in particular, strengthen the operational autonomy of the State Bank of Vietnam.
  - Noted that strengthened capital position and improved provisioning practices may provide a buffer, but loan portfolios could come under pressure as growth slows.

### IMF Executive Board assessment and policy guidance
- Directors commended authorities for progress stabilizing the overheating 2008 economy and welcomed improvements in inflation and the trade balance.
- Directors noted substantial near-term challenges from global conditions; risks tilted firmly to the downside.
- Directors considered an accommodative fiscal stance in 2009 appropriate to mitigate the downturn but cautioned that without concessional external financing, a large stimulus could weaken external position, crowd out private activity, and undermine fiscal sustainability.
- Recommended that the authorities:
  - Revise the 2009 budget plan to ensure stimulus measures are well targeted and effective in supporting aggregate demand.
  - Broaden the tax base and review expenditure structure to ensure efficiency of public investment and protection of vulnerable groups.
  - Press ahead with reform of state-owned enterprises (SOEs); equitization had been postponed partly due to market conditions.
  - Continue to improve the quality and timeliness of data, especially in fiscal accounts, SOEs, and banking, and maintain an effective public communication strategy.

### Authorities’ view and policy aims (Statement by Perry Warjiyo and Narayanan Raman)
- Authorities acknowledged the difficult 2008 conditions: GDP increased by 6½ percent in the first six months of 2008; inflation rose to over 28 percent during the year; trade deficit in 2008 reached US$18 billion.
- Authorities shifted focus from inflation to growth given global deterioration; have taken proactive monetary and fiscal measures to sustain growth and ensure social safety.
- Adopted a Resolution on emergency measures with main aims to:
  - Promote production, business and exports;
  - Stimulate consumption and investment;
  - Implement flexible monetary and financial policies;
  - Ensure social safety;
  - Ensure the full and well-targeted implementation of these measures.

*Public Information Notice (PIN) No. 09/36, March 17, 2009.*

### 6.      Having said that, the authorities are well aware that any stimulus, particularly fiscal

### _cr09110 - 6.      Having said that, the authorities are well aware that any stimulus, particularly fiscal

### Stimulus financing and investor confidence
- Any stimulus, particularly fiscal stimulus, will need to be financed domestically given the sense of flux in global markets.
- The authorities will ensure that any moves to source funding from domestic bond markets will be done in a sustainable manner.
- Vietnam has a high savings rate and government bonds remain an attractive asset in the current environment.
- The authorities state their stimulus plans are not being crafted in response to regional “peer pressure”, though the stance and sizes of regional peers’ responses provide useful cross-checks and information on cyclical positions.
- Since the beginning of the year, the authorities licensed 67 projects with a total investment value of US$1.5 billion, indicating continuing inflows of foreign direct investment.

### External stability
- The SBV reiterated its goal to allow significantly greater flexibility to the dong over the medium term and agrees that greater flexibility would be appropriate given the increasing sophistication of the Vietnamese economy.
- Transition to greater flexibility will be pursued with prudent steps to avoid negative impacts on the economy and external position.
- Staff DSA shows balance sheet effects of a large dong depreciation could be significant; too significant a depreciation could reverse de-dollarization and render monetary policy less effective.
- Authorities intend to consider options including adjusting the trading band and closely monitoring the central rate.
- Following 2008 exchange rate steps, the dong’s value in the parallel market closed significantly to within 2 percent of the official rate.
- Current account deficit, while risen, remains fully funded by stable long-term flows including concessional financing, ODA and foreign direct investment.
- Automatic correction in the current account is expected if some of these flows decline, via lower capital and intermediate imports.
- The deep pool of domestic savings covered exits of foreign portfolio investors; foreign portfolio investors have mostly exited and further outflows present a negligible risk.
- Reserves position remains relatively ample at over US$22 billion, allowing the SBV to ensure the foreign exchange market continues to function.
- Authorities agree with the DSA conclusion that Vietnam remains at low risk of distress and will maintain a prudent debt management strategy.
- Public debt has risen in recent years partly to meet pressing infrastructure needs; such outlays could enhance economic efficiency and raise growth levels.
- Some outlays aimed at putting state-owned enterprises on a sounder footing are expected to be recouped when privatization (equitization) takes place.
- A key challenge is the gradual loss of access to concessional resources as Vietnam transitions to a full-fledged emerging market economy.

### Financial sector stability and policies
- Authorities found staff’s analysis of financial sector stability to be balanced and well researched; they agreed Vietnamese banks remain in a strong position.
- Banking system indicators (as at end-2008):
  - Equity capital in the banking system increased by 30 percent compared with the level a year earlier.
  - Capital adequacy ratio improved from 8.9 percent to 9.7 percent over the same period.
  - Loans given out cover between 35-50 percent of the assessed value of any asset.
  - Non-performing loan (NPL) ratio increased to 2.1 percent at the end of 2008 compared to 1.5 percent as at end-2007; authorities note this remains a very low level.
- SBV proactive measures to minimize emerging risks:
  - Requiring commercial banks to review all their deposits and investments in foreign banks and financial institutions to have contingency plans to reallocate deposits to safer institutions.
  - Requiring commercial banks to review and check all their investment lending, particularly exposure to high risk sectors such as real estate and purchase of securities, and to strengthen supervisory and prudential measures on these loans.
  - Exercising greater oversight over risky loans and reviewing and monitoring bank capital levels.
  - Strengthening the bank resolution framework, including completing regulations on debt factoring, setting up vehicles to deal with impaired assets of commercial banks, and preparing and submitting regulations on dealing with problem banks to the Prime Minister.
- Expected financial sector trajectory:
  - Authorities expect strong growth in the financial sector over the medium term as part of convergence and modernization.
  - Emphasis placed on capital as the first and best line of defense; significant emphasis on raising capitalization levels.
  - Need acknowledged to remove institutional roadblocks; work on SBV Law and the Credit and Financial Institutions Law seen as cornerstone reforms.
  - Authorities appreciate MCM feedback and Fund assistance in financial sector management, including crisis management.

### Structural reforms
- Ongoing reforms are driven by Vietnam’s economic transition and anticipation of full WTO commitments.
- Fiscal reforms:
  - Strong impetus to enact and implement the new State Budget Law, to be presented to the National Assembly later this year, aiming to improve central-provincial relationships, reporting bases for revenues and expenditures, execution of fiscal measures, and transparency and timeliness of reporting.
  - Pilot multi-year rolling budgeting framework under way for six ministries and three local authorities, with positive results and plans to expand.
  - Preparing for loss of tariff revenues and reducing over-dependence on oil revenues; initiatives include considering a large taxpayers unit and examining the role of taxes on assets; indirect taxes will form an important part of future reforms.
  - Expenditure-side measures emphasize balancing fiscal sustainability with pressing needs; public-private partnerships (PPPs) will be pursued carefully and prudently after careful design and testing.
- Monetary and legal reforms:
  - Significant legislative changes are being prepared to enshrine SBV responsibilities and authority; the SBV Law will clarify important roles for a fast modernizing economy and a revised draft is expected to be brought to the National Assembly shortly.
- Financial sector reforms:
  - Continued push for better provisioning and risk reporting standards; reporting requirements tightened with new loan categories.
  - SBV strengthening supervisory capacity through intensified on-site and off-site monitoring.
  - Regulators working closely with fiscal authorities to ensure crisis resolution framework can meet potential demands; framework proved robust during market disruptions experienced last May.

### The role of the Fund
- Authorities identify capacity as key to improved policy formulation and implementation; progress made but shortcomings remain.
- The Fund (staff at headquarters and the Resident Representative’s office in Hanoi) has played an important role in upgrading capabilities.
- Authorities have requested Fund assistance in areas highlighted by surveillance as needing improvement, indicating staff advice is being taken seriously.
- Fund contributions cited:
  - MCM missions on crisis management and resolution frameworks over the past year.
  - HQ feedback on legislative reforms proposed by SBV to enhance regulatory and supervisory capacity.
  - Lead role in areas such as financial stability, statistical improvements and the fiscal framework.
- Authorities hope the Fund will continue to provide assistance going forward.

*Excerpt from the authorities’ responses and discussions contained in the provided chapter excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09110.pdf_