## _cr16240 ## Source details **Canonical URL:** [_cr16240](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16240.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16240.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16240.pdf.json) --- ### Context and reform momentum - Vietnam has experienced solid growth with low inflation, driven by openness to trade and FDI; productivity spillovers from the FIE sector to the domestic economy remain limited. - Legacy and emerging vulnerabilities: public debt is high, external debt has increased, rapid credit expansion poses financial-stability risk, and bank recapitalization to deal with impaired assets has yet to materialize. - Political impetus: January 2016 Party Congress and the new government (April 2016) emphasize greater use of market-based mechanisms and acceleration of a second generation of reforms. - Recent policy moves consistent with Fund advice: - More flexible daily central exchange rate mechanism introduced. - Monetary policy increasingly focused on inflation stability; interest in moving toward using inflation as a nominal anchor. - Banking reforms: phasing out explicit loan-classification forbearance, strengthening supervision, enhanced macroprudential oversight. - Implementation gaps: NPL resolution and recapitalization have not progressed in earnest; SOE legal framework developed but implementation lags; sustained fiscal consolidation has not materialized. ### Macroeconomic developments and outlook - Recent history and short-term outcomes: - Real GDP rose by 6¾ percent (y/y) in 2015. - Real GDP growth slowed to 5½ percent (y/y) in 2016 Q1. - Agriculture production fell sharply owing to severe drought and salinization. - Headline inflation fell below 1 percent (y/y) then ticked upward in early 2016; core inflation around 1¾ percent (y/y). - Real estate prices increased slightly but remained below previous peak. - Credit growth picked up to 19¼ percent (y/y) in early 2016; SBV credit growth targets set at 18–20 percent (y/y) for 2016. - State-owned banks expanded credit faster than private banks, concentrated in real estate, financial, and personal sectors. - Outlook and projections: - Near-term growth projected to moderate to around 6 percent in 2016. - Over the medium term growth projected to settle around its potential rate of 6¼ percent. - Headline inflation projected to rise due to food and administered prices; underlying inflation should remain moderate absent broad-based demand pressures. - FDI inflows projected to remain strong; medium-term benefit from FTAs expected. - Policy note: a bolder package of structural, fiscal, and banking reforms would raise productivity and facilitate sustained higher long-run growth. ### External sector, reserves, and balance-sheet indicators - External developments: - International reserves declined by an estimated US$9 billion from their 2015 peak to around US$28.3 billion (below 2 months of imports) before increasing to US$29 billion in February and US$33.9 billion in April. - By end-2015 the dong had depreciated by about 5 percent against the dollar, but was about 3½ percent appreciated in real effective terms; the +/-3 percent trading band retained. - A dual, segmented current account persists: domestic sector ran a trade deficit while the FIE sector’s trade surplus continued. - Selected level and projection figures (Table highlights): - Exports f.o.b.: 2015 = 162.1 (US$ billions); 2016 (Proj.) = 174.7; 2017 (Proj.) = 192.7. - Imports f.o.b.: 2015 = 154.7; 2016 (Proj.) = 166.7; 2017 (Proj.) = 184.6. - Current account balance (including official transfers, percent of GDP): 2015 = 0.5; 2016 (Proj.) = 0.3; 2017 (Proj.) = 0.0. - Gross international reserves (in billions of U.S. dollars): 2015 = 28.4; 2016 (Proj.) = 33.7; 2017 (Proj.) = 39.9. ### Fiscal stance, public debt, and consolidation recommendations - Recent fiscal outcomes: - Deficits have averaged 6½ percent of GDP since 2012. - 2015 deficit moderated to 5.9 percent of GDP. - Revenue drop since 2012 due to corporate income tax and tariff reductions, tax exemptions, and declining oil revenues; current expenditures including interest payments increased while capital expenditure constrained. - 2016 projections and composition: - A deficit of 6½ percent of GDP projected for 2016. - Projected gains in tax and nontax revenue expected to more than offset a 2 percentage point corporate income tax cut (to 20 percent). - Carry-forward local government spending estimated to add about 1½ percent of GDP to expenditures. - Public debt trajectory and risks: - PPG debt projected to increase to 62 percent in 2016, up over 16 percentage points in the past five years. - Under staff baseline (modest consolidation to a deficit around 5 percent of GDP), PPG debt would rise toward 70 percent of GDP, elevating debt-distress risk. - Nominal gross public debt (percent of GDP): 2015 = 58.3; 2016 = 62.1; 2017 = 64.6; 2018 = 66.0; 2019 = 66.7; 2020 = 67.2; 2021 = 67.5. - Public gross financing needs (percent of GDP): 2015 = 8.4; 2016 = 10.3; 2017 = 9.8; 2018 = 9.6; 2019 = 9.8; 2020 = 9.9; 2021 = 10.2. - Policy recommendations for consolidation: - Begin fiscal consolidation this year with growth-friendly measures and include funds for bank recapitalization. - Proposed consolidation path: deficit reduction of ¾ of a percentage point of GDP per year, together with accelerated structural and bank reforms, to place the debt ratio on a downward path and mitigate debt distress risk. - Specific revenue measures: broaden revenue base, reduce exemptions and incentives, increase fuel and environmental taxation with targeted protection for the poor, eliminate the lower VAT rate of 5 percent (unify VAT at 10 percent recommended), introduce property, interest income, and capital gains taxes, include pensions under personal income tax, and strengthen revenue administration. - Expenditure-side: comprehensive civil service reform to rationalize public wage bill; protect social and infrastructure outlays; improve public capital spending efficiency and provincial coordination; consider greater use of PPPs for infrastructure. ### Public debt sustainability scenarios and stress tests - Baseline and scenario outcomes: - Baseline: PPG debt projected to stabilize around 67½ percent of GDP by 2021, breaching the government ceiling of 65 percent of GDP in 2018. - Constant primary balance scenario: PPG debt reaches about 74¼ percent of GDP by 2021. - Historical scenario: PPG debt decreases to 62 percent of GDP in 2021. - Macro-fiscal stress tests: primary balance worsening by 1¼ percentage points of GDP in 2017–18 would push PPG debt to 70½ percent of GDP in 2021. - Probabilistic simulation: 25 percent chance PPG debt could reach about 80 percent of GDP under a worst-case combination of shocks; 25 percent chance it falls below 55 percent under a combination of positive shocks. - Debt dynamics and selected indicators (exact figures preserved): - Guarantees (percent of GDP): 2015 = 11.5; 2016 = 12.1; 2017 = 11.1; 2018 = 10.1; 2019 = 9.1; 2020 = 8.3; 2021 = 7.5. - Primary deficit (percent of GDP): 2016 = 3.9; 2017 = 4.4; 2018 = 3.7; 2019 = 3.2; 2020 = 2.9; 2021 = 2.6. - Primary (noninterest) revenue (percent of GDP): 2016 = 23.7; 2017 = 22.9; 2018 = 22.8; 2019 = 22.8; 2020 = 22.6; 2021 = 22.3. - Primary (noninterest) expenditure (percent of GDP): 2016 = 27.7; 2017 = 27.3; 2018 = 26.6; 2019 = 26.1; 2020 = 25.5; 2021 = 24.8. - Policy implication: the 1.5 percent adjustment referenced is assumed to be achieved mainly through expenditure reduction; strengthen fiscal consolidation and expenditure efficiency to avoid breaching policy ceilings. ### Banking sector: NPL resolution, VAMC, and recapitalization - Key diagnostics: - Reported capital adequacy ratio: 12¾ percent. - Reported NPL ratio: 2.6 percent; broader impaired-loan measure (including NPLs sold to VAMC and restructured loans): about 12½ percent of total loans. - Banking-sector profitability: ROA = 0.5 percent; ROE = 6¼ percent. - Recapitalization estimates and recommendations: - Staff estimates recapitalization costs for public banks at around 2½ percent of GDP. - Recapitalization by existing shareholders, including budget resources for SOCBs, is recommended; subsequent equitization to recover initial budgetary recapitalization costs recommended. - Using public money up front (estimated at 2½ percent of GDP) would be manageable, reduce uncertainty, and provide insurance against larger contingent liabilities. - VAMC-related recommendations: - Accelerate resolution and sale of NPLs in its portfolio; strengthen VAMC capacity, permit it to recognize losses and pass losses to participating banks. - Provide more resources, develop valuation and securitization methodologies, grant legal protection for officials involved in valuation of loans and collateral, and establish quantitative NPL-resolution targets. - License more institutions to trade NPLs and collateral to create an NPL market. - Legal/institutional reforms: - Strengthen debt enforcement and collection framework to facilitate collateral sales. - Create a specialized resolution regime for financial institutions, including a framework for purchase-and-assumption transactions. - Macroprudential guidance: - Staff view macroprudential tightening as appropriate given rapid credit growth. - Proposed unified LTD limit: 80 percent system-wide (staff recommendation to forgo proposed increase for SOCBs). - Recommended credit growth moderation target: below 15 percent to reduce financial-stability risks. - Other measures: tighten risk weights for real estate loans and prudential ratios for maturity-mismatch exposures; establish clear communications and publish a financial-stability report. ### Monetary policy framework, operations, and inflation anchor - Operational and institutional recommendations for transition to inflation targeting: - Adopt inflation as the nominal anchor as exchange-rate flexibility increases; strengthen monetary-policy operational and institutional frameworks and adopt a medium-term inflation objective. - Establish an interest-rate corridor (300 b.p. width) with the collateralized overnight credit facility as ceiling and overnight deposit facility as floor; guide overnight interbank rate to the corridor center via liquidity operations. - Phase out administrative measures (interest-rate ceilings, credit targets) and rely on open-market operations complemented with standing facilities. - Improve data quality, forecasting, and analytical tools (including FPAS model); develop communications strategy and unit; enhance SBV autonomy, accountability, and transparency. - Staff stance on current policy: - Keep monetary policy on hold in the near term while modernizing the framework; tighten if underlying inflation rises, consider easing if inflation stalls while growth weakens. - Suggested operational improvement: stabilize overnight interbank rate close to policy repo rate and establish an interest-rate corridor. - Box 5 highlights: detailed steps to design operational, communications, analytical, and institutional upgrades to support a gradual shift to inflation as the nominal anchor. ### Trade developments, FTAs, and TPP implications - Trade openness and structure: - Trade amounts to about 160 percent of GDP. - FDI-driven manufacturing exports have shifted the product mix from commodities to manufacturing; FIEs account for 70 percent of exports. - TPP potential impacts: - Estimates suggest GDP could rise by a cumulative 8 percent, and exports by 30 percent, by 2030. - TPP countries account for 39 percent of Vietnam’s exports. - TPP will eliminate or reduce many tariff lines: about 65 percent of Vietnam’s import tariff lines for TPP members eliminated on commencement, 85 percent after four years, 98 percent after a decade; similar large eliminations for partners’ tariffs on Vietnam’s exports. - Fiscal implication: trade-revenue loss given current trade revenues amount to 2½ percent of GDP and average tariff around 9½ percent. - TPP requires SOEs to operate on market principles and allows a one-time capital injection for restructuring; labor-rights protection is a challenge where Vietnam has not ratified certain ILO conventions. - Policy priorities to maximize TPP benefits: - Accelerate SOE reform, improve domestic supplier integration with FIEs, reduce dependence on non-TPP inputs (e.g., yarn/textiles), and address labor-rights and regulatory gaps. ### Structural reforms to raise potential growth - Growth and productivity concerns: - TFP growth has declined by about 1½ percentage points since the mid-2000s. - Nearly half the workforce is in agriculture and three quarters employed at the household level with low productivity. - Working-age population share has started to decline. - SOE reform priorities: - Faster and more comprehensive equitization with transparency of proceeds and enforcement of disclosure and reporting; governance reforms to address conflicts of interest; divestment from non-core areas and restructuring/exit of unprofitable SOEs. - Curtail SOEs’ preferential access to capital and land; strengthen property rights and competition policy. - Business environment and human capital: - Improve doing-business climate (Vietnam ranks 90th); strengthen public investment efficiency; increase and better target R&D and vocational training; extend health coverage; address inequality and gender gaps; strengthen environmental policies for sustainability. - Authorities’ commitments: - Accelerate SOE reforms in 2016–20 with a roadmap to halve the number of SOEs by 2020; agreed need to resolve impaired loans and remove legal constraints to resolve NPLs. ### Risks (selected with likelihood, impact, transmission, and policy recommendations) - Public debt/GDP ratio increases further; inadequate fiscal consolidation; private external debt continues rising - Likelihood:  High; Impact: Medium. - Transmission: Higher interest rates, exchange-rate pressure, weaker confidence, crowding out. - Policy recommendations: Broaden revenue base, reduce exemptions, strengthen administration, introduce a property tax, curtail non-essential spending, civil service reform. Allow greater exchange-rate flexibility. - Banking-sector NPLs exacerbated; high credit growth to real estate and financial sector - Likelihood:  Medium; Impact: High. - Transmission: Adverse macro-financial feedback loop. - Policy recommendations: Accelerate NPL resolution and recapitalization of systemically important banks, resolve small unviable banks, strengthen safety nets. Reduce credit growth targets, tighten macroprudential policies. - Tighter or more volatile global financial conditions, surge in the U.S. dollar - Likelihood:  High; Impact: Medium. - Transmission: Capital outflows pressure exchange rate and reserves, confidence declines. - Policy recommendations: Allow greater exchange-rate flexibility; move toward using inflation as a nominal anchor; accelerate fiscal consolidation and structural reforms. - Positive scenarios: - Deeper integration in regional supply chains and earlier-than-expected TPP/FTAs implementation could strengthen exports, FDI, and productivity. - Policy recommendations in these cases: allow exchange-rate flexibility, accelerate SOE and market reforms, adapt monetary framework to focus on inflation stability. ### Key numerical targets and indicators (selected exact figures) - Recapitalization costs for public banks: around 2½ percent of GDP. - Proposed unified LTD limit: 80 percent system-wide. - Recommended credit growth moderation target: below 15 percent. - Authorities’ medium-term growth target: 6½–7 percent. - Growth assumption used in benchmarking beyond T=0: 6.5 percent. - Public and publicly guaranteed debt projection under 2016 budget plan: 62 percent of GDP. - Legal debt-to-GDP limit: 65 percent. - Possible medium-term debt-to-GDP under modest consolidation: approach 70 percent. - Medium-term fiscal deficit goal: 3 percent of GDP. - Proposed unified VAT rate: 10 percent. - Timeframe for SOE reforms: 2016–20; roadmap to halve number of SOEs by 2020. - Selected macro table highlights: - Real GDP (percent change): 2015 = 6.7; 2016 (Proj.) = 6.1; 2017 (Proj.) = 6.2. - CPI (period average): 2015 = 0.6; 2016 (Proj.) = 2.0; 2017 (Proj.) = 3.7. - Public and publicly guaranteed debt (end of period): 2015 = 58.3; 2016 (Proj.) = 62.1; 2017 (Proj.) = 64.6. - Credit to the economy (percent change, end of period): 2015 = 18.8; 2016 (Proj.) = 17.4; 2017 (Proj.) = 16.2. - Gross international reserves (in billions of U.S. dollars): 2015 = 28.4; 2016 (Proj.) = 33.7; 2017 (Proj.) = 39.9. *Source: IMF staff report excerpt — "2. Structural Benchmarking" and contiguous sections as provided.* ### 2. Structural Benchmarking______________________________________________________________________ 19 ### 2. Structural Benchmarking ### Context and reform momentum - Vietnam has experienced solid growth with low inflation; openness to trade and FDI has driven increasingly sophisticated exports and market diversification. - Legacy and emerging vulnerabilities require policy upgrades: public debt is high, external debt has increased, rapid credit expansion poses financial stability risk, and adequate bank recapitalization to deal with impaired assets has yet to materialize. - Structural reforms, including for state-owned enterprises (SOEs), are needed to strengthen spillovers of productivity gains from the foreign-invested sector (FIE) to the domestic economy. - The January 2016 Party Congress and the new government formed in April reflect a renewed reform drive emphasizing greater use of market-based mechanisms and acceleration of a second generation of reforms. - Recent policy moves broadly align with past Fund advice: more flexible daily central exchange rate mechanism introduced; monetary policy increasingly focuses on inflation stability; interest in moving toward using inflation as a nominal anchor; banking sector reforms include phasing out explicit loan classification forbearance, strengthening supervision, and enhanced macroprudential oversight. - Implementation gaps remain: resolution of nonperforming loans (NPLs) and recapitalization have not progressed in earnest; SOE legal framework developed but implementation lags; sustained fiscal consolidation has not materialized. ### Macroeconomic developments (recent history) - Real GDP rose by 6¾ percent (y/y) in 2015, supported by macrofinancial policy settings; investment and consumption contributed to strong domestic demand. - Export growth moderated in the second half of 2015 due to lower commodity prices and slowing external demand; strong import growth (mainly machinery and intermediate goods) in first three quarters weakened toward year-end. - Real GDP growth slowed to 5½ percent (y/y) in the first quarter of 2016. - Agriculture production fell sharply owing to a severe drought and arable land salinization; industrial production moderated with soft trade. - Headline inflation fell to below 1 percent (y/y) before ticking upward in early 2016 due to higher food and administered healthcare prices. - Core inflation excluding administered price adjustments has fallen to around 1¾ percent (y/y). - Real estate prices have increased slightly but remain below their previous peak, aided by substantial increase in supply (residential apartments, hotels, retail space). - Credit growth picked up to 19¼ percent (y/y) in early 2016; SBV credit growth targets were set at 18–20 percent (y/y) for 2016. - State-owned banks expanded credit significantly faster than private banks; most of the increase was to real estate, financial, and personal sectors including mortgages, raising concerns over productivity of new credit. ### External sector and reserves - Heightened global financial volatility in H2 2015 spilled over into domestic markets; SBV made exchange rate regime more flexible and intervened in support of the dong. - International reserves declined by an estimated US$9 billion from their 2015 peak to around US$28.3 billion (below 2 months of imports). - In early 2016 portfolio and direct investment inflows reversed outflows and international reserves increased to US$29 billion in February. - By end-2015 the dong had depreciated by about 5 percent against the dollar, but was about 3½ percent appreciated in real effective terms; the +/-3 percent trading band was retained. - A dual, segmented external current account persists: the domestic sector ran a trade deficit while the FIE sector’s trade surplus remained; exports of FIEs continued to perform well. - No clear evidence of exchange rate misalignment exists, but strengthening the external position requires higher reserves and structural and SOE reforms to improve domestic-sector competitiveness and facilitate productivity spillovers from the FIE sector. ### Outlook and projections - Near-term growth projected to moderate to around 6 percent in 2016, reflecting drought impacts on agriculture, lower external demand, and tighter global financial conditions spillovers. - Headline inflation is projected to rise due to higher food and administered prices; underlying inflation should remain moderate absent broad-based demand pressures. - Current account balance projected to decline slightly in near term as exports and imports soften, then improve as export sector responds to increased productive capacity and free trade agreements. - FDI inflows projected to remain strong while short-term capital outflows moderate. - Over the medium term growth projected to settle around its potential rate of 6¼ percent. - A bolder policy package of structural, fiscal, and banking reforms would raise productivity, mitigate risks, and facilitate sustained higher long-run growth. ### Risks — channels and policy recommendations (selected entries from Risk Assessment Matrix) - Public debt/GDP ratio increases further; inadequate fiscal consolidation; private external debt continues rising - Likelihood:  High - Impact: Medium - Transmission: Higher interest rates, exchange rate pressure, weaker confidence, crowding out - Policy recommendations: Broaden revenue base, reduce exemptions, strengthen administration, introduce a property tax, curtail non-essential spending, civil service reform. Allow greater exchange rate flexibility. - Banking-sector NPLs are exacerbated; high credit growth to real estate and the financial sector create new risks - Likelihood:  Medium - Impact: High - Transmission: Adverse macro-financial feedback loop - Policy recommendations: Accelerate NPL resolution and recapitalization of systemically important banks, resolve small unviable banks, strengthen safety nets. Reduce credit growth targets, tighten macroprudential policies. - Prolonged drought and salinization events - Likelihood:  Medium - Impact: Medium - Transmission: Successive crop yields underperform, spillovers to trade, transport and agro-industry - Policy recommendations: Monetary policy should look through first round effects on inflation to possible second round effects. Make fiscal space for mitigation expenditures. - Tighter or more volatile global financial conditions, surge in the U.S. dollar - Likelihood:  High - Impact: Medium - Transmission: Capital outflows pressure exchange rate and reserves, confidence declines - Policy recommendations: Allow greater exchange rate flexibility, move toward using inflation as a nominal anchor. Accelerate fiscal consolidation, and structural reforms to support confidence and FDI. - Structurally weak growth in key advanced and emerging economies / significant China slowdown - Likelihood:  Medium - Impact: Medium - Transmission: Weaker export growth, FDI and remittances - Policy recommendations: Allow greater exchange rate flexibility, move toward using inflation as a nominal anchor. Accelerate financial sector, SOE and structural reforms to improve productivity, FDI, and domestic activity. - Persistently lower energy prices - Direction:  External /  Fiscal - Likelihood: High - Impact: Low / High - Transmission: Improved current account balance / lower fiscal revenues - Policy recommendations: Allow exchange rate flexibility. Strengthen revenue: broaden base, reduce exemptions, strengthen administration, introduce a property tax. - Deeper integration in regional supply chains - Likelihood:  Medium - Impact: Stronger exports, improved current account balance - Policy recommendations: Allow exchange rate flexibility, strengthen international reserves buffers. - Earlier-than-expected implementation of TPP or further FTAs - Likelihood:  Medium - Impact: Stronger imports, FDI, exports and investment; productivity improvement - Policy recommendations: Accelerate SOE and market reforms, and adapt the monetary policy framework to focus on inflation stability with more exchange rate flexibility. - Accelerated adoption of monetary policy focus on inflation stability with greater exchange rate flexibility - Likelihood:  Medium - Impact: Medium - Transmission: Increased macroeconomic stability, investment, and reserves - Policy recommendations: Strengthen monetary policy operational and institutional frameworks, adopt a medium-term inflation objective. ### Policy discussion and recommendations - Overall message: Healthy growth and low inflation create a favorable window for a second generation of reforms. - Broad policy priorities: - Implement a growth-friendly fiscal consolidation as a high priority to restore the anchor for macro stability. - In the near term, monetary policy can be put on hold, but modernizing the monetary policy framework is needed to make increased use of the more flexible exchange-rate regime. - Pursue bank recapitalization and accelerate NPL resolution; unwind previous macroprudential policy easing. - Accelerate banking, SOE, and structural reforms to boost domestic-sector productivity and facilitate spillovers from FIE sector. - Specific fiscal recommendations highlighted earlier: broaden revenue base, reduce exemptions, strengthen administration, introduce a property tax, curtail non-essential spending, and civil service reform. - Monetary policy and exchange rate: Allow greater exchange rate flexibility and move toward using inflation as a nominal anchor; strengthen monetary policy operational and institutional frameworks and adopt a medium-term inflation objective. *Source: IMF staff report excerpt — "2. Structural Benchmarking" and contiguous sections as provided.* ### 12. Fiscal policy has been loose in recent years. Deficits have averaged 6½ percent of GDP ### _cr16240 - 12. Fiscal policy has been loose in recent years. Deficits have averaged 6½ percent of GDP ### Fiscal stance and recent outcomes - Deficits have averaged 6½ percent of GDP since 2012. - Revenue as a share of GDP dropped since 2012, reflecting: - corporate income tax rate and tariff reductions, - tax exemptions and incentives, - declining oil revenues. - Current expenditures including interest payments increased, while capital expenditure has been constrained. ### 2015 outcome (preliminary) - The 2015 deficit moderated to 5.9 percent of GDP. - The deficit outcome was close to the budget plan but with markedly different composition: - Revenues rose very strongly, exceeding the budget plan by 2 percent of GDP, reversing the downward trend in the revenue-to-GDP ratio. - Overperformance reflected better tax administration, and higher environmental taxes, local government revenue, land user rights sales, and SOE dividends. These more than offset falling oil revenues. - Expenditure was higher than planned, reflecting: - carry-forward spending of 2014 local government revenue, - higher capital and social expenditures, - higher interest expense. ### 2016 projection and composition - A deficit of 6½ percent of GDP is projected for 2016, the same as the budget plan but with higher revenue and expenditure. - Projections and drivers: - Gains in tax and nontax revenue are projected to be largely sustained in the near term, more than offsetting the impact of a 2 percentage point (to 20 percent) cut in the corporate income tax rate. - Carry-forward spending of last year’s local government revenue overperformance is estimated to add about 1½ percent of GDP to expenditures compared with the authorities’ budget. ### Public debt trajectory and debt-distress risk - The ratio of public and publicly-guaranteed (PPG) debt to GDP is projected to increase to 62 percent in 2016, up over 16 percentage points in the past five years, reflecting persistently high budget deficits and lower-than-projected nominal GDP due to low inflation. - Under staff’s baseline projection (which incorporates a modest consolidation to a deficit around 5 percent of GDP in the medium term), PPG debt would rise toward 70 percent of GDP, elevating the risk of debt distress. - 2016 PPG debt includes banking restructuring cost, 2.5 percent of GDP (as noted in the fiscal consolidation table). ### Authorities’ medium-term plan and implementation challenges - The authorities’ draft medium-term budget plan indicates a deficit around 3 percent of GDP by 2020. - Challenges to achieving this consolidation: - Structural revenue-enhancing policies have yet to be approved. - Over the medium term, tax exemptions and trade tariff reductions due to trade agreements will undermine buoyancy. - Nontax revenues could ease due to declining SOE dividends as equitization advances. - Planned restraint of social spending by increasing fees for public healthcare and education could raise social insurance costs. - Civil service reform, which could yield substantial savings, is not yet planned. - In the absence of revenue enhancements or current savings, adjustment could fall on large cuts to capital spending, undermining growth. ### Policy recommendations for fiscal consolidation and bank recapitalization - Fiscal consolidation should begin this year with growth-friendly measures and include funds for bank recapitalization. - Specific consolidation path proposed: - Deficit reduction of ¾ of a percentage point of GDP per year, together with accelerated structural and bank reforms that could gradually boost real GDP growth to the authorities’ medium-term objective of 7 percent, would place the debt ratio on a downward path and mitigate debt distress risk. - Bank recapitalization: - Using public money to recapitalize state-owned banks up front—estimated at 2½ percent of GDP—would result in a manageable near-term debt increase, reduce uncertainty, and provide insurance against potentially larger public sector liabilities if banks faced heightened distress. ### Structural revenue-enhancing measures suggested - Measures that could be taken this year: - reducing exemptions and incentives, - further increasing fuel and environmental taxation while protecting the poor through targeted transfers, - eliminating the lower VAT rate of 5 percent, - further strengthening revenue administration. - Additional measures for subsequent implementation: - broadening the tax base by introducing a property, interest income, and capital gains tax, - including pensions under personal income tax. - Using equitization proceeds to finance the deficit would further restrain debt and enhance National Assembly oversight of these funds. ### Expenditure-side reforms and efficiency gains - Scope to rationalize the public wage bill and enhance public spending efficiency: - Expenditure on public employment is significantly higher than in other countries in the region; a comprehensive civil service reform is needed. - Spending on education is higher than in comparable countries in the region and yields good primary and secondary results, though vocational and tertiary education could improve. - Healthcare spending is in line with comparable countries; plans to increase private-sector participation in education and healthcare should proceed carefully to ensure quality and protect access for the poor. - Improvements in public capital spending efficiency are needed, with stronger control and coordination at the provincial level. - The authorities signaled intentions: - reduce the deficit to 4 percent on average over the 2016-2020 period, falling to around 3 percent by 2020, - maintain debt below the legal limit of 65 percent of GDP, - consider property tax introduction, reintroduction of capital gains tax, and unification of the VAT rate at 10 percent, - not planning increases in tax rates in the near term, - plans to reduce the public wage bill and increase use of PPPs for infrastructure development, - Ministry of Finance emphasized that bank recapitalization costs should not result in public debt exceeding the legal limit. ### Monetary, exchange-rate, and macrofinancial policy linkages (summary of related policy context) - Monetary policy: - Monetary policy was accommodative over most of last year against falling inflation; short-term interbank rates fluctuated below the SBV’s repo rate with abundant liquidity. - Staff recommended keeping monetary policy on hold as recent shocks feed through the economy; if underlying inflation rises, tightening would be appropriate; if inflation stalls while growth weakens, some easing could be considered. - Suggested operational improvements: stabilize the overnight interbank rate close to the policy repo rate, establish an interest-rate corridor (overnight standing credit facility as ceiling, deposit facility as floor), and guide the interbank rate to the center via liquidity operations. - Credit growth and macroprudential stance: - The 2016 credit growth target should not be binding; allowing credit growth to decline to below 15 percent would reduce expansion of the credit-to-GDP ratio below risky levels associated with past macroeconomic instability. - Macroprudential framework developments include a proposed Financial Stability Council, a new Monetary and Financial Stability Department at the SBV, and proposed measures such as increasing risk weights for real estate loans and reducing maturity-mismatch prudential ratios. - Bank-sector strains and recapitalization rationale: - Banking-sector profitability: ROA is 0.5 percent and ROE is 6¼ percent. - Reported capital adequacy ratio is 12¾ percent; reported NPL ratio has declined to 2.6 percent, but a broader measure including NPLs sold to VAMC and restructured loans yields an impaired loan ratio of about 12½ percent of total loans. - VAMC operations lack resolution incentives (5–10 year provisioning, repurchases by banks) and make little progress restructuring or selling NPLs; DATC purchases impaired assets outright with a haircut. - The strategy of allowing banks to recapitalize mainly via retained earnings will take many years and is risky given rising sovereign indebtedness, deteriorating corporate sector performance (particularly SOEs), and potential shocks such as higher domestic interest rates. - Recommendation linking fiscal and financial policies: - Upfront public recapitalization of banks (estimated at 2½ percent of GDP) would be manageable, reduce uncertainty, and provide insurance against larger contingent liabilities; this should be included within a growth-friendly consolidation strategy. *Italic: International Monetary Fund staff summary of Vietnam fiscal, monetary, and macrofinancial assessments and recommendations as presented in the source content.* ### 33. Staff recommended broadening reforms. Key elements include: accelerated NPL loss ### _cr16240 - 33. Staff recommended broadening reforms. Key elements include: accelerated NPL loss recognition and resolution; recapitalization by existing shareholders, including budget resources for state-owned commercial banks (SOCBs); stronger governance, operational and risk management, and adoption of IFRS reporting; enhanced supervision of SOCBs and equitization to recover initial budgetary recapitalization costs; and orderly resolution of unviable institutions. ### Banking sector: NPL resolution, VAMC, and recapitalization - Staff recommended accelerated NPL loss recognition and resolution. - Recapitalization: - Staff estimates recapitalization costs for public banks at around 2½ percent of GDP. - Estimates for private banks suggest no immediate recapitalization needs in aggregate, though capital needs for individual banks likely exist. - Recapitalization by existing shareholders, including budget resources for state-owned commercial banks (SOCBs), recommended. - Subsequent equitization of state-owned banks to recover initial budgetary recapitalization costs recommended. - VAMC (Vietnam Asset Management Company) recommendations: - Accelerate resolution and sale of NPLs in its portfolio. - Strengthen VAMC, permit it to recognize losses, and pass losses along to participating banks. - Provide more resources, develop valuation and securitization methodologies, and grant legal protection for officials involved in valuation of loans and collateral for sale at market prices. - Establish quantitative performance targets for NPL resolution; strengthen agent bank oversight and incentives. - License more institutions to trade in NPLs and collateral to create an NPL market. - Legal and institutional reforms: - Bank diagnostic assessments and legal reforms to (i) improve the debt enforcement and collection framework to facilitate collateral sales; and (ii) create a specialized resolution regime for financial institutions, including a framework for purchase and assumption transactions. - VAMC will require more capital and staffing, development of valuation and securitization methods, better incentives, and legal protection. - Current practice concerns: - Some banks have moved NPLs off-balance-sheet by establishing their own asset management companies. - The VAMC is described as currently a warehouse for NPLs with little scope to resolve, restructure, or sell them. - The overall approach of slow provisioning and recapitalization through retained earnings is risky. ### Macroprudential policy and financial stability - Staff view macroprudential tightening as appropriate given rapid credit growth. - Specific policy guidance: - The proposed increase in the LTD ratio for state-owned banks would raise it above the average in middle-income countries; given lack of liquidity pressures, the increase should be forgone and the LTD limit unified at 80 percent system-wide. - Macroprudential measures should focus on systemic risk and not be used for demand management. - If rapid credit growth continues despite measures, broader-based macroprudential tightening would be warranted. - To increase effectiveness, establish a clear communications strategy and consider publishing the financial stability report. - Credit growth and targets: - The 2016 credit growth targets are described as excessive. - Allowing credit growth to moderate to below 15 percent would reduce financial stability risks from future NPLs. - Other recommended prudential measures: - Tighten risk weights for real estate loans and prudential ratios for asset/liability mismatches. ### AML/CFT framework - Progress has been made in strengthening the AML/CFT framework. - Authorities are encouraged to strengthen implementation. - Under national AML/CFT committee leadership, Vietnam addressed technical gaps highlighted in the 2009 APG mutual evaluation report and 2010 FATF assessment. - Key challenge: effective implementation commensurate with Vietnam’s ML/FT risks. - A national risk assessment was under preparation. ### Structural reforms to raise potential growth - Growth and productivity challenges: - Vietnam’s growth performance has lagged East Asia’s most successful high-growth countries at similar development levels. - Working-age population share has started to decline. - Total factor productivity (TFP) growth has declined by about 1½ percentage points since the mid-2000s. - Nearly half the workforce is in agriculture and three quarters employed at the household level, both with very low productivity. - SOE reform: - State maintains full ownership of more than 700 SOEs; SOEs enjoy preferential access to production factors including capital and land. - Simultaneous control and regulation of major SOEs by line ministries and local governments creates conflicts of interest. - Recommended accelerations: - Faster and more comprehensive equitization while ensuring due process. - Transparency of equitization proceeds and their use. - Enforcement of disclosure and reporting requirements. - Governance reforms to address conflicts of interest and strengthen accountability. - Continued divestment from non-core areas and restructuring/exit of unprofitable SOEs. - Create a level playing field by curtailing SOEs’ preferential access to credit and other resources. - Strengthen property rights and enforcement of competition policy. - Business environment and public investment: - Vietnam ranks 90th in the World Bank’s doing business report and scores low in governance quality indices. - Export performance has been supported by low trade costs and trade agreements, but overall investment spending growth has been low, with public investment constrained by low revenues. - Expenditure on R&D is low compared to other countries at the same development stage. - Recommended: better business climate, more efficient public investment to strengthen infrastructure, and higher and more targeted spending on research and development. - Human capital and social policy: - Invest in vocational training and increase secondary school attendance to address skills mismatches. - Further extend health coverage. - Address inequality and gender gaps through targeted initiatives in education, nutrition and sanitation, and by extending pensions in a financially sustainable manner. - Strengthen environmental policies for long-run growth sustainability given environmental challenges, including climate change. - Authorities’ plans and recognition: - Authorities agreed with need to resolve impaired loans in banks and at the VAMC and to remove legal constraints to resolve NPLs. - Authorities noted restricting dividend payments at weak performing banks could help build capital over the medium-term if favorable growth continues. - Authorities emphasized difficulty of using budget resources to recapitalize state-owned banks and challenges attracting new private capital under current market conditions, but agreed public recapitalization costs might be recovered through a strong and well sequenced equitization program. - Authorities planned faster reforms of the SOE sector in the 2016–20 period, including greater transparency and disclosure, accelerated equitization, improved inter-agency coordination, and limiting state involvement to strategic sectors. A list of SOEs to remain in state ownership and a roadmap to halve their number by 2020 were being developed. ### Fiscal and monetary policy priorities (staff appraisal) - Fiscal outlook and recommendations: - Based on authorities’ 2016 budget plan (which indicates no consolidation), public and publicly guaranteed debt is projected to increase to 62 percent of GDP. - If fiscal consolidation is modest (staff baseline), debt-to-GDP would breach legal limit of 65 percent in coming years, and approach 70 percent in the medium term. - Fiscal consolidation should begin this year. - Priorities: structural revenue-enhancing measures to protect social and infrastructure outlays and recapitalize state-owned banks. - Specific revenue measures recommended: - Reduce exemptions and incentives. - Raise fuel and environment taxes. - Unify the VAT at 10 percent. - Introduce property, capital gains, and interest income taxes, include pensions under personal income tax. - Further strengthen revenue administration. - Comprehensive civil service reform to reduce the large public wage bill and strengthen spending efficiency. - Direct all SOE equitization proceeds to deficit financing to enhance transparency and assist debt reduction. - Medium-term objective: reduce the deficit to 3 percent of GDP, alongside structural and bank reforms, to reduce debt distress risk. - Monetary policy and exchange rate: - Current monetary policy stance described as appropriate; adoption of a more flexible exchange rate regime is commendable. - With underlying inflation low and growth slowing, monetary policy should remain on hold. - New flexible exchange-rate regime should be used to buffer external shocks; accumulation of international reserves through opportunistic intervention is appropriate. - Recommend gradual shift toward using inflation as the nominal anchor and a comprehensive package of operational, communications and institutional reforms to support transition. ### Summary of key numerical indicators and targets (as stated) - Recapitalization costs for public banks: around 2½ percent of GDP. - Proposed unified LTD limit: 80 percent system-wide. - Recommended credit growth moderation target: below 15 percent. - Authorities’ medium-term growth target: 6½–7 percent. - Growth assumption used in benchmarking chart beyond T=0: 6.5 percent. - Public and publicly guaranteed debt projection under 2016 budget plan: 62 percent of GDP. - Legal debt-to-GDP limit: 65 percent. - Possible medium-term debt-to-GDP under modest consolidation: approach 70 percent. - Medium-term fiscal deficit goal: 3 percent of GDP. - Proposed unified VAT rate: 10 percent. - Timeframe mentioned for SOE reforms: 2016–20; roadmap to halve number of SOEs by 2020. *IMF staff report excerpt contained in content unit _cr16240.* ### 55. It is recommended that the next Article IV Consultation take place on the standard 12- ### _cr16240 - 55. It is recommended that the next Article IV Consultation take place on the standard 12- ### Macroeconomic developments - Economic growth has been solid, but agriculture contracted in 2016 Q1. - Contribution to GDP growth by economic activities (2010 prices) shown for 2011Q1–2016Q1 with Agriculture, forestry, and fisheries; Industry; Construction; Services. - Contribution to GDP growth by expenditure (2010 prices) shows Gross capital formation, Consumption, Exports, Imports, Errors and omissions, GDP growth (right axis) for 2011Q1–2016Q1. - Interest rates (end of period): Interbank overnight rate, 7-day repo rate, Refinancing rate, 3-month deposit rate, 12-month deposit rate, Short term lending rate, Long term lending rate (Jan-12 to Jan-16). - Revenue and expenditure stance (in percent of GDP) and expenditure stance, revenue stance, fiscal stance for 2009–Proj.2016. - Inflation and output gap: Headline and Core (excl. raw food, energy and administered prices W=0.58, LHS) with Output gap (In percent of potential GDP, RHS). Core inflation has fallen to low levels, though headline inflation is ticking up. - Contribution to credit growth (year-on-year percent change) by sector (agriculture; industry; construction; trade, transportation and communication; real estate; financial and other services) through 2015Q3. ### External sector - Exports began to moderate in the second half of 2015 after holding up well through the first half of the year. - Import growth decelerated toward the end of 2015, particularly investment goods and intermediate inputs; intermediate inputs and machinery equipment account for more than half of imports. - FDI remains strong and concentrated in manufacturing. FDI commitments (In billions of USD) show Manufacturing/processing, Wholesale/retail, Real estate, Others for 2009–2015. - Balance of payments, after strengthening in recent years, came under pressure from capital outflows in the second half of 2015, prompting the authorities to depreciate the exchange rate, increase exchange rate flexibility, and intervene using reserves. - Exchange rates: Bloomberg mid-interbank rate, Parallel rate, Lower band, Upper band (Jan-14 to Apr-16). An upward movement indicates an appreciation of Dong. Gross international reserves (right axis) in billions of U.S. dollars shown. - Exports (3mma, year-on-year percent change) for Total exports, Textile and footwear exports, Electronics exports 1/, Agriculture exports (Jan-12 to Jan-16). 1/ Includes electronic goods and PC, electronic wire and cable, and telephone (all kinds and parts). - Imports (3mma, year-on-year percent change) for Total imports, Machinery equipment and steel, Intermediate inputs (fabric and electronics) 1/ (Jan-12 to Jan-16). 1/ Electronics also include final goods. - Imports by category (In millions of USD) for 2009–2015: Steel, Machinery and equipment, Intermediate inputs (fabric and electronics) 1/, Commodities, Others. ### Financial conditions and banking developments - Stock market has been range-bound, outperforming regional bourses (Stock Market Performance Index, January 2012=100; data as of May 2nd, 2016). - Sovereign spreads have increased in line with regional EMs (Vietnam EMBIG spread; Emerging Asia EMBIG spread; Vietnam credit default swaps; gross foreign purchase of government bonds). - Government financing costs increased since mid-2015. - Bank funding costs increased recently as the State Bank of Vietnam tightened liquidity to support the currency (Interbank overnight rate, Interbank 1-week rate, 3-month deposit rate; Apr-16). - Credit growth has accelerated, particularly from state banks; includes four main state banks: Vietcombank, Incombank, BARD and BIDV. Credit Growth (year-on-year percentage change) by To SOEs, To non-SOEs, From state banks 1/, From non-state banks across 2011Q4–2015Q4. - Banks’ asset quality remains poor: Credit/deposit ratio and NPL (RHS) shown for 2008Q1–2015Q3. - Domestic bond yield curve (percent per annum) shown for tenors 1YR–15YR comparing One year ago, Six months ago, Today (data as of May 2nd, 2016). ### Fiscal developments and public debt - Fiscal revenue has been on a declining trend over 2006–2015 in percent of GDP; contrast to regional experience (ASEAN-4, Cambodia, China, Vietnam). - In the latest year, weakness in oil and CIT revenues was more than offset by higher VAT, environmental tax, and non-tax revenues. - Capital spending and social current expenditure have been restrained, while non-social current spending has increased. - Fiscal deficits have remained high, leading to rising public debt. Public and Publicly Guaranteed Debt (In percent of GDP) increased across 2006–2015. - Key fiscal numbers (selected): - Revenue (in percent of GDP): 2010: 27.3; 2011: 25.9; 2012: 22.6; 2013: 23.1; 2014: 21.9; 2015: 23.7; 2016 (Proj.): 22.9; 2017 (Proj.): 22.8. - Expenditure (in percent of GDP): 2010: 30.0; 2011: 26.9; 2012: 29.4; 2013: 30.5; 2014: 28.0; 2015: 29.6; 2016 (Proj.): 29.5; 2017 (Proj.): 28.8. - Net lending (+)/borrowing (-): 2010: -2.8; 2011: -1.1; 2012: -6.8; 2013: -7.4; 2014: -6.1; 2015: -5.9; 2016 (Proj.): -6.5; 2017 (Proj.): -6.0. - Public and publicly guaranteed debt (end of period, percent of GDP): 2010: 47.1; 2011: 45.8; 2012: 47.9; 2013: 51.8; 2014: 55.1; 2015: 58.3; 2016 (Proj.): 62.1; 2017 (Proj.): 64.6. ### Selected indicators and projections (Table 1 highlights) - Real GDP (percent change): 2010: 6.4; 2011: 6.2; 2012: 5.2; 2013: 5.4; 2014: 6.0; 2015: 6.7; 2016 (Proj.): 6.1; 2017 (Proj.): 6.2. - CPI (period average): 2010: 9.2; 2011: 18.7; 2012: 9.1; 2013: 6.6; 2014: 4.1; 2015: 0.6; 2016 (Proj.): 2.0; 2017 (Proj.): 3.7. - CPI (end of period): 2010: 11.7; 2011: 18.1; 2012: 6.8; 2013: 6.0; 2014: 1.8; 2015: 0.6; 2016 (Proj.): 3.5; 2017 (Proj.): 3.8. - Core inflation (end of period): 2010: 9.3; 2011: 13.4; 2012: 10.7; 2013: 6.6; 2014: 3.3; 2015: 1.4. - Public and publicly guaranteed debt (end of period): 2010: 47.1; 2015: 58.3; 2016 (Proj.): 62.1; 2017 (Proj.): 64.6. - Broad money (M2, percent change, end of period): 2010: 33.3; 2011: 12.1; 2012: 18.5; 2013: 18.8; 2014: 17.7; 2015: 16.2; 2016 (Proj.): 19.7; 2017 (Proj.): 17.5. - Credit to the economy (percent change, end of period): 2010: 32.4; 2011: 14.4; 2012: 8.7; 2013: 12.7; 2014: 13.8; 2015: 18.8; 2016 (Proj.): 17.4; 2017 (Proj.): 16.2. - Current account balance (including official transfers, percent of GDP): 2010: -3.8; 2011: 0.2; 2012: 6.0; 2013: 4.5; 2014: 5.1; 2015: 0.5; 2016 (Proj.): 0.3; 2017 (Proj.): 0.0. - Gross international reserves (in billions of U.S. dollars; excludes government deposits): 2010: 12.4; 2011: 13.5; 2012: 25.4; 2013: 26.0; 2014: 34.3; 2015: 28.4. ### Balance of payments (Table 2 highlights) - Current account balance (in billions of U.S. dollars): 2010: -4.3; 2011: 0.2; 2012: 9.3; 2013: 7.7; 2014: 9.5; 2015: 0.9; 2016 (Proj.): 0.5; 2017 (Proj.): 0.1. - Trade balance (in billions of U.S. dollars): 2010: -5.1; 2011: -0.4; 2012: 8.7; 2013: 8.7; 2014: 12.1; 2015: 7.4; 2016 (Proj.): 8.0; 2017 (Proj.): 3.1. - Exports f.o.b. (in billions of U.S. dollars): 2010: 72.2; 2011: 96.9; 2012: 114.5; 2013: 132.0; 2014: 150.2; 2015: 162.1; 2016 (Proj.): 174.7; 2017 (Proj.): 192.7. - Imports f.o.b. (in billions of U.S. dollars): 2010: 77.4; 2011: 97.4; 2012: 105.8; 2013: 123.3; 2014: 138.1; 2015: 154.7; 2016 (Proj.): 166.7; 2017 (Proj.): 184.6. - Capital and financial account balance (in percent of GDP): 2010: 6.2; 2011: 6.5; 2012: 8.7; 2013: 0.3; 2014: 5.5; 2015: 1.6; 2016 (Proj.): 4.8; 2017 (Proj.): 6.1. - Direct investment (net, in percent of GDP): 2010: 7.1; 2011: 6.6; 2012: 7.2; 2013: 6.9; 2014: 8.1; 2015: 10.7; 2016 (Proj.): 13.0; 2017 (Proj.): 13.2. - Change in net foreign assets: 2010: -7.1; 2011: -6.4; 2012: -6.0; 2013: -11.7; 2014: -9.1; 2015: -14.8; 2016 (Proj.): -7.4; 2017 (Proj.): -6.7. - Gross international reserves (in billions of U.S. dollars): 2010: 12.4; 2011: 13.5; 2012: 25.4; 2013: 26.0; 2014: 34.3; 2015: 28.4; 2016 (Proj.): 33.7; 2017 (Proj.): 39.9. - Memorandum: Current account balance (in percent of GDP): 2010: -3.8; 2011: 0.2; 2012: 6.0; 2013: 4.5; 2014: 5.1; 2015: 0.5; 2016 (Proj.): 0.3; 2017 (Proj.): 0.0. ### Government budgetary operations (Table 3 highlights, in trillions of dong and percent of GDP) - Total revenue and grants (in trillions of dong): 2010: 588; 2011: 719; 2012: 733; 2013: 827; 2014: 863; 2015: 996; 2016 (Proj.): 985; 2017 (Proj.): 1,044; 2018 (Proj.): 1,139. - Tax revenue (in trillions of dong): 2010: 483; 2011: 608; 2012: 617; 2013: 685; 2014: 718; 2015: 764; 2016 (Proj.): 816; 2017 (Proj.): 816; 2018 (Proj.): 900. - Oil revenues (in trillions of dong): 2010: 69; 2011: 101; 2012: 125; 2013: 120; 2014: 100; 2015: 68; 2016 (Proj.): 55; 2017 (Proj.): 56; 2018 (Proj.): 68. - Expenditure (in trillions of dong): 2010: 648; 2011: 749; 2012: 995; 2013: 1,093; 2014: 1,105; 2015: 1,243; 2016 (Proj.): 1,277; 2017 (Proj.): 1,342; 2018 (Proj.): 1,436. - Net lending (+)/borrowing (-) (in trillions of dong): 2010: -59; 2011: -29; 2012: -221; 2013: -266; 2014: -242; 2015: -247; 2016 (Proj.): -293; 2017 (Proj.): -298; 2018 (Proj.): -297. - Memo: Public and publicly guaranteed debt (percent of GDP): 2010: 47.1; 2015: 58.3; 2016 (Proj.): 62.0; 2017 (Proj.): 62.1; 2018 (Proj.): 64.6. - Primary balance (percent of GDP): 2010: -1.6; 2011: 0.0; 2012: -5.6; 2013: -5.9; 2014: -4.5; 2015: -3.9; 2016 (Proj.): -4.3; 2017 (Proj.): -4.4; 2018 (Proj.): -3.7. ### Monetary survey (Table 4 highlights, in trillions of dong at end-period) - Net foreign assets (Est.): 2010: 267; 2011: 300; 2012: 548; 2013: 613; 2014: 826; 2015: 836; 2016 (Est.): 1,061; 2017 (Proj.): 1,275. - Net domestic assets: 2010: 2,523; 2011: 2,826; 2012: 3,155; 2013: 3,788; 2014: 4,353; 2015 (Est.): 5,184; 2016 (Proj.): 6,144; 2017 (Proj.): 7,192. - Domestic credit: 2010: 2,690; 2011: 3,063; 2012: 3,404; 2013: 3,876; 2014: 4,480; 2015 (Est.): 5,381; 2016 (Proj.): 6,359; 2017 (Proj.): 7,428. - Credit to the economy (in trillions of dong): 2010: 2,476; 2011: 2,830; 2012: 3,078; 2013: 3,470; 2014: 3,950; 2015 (Est.): 4,693; 2016 (Proj.): 5,509; 2017 (Proj.): 6,402. - Total liquidity (M2, in trillions of dong): 2010: 2,789; 2011: 3,126; 2012: 3,703; 2013: 4,401; 2014: 5,179; 2015 (Est.): 6,020; 2016 (Proj.): 7,206; 2017 (Proj.): 8,467. - Money multiplier: 2010: 6.3; 2011: 6.0; 2012: 5.6; 2013: 6.3; 2014: 6.3; 2015: 6.1; 2016 (Proj.): 6.2; 2017 (Proj.): 6.2. - Credit to the economy (Total, in percent of GDP): 2010: 114.7; 2011: 101.8; 2012: 94.8; 2013: 96.8; 2014: 100.3; 2015 (Est.): 111.9; 2016 (Proj.): 121.0; 2017 (Proj.): 128.4. ### Medium-term projections (Table 5 highlights, 2010–21) - Output Real GDP (percent change) projections: 2018: 6.2; 2019: 6.2; 2020: 6.2; 2021: 6.2. - CPI (period average) projection: 2018: 4.0; 2019: 4.0; 2020: 4.0; 2021: 4.0. - Public and publicly guaranteed debt (end of period, percent of GDP): 2018: 66.0; 2019: 66.7; 2020: 67.2; 2021: 67.5. - Gross international official reserves (in billions of U.S. dollars) projections: 2018: 47.6; 2019: 57.0; 2020: 67.6; 2021: 80.0. - Total external debt (in billions U.S. dollars) projections: 2018: 89.6; 2019: 99.4; 2020: 107.8; 2021: 116.6. - Current account balance (percent of GDP) projections: 2018: 0.1; 2019: 0.3; 2020: 0.5; 2021: 0.8. - Nominal GDP (in trillions of dong) projections: 2018: 4,987; 2019: 5,488; 2020: 6,051; 2021: 6,670. ### Progress toward Millennium Development Goals (Table 6 highlights, as of December 2015) - Goal 1: Extreme poverty reduced by three-quarters between 1990 and 2008 — Status: Achieved. - Goal 2: Net enrollment ratio in primary education at 98.1 enrollees per 100 children — Status: Achieved. - Goal 3: Ratio of girls to boys in primary education of 0.99 in 2014 — Status: Achieved. - Goal 4: Under-five mortality reduced by 60 percent between 1990 and 2014 (down from 51 to 22 deaths per 1,000) — Status: Nearly achieved. - Goal 5: Maternal mortality fell from 233 per 100,000 births in 1999 to 54 in 2015 — Status: Achieved. - Goal 6: HIV/AIDS infection rate on upward trend; 0.5 per year per 100 people aged 15-49 in 2014 — Status: Unlikely to be achieved. - Goal 6 (TB): Cases reduced by 45 percent in 2014 — Status: Achieved. - Goal 7: Forest cover up but loss in closed-canopy forest and biodiversity — Status: Likely to be achieved. - Target 10: 98 percent with access to improved water source in 2015; sanitation access greatly enhanced — Status: Achieved. *Sources: Vietnamese authorities; Bloomberg LP; IMF staff estimates; IMF, DOTS; IMF, WEO; United Nations Development Program; General Statistics Office of Vietnam; and the World Bank.* ### Box 1. Vietnam: Trade Developments, TPP, and FTAs ### Box 1. Vietnam: Trade Developments, TPP, and FTAs ### Trade openness and export structure - Vietnam is among the world’s most open economies, with trade amounting to about 160 percent of GDP. - It has increased world export and import market shares roughly fivefold in the last 15 years. - Export growth has been particularly strong in labor-intensive manufacturing of apparel/footwear and, more recently, electronics. - Vietnam has captured a larger market share of global exports of major low-end manufacturing goods than any other country in recent years, while China’s market share in this category has declined. - Gains in final electronics export market share have been similarly impressive, with only China achieving larger gains. - As a result, Vietnam’s export product mix has shifted from commodities to manufacturing. - Geographically, exports are diversified with the U.S., the EU, and other non-East-Asian countries accounting for about 20 percent each, while China and Japan account for just under 10 percent each. ### FDI, value added, and import patterns - Vietnam’s manufacturing export growth is largely driven by FDI with major inflows from Korea, Japan, Singapore, and Taiwan Province of China. - FDI inflows accelerated in the run-up to Vietnam’s WTO accession in January 2007 from an annual average of US$2.5 billion from 2000–05 to an annual average of US$8.4 billion from 2008–14. - The FDI sector’s share in Vietnam’s total exports has reached 70 percent. - Through multinational investments, Vietnam is embedded in global and Asian supply chains; analysis of gross and value added data shows multinationals tend to use Vietnam for final assembly with comparatively high foreign value added content. - Imports of intermediate and investment goods have been rising fast in recent years, with China supplying ⅓ of imports. ### Trade policy, FTAs, and the TPP’s potential impact - Import tariffs have been gradually reduced, while most quantity restrictions have been removed. Vietnam has entered into a number of bilateral, regional, and multilateral trade agreements. - The Trans-Pacific Partnership (TPP) is of particular importance: - Estimates suggest GDP could rise by a cumulative 8 percent, and exports by 30 percent, by 2030. - TPP countries now account for 39 percent of Vietnam’s exports. - TPP will provide opportunities to penetrate major markets further and support FDI inflows if investors locate to Vietnam to access TPP markets. - By eliminating or reducing tariff lines on industrial and agricultural products, TPP could boost major products in which Vietnam already enjoys advantages. - Textile, apparel and footwear industries are considered possible winners due to their well-established position in the global supply chain. - TPP’s strict regulations such as the “yarn forward” rules of origin could result in on-shoring of textile and other input manufacturing, reducing the sector’s heavy dependence on imports from China and improving the trade position. - Seafood and agriculture exports could also benefit. - The livestock and dairy industries could face difficulties due to lower cost competitiveness and a phasing out of import duties. - Fiscal and regulatory implications of TPP: - Vietnam’s average tariff is around 9½ percent, and trade revenues currently amount to 2½ percent of GDP. - About 65 percent of Vietnam’s import tariff lines (for TPP members) will be eliminated upon commencement, 85 percent four years later and 98 percent after a decade. - For trading partners’ tariff lines on Vietnam’s exports, 80 to 95 percent will be eliminated on commencement, focused on agriculture, fisheries, textile and apparel products, footwear, wooden furniture, electrical, electronics, and rubber. - TPP requires SOEs to operate on market principles, with a level playing field for regulations, subsidies, and investments, and improved transparency; TPP does, however, allow Vietnam to provide a one-time capital injection to SOEs for restructuring. - Protection of labor rights is a challenge where Vietnam has not ratified ILO conventions. - The elimination of tariff lines will have an adverse fiscal impact. ### Structural challenges and reform priorities - Increasing productivity is a major challenge for Vietnam in implementing TPP: - While foreign-invested enterprises perform well, Vietnam’s domestic sector lacks competitiveness, as reflected in a sizable domestic-sector trade deficit. - SOE reform will be a priority challenge given TPP requirements on market principles, transparency, and a level playing field. - Protection of labor rights where Vietnam has not ratified ILO conventions will be a policy area to address. - The yarn forward rule highlights the need to reduce dependence on non-TPP inputs (for example, yarn and textile materials currently heavily sourced from China). *IMF staff summary from Box 1. Vietnam: Trade Developments, TPP, and FTAs.* ### Box 5. Vietnam: Inflation as a Nominal Anchor for Monetary Policy ### Box 5. Vietnam: Inflation as a Nominal Anchor for Monetary Policy ### Rationale and context - As Vietnam allows greater exchange rate flexibility, preparations for gradually shifting to inflation as monetary policy’s nominal anchor will require upgrading operational, communications and institutional frameworks. - Maintaining low and stable inflation is key to entrench macroeconomic stability and achieve sustained improvements in the livelihood of Vietnam’s population. - A framework that pursues multiple objectives—real growth, inflation, the exchange rate, credit growth—is opaque, complicates policy formulation, reduces policy effectiveness, and has the potential to confuse markets, investors and consumers, particularly when these targets come under conflicting pressure. - Vietnam’s recent move toward more exchange-rate flexibility is a step in the right direction, and broader reforms are now needed. ### Measures to strengthen monetary policy operations - Establish an interest rate corridor as an operational instrument (300 b.p. width), with the rate at the collateralized overnight credit facility as the ceiling and that of the overnight deposit facility as the floor. - Shift the corridor to signal changes in the stance of monetary policy. Give policy decisions enough time to work as they affect prices with a lag. Adjustments should be forward looking. - Rely upon open market operations complemented with standing facilities to implement liquidity management. Strengthen liquidity forecasting to help reduce volatility in the interbank market. - Phase out the use of administrative measures (interest rate ceilings and credit targets) to manage liquidity, since they fuel uncertainty in the market and constrain the transmission of changes in policy interest rates to economic activity and inflation. - Adopt the overnight interbank rate as the operational target for monetary policy. The rate should be guided to the center of the interest rate corridor using fine-tuning liquidity management operations. ### Measures to strengthen communications - Design a communications strategy and unit. Build credibility by communicating well to help align market expectations around the SBV’s primary objective of maintaining low and stable inflation as a means to achieve macroeconomic stability. - Explain the rationale behind the SBV’s framework for monetary policy. Clearly communicate the roles of inflation, exchange rate, liquidity management, the interest rate corridor, and broadly what market participants expect of the SBV’s policy reaction function. - Make the policies of SBV and its decisions more predictable for market participants to help reduce macroeconomic volatility and align variables faster around the SBV’s target. ### Measures to improve economic analysis, forecasting, and policy formulation - Improve data quality and management, including of quarterly GDP expenditure; surveys of confidence, inflation expectations, and capacity utilization. - Strengthen current economic analysis and short-term forecasting, including use of the FPAS model. - Develop a suite of analytical tools and capacity to strengthen medium-term modeling and forecasting. ### Measures to strengthen the institutional framework - Propose a suitable inflation target over a long-term horizon to be agreed upon with the government and set low inflation as the primary policy objective in the SBV law. If the law cannot be changed, a signed agreement between the SBV and the Government should be undertaken to establish inflation stability as the SBV’s primary objective. - Over time, designate to the SBV sole responsibility for policy implementation. Separate the role of Governor and that of cabinet member and use an appointment term independent from the political calendar. - Provide for the SBV’s financial autonomy, accountability and transparency, but require the SBV to disclose information and be transparent with respect to its policy decisions as well as with the management of its budget. *Source: Box 5. Vietnam: Inflation as a Nominal Anchor for Monetary Policy (excerpt).* ### Box 9. Vietnam: Gender Equality (Concluded) ### Box 9. Vietnam: Gender Equality (Concluded) ### Women’s health, survival, and vulnerability - The women’s health and survival indicator, although very close to equality, has recently fallen. - Declining sex ratio at birth: 0.9 female/male ratio in 2015. - Rising adolescent fertility: around 40 births per 1,000 women aged between 15 and 19 in 2014 (against 30 in 2007). - Women are vulnerable to domestic violence. - Data sources cited: World Bank, World Development Indicators, 2015; General Statistics Office of Vietnam, National Study on Domestic Violence against Women in Vietnam, 2010. ### Women’s political empowerment - Political empowerment has been subdued in the last decade and Vietnam slipped well below peers’ level. - Share of women in parliament has stagnated since 2007. - Share of women occupying ministerial positions: - 13 percent in 2007 (similar to the sample average in 2007). - 9 percent in 2015 (while the sample average had reached 25 percent). ### Policy framework, implementation, and enforcement challenges - Constitutional guarantees for gender equality exist. - Milestone laws: - Law of Gender Equality (2006). - Law on Prevention and Control of Domestic Violence (2007). - Presidential commitment: President Sang publicly stated Vietnam’s commitment to narrowing the gender gap across all sectors and improving access of women—especially those in disadvantaged areas—to health care, education and employment. - National Policy Framework for Gender Equality (NSGE) approved for the period 2011–20 to highlight the importance of gender equality for socio-economic development. - Implementation and enforcement challenges: - Laws have been difficult to enforce. - Institutions face challenges in awareness raising, reporting, gender analysis, collection of sex-disaggregated data, and monitoring. - Perceptual wage-equality data referenced: World Economic Forum’s Executive Opinion Survey, 2015 (response to: “In your country, for similar work, to what extent are wages for women equal to those of men?”). *Box 9. Vietnam: Gender Equality (Concluded).* ### 1.5 percent and is assumed to be achieved mainly through expenditure reduction. ### _cr16240 - 1.5 percent and is assumed to be achieved mainly through expenditure reduction. ### Public debt sustainability — baseline and scenarios - Baseline projection: - Public and Publicly Guaranteed (PPG) debt is projected to increase in the short run and stabilize at around 67½ percent of GDP by 2021, breaching the government ceiling of 65 percent of GDP in 2018. - The share of foreign currency-dominated debt is projected to decrease from 47¾ percent of total debt in 2015 to 44 percent in 2021. - Most of Vietnam’s debt has medium to long-term maturity. - Constant primary balance scenario: - If the deficit remained at the 2016 level, PPG debt would not stabilize in the medium term and would reach about 74¼ percent of GDP by 2021. - Historical scenario: - Setting real GDP growth, the primary balance, and real interest rates at their historical averages leads to a decrease in PPG debt to 62 percent of GDP in 2021. - Macro-fiscal stress tests: - A primary balance worsening in 2017–18 by 1¼ percentage points of GDP would push PPG debt to 70½ percent of GDP in 2021 (surpassing the 70 percent threshold). - A real interest rate shock would also push PPG debt over the 70 percent threshold. - The impacts of other macro-fiscal shocks are more limited. - Probabilistic dynamic simulation: - There is a 25 percent chance that PPG debt could reach about 80 percent of GDP under a worst-case combination of shocks. - A combination of positive shocks would reduce the debt-to-GDP ratio below 55 percent with a 25 percent probability. ### Debt dynamics, flows, and indicators (selected exact figures) - Nominal gross public debt (percent of GDP): 2015 = 58.3; 2016 = 62.1; 2017 = 64.6; 2018 = 66.0; 2019 = 66.7; 2020 = 67.2; 2021 = 67.5. - Of which: guarantees (percent of GDP): 2015 = 11.5; 2016 = 12.1; 2017 = 11.1; 2018 = 10.1; 2019 = 9.1; 2020 = 8.3; 2021 = 7.5. - Public gross financing needs (percent of GDP): 2015 = 8.4; 2016 = 10.3; 2017 = 9.8; 2018 = 9.6; 2019 = 9.8; 2020 = 9.9; 2021 = 10.2. - Change in gross public sector debt (percent of GDP, annual): 2016 = 3.1; 2017 = 3.8; 2018 = 2.5; 2019 = 1.3; 2020 = 0.8; 2021 = 0.5; cumulative 2005–2021 = 9.3. - Identified debt-creating flows (cumulative 2005–2021): 9.2. - Primary deficit (percent of GDP): 2016 = 3.9; 2017 = 4.4; 2018 = 3.7; 2019 = 3.2; 2020 = 2.9; 2021 = 2.6; cumulative 2005–2021 = 19.4. - Primary (noninterest) revenue (percent of GDP): 2016 = 23.7; 2017 = 22.9; 2018 = 22.8; 2019 = 22.8; 2020 = 22.6; 2021 = 22.3; cumulative = 135.6. - Primary (noninterest) expenditure (percent of GDP): 2016 = 27.7; 2017 = 27.3; 2018 = 26.6; 2019 = 26.1; 2020 = 25.5; 2021 = 24.8; cumulative = 155.0. - Automatic debt dynamics contribution (cumulative 2005–2021): -18.8. - Interest rate/growth differential (cumulative): -18.8. - Real interest rate contribution (cumulative): 2.8. - Real GDP growth contribution (cumulative): -21.7. - Other identified debt-creating flows (percent of GDP, annual examples): 2014 = 2.5; 2015 = 0.8; 2016 = -1.5; 2017 = 1.4; 2018 = 1.7; cumulative = 8.6. - Residual, including asset changes (percent of GDP, annual examples): 2014 = 1.6; 2015 = 0.2; 2016 = 0.3; 2017 = 0.1; cumulative examples shown. ### Risk assessment and heat map - Overall heat map assessment: moderate risk of debt distress. - Gross-financing-needs-to-GDP ratio remains below the 15 percent threshold under all shocks. - Debt profile vulnerabilities highlighted: - Market perception risks (EMBIG and bond spread considerations). - External financing risks. - Foreign currency debt (share projected to decline but remains significant). ### External debt sustainability - External debt and financing needs (levels and drivers): - External debt is estimated at about 43 percent of GDP in 2015 with gross external financing about 7 percent of GDP. - Under the baseline, external debt would stabilize at 46½ percent of GDP as gross external financing needs stabilize, supported by projected improvement of the current account and increased FDI inflows from recently signed trade agreements (including TPP). - Vulnerabilities: - Vietnam’s external debt is vulnerable to real depreciation and current-account shocks. - Growth and interest rate shocks have only limited impact on external debt dynamics. - External debt stress-test indications (selected scenario outcomes): - Historical scenario average shown as 38 (presumably percent of GDP) vs. baseline 45 (as presented in bound tests figures). - Combined shocks and real depreciation scenarios show higher external debt paths (examples in figures: combined shock = 53; 30% depreciation scenario = 65). ### Realism of baseline assumptions and forecasting track record - Forecast track record (examples, 2006–2014): - Real GDP growth forecast error median: -0.64 (percent), percentile rank 33%. - Primary balance forecast error median: -1.34 (percent of GDP), percentile rank 25%. - Inflation (deflator) forecast error median: 4.57 (percent), percentile rank 92%. - Fiscal adjustment realism: - Vietnam’s 3-year adjustment in cyclically-adjusted primary balance (CAPB) distribution places it with a percentile rank of 34% for larger adjustments. - Vietnam’s 3-year average level of CAPB places it with a percentile rank of 88% for higher CAPB levels. ### Key stress-test scenarios (selected assumptions and outcomes) - Primary Balance Shock: - Primary balance path example: 2016 = -4.4; 2017 = -5.1; 2018 = -4.6; 2019 = -2.9; 2020 = -2.6; 2021 = -2.5 (percent of GDP). - Effective interest rate example: 2016 = 4.6; 2017 = 4.6; 2018 = 4.7; 2019 = 4.7; 2020 = 4.6; 2021 = 4.5 (percent). - Real GDP Growth Shock: - Real GDP growth example: 2016 = 6.1; 2017 = 5.5; 2018 = 5.5; 2019 = 6.2; 2020 = 6.2; 2021 = 6.2 (percent). - Real Interest Rate Shock: - Effective interest rate example: 2016 = 4.6; 2017 = 4.6; 2018 = 5.3; 2019 = 5.8; 2020 = 6.2; 2021 = 6.5 (percent). - Real Exchange Rate Shock and Combined Macro-Fiscal Shock scenarios are modeled with corresponding paths for growth, inflation, primary balance, and effective interest rates (numerical example sets are provided in the stress-test tables and figures). ### Policy-relevant implications (as presented in the content) - Fiscal consolidation assumption: - The 1.5 percent adjustment is assumed to be achieved mainly through expenditure reduction. - Policy priorities implied by the analysis: - Strengthen fiscal consolidation and expenditure efficiency to avoid debt breaching policy ceilings. - Monitor and manage foreign-currency exposure and external financing vulnerabilities to reduce sensitivity to real depreciation and market perception shocks. - Preserve or strengthen primary balances to lower the probability of high-debt adverse scenarios. *Source: IMF staff.* ### 1. This statement provides information that has become available since the staff report ### _cr16240 - 1. This statement provides information that has become available since the staff report ### New information since staff report - The information provided became available after staff report (SM/16/124) was circulated to the Executive Board on June 3, 2016, and does not alter the thrust of the staff appraisal. ### Macroprudential policy announcement - The State Bank of Vietnam announced tightening of macroprudential policy: - The risk weight for real estate loans will be increased at the beginning of 2017. - The prudential ratio governing maturity mismatches for lending will be tightened in two steps at the beginning of 2017 and 2018. - The loan-to-deposit ratio limit for state-owned banks remains unchanged. - Circular specifying prudential ratios for credit institutions and foreign bank branches: - The risk index of receivable lending for real estate will be raised from 150 percent to 200 percent, effective January 2017. - Roadmap to reduce the maximum ratio of short-term funds used for medium and long term loans from 60 percent currently to 50 percent in January 2017 and to 40 percent in January 2018. ### Financial and external sector developments - Monetary conditions and credit: - The overnight interbank interest rate has declined well below the policy repo rate of 5 percent. - Credit growth increased further in March to 19.9 percent (y/y). - The SBV issued an instruction to banks to prioritize credit for productive sectors such as manufacturing, agriculture and export; credit to real estate and other potentially risky sectors is being closely monitored. - Vietnam has a high credit-to-GDP ratio reflecting a bank-based economy. - Exchange rate and reserves: - The exchange rate has remained relatively stable with small variations in the daily central rate. - Following adoption of a more flexible exchange-rate regime, speculative activity moderated, contributing to ample foreign currency supply and stabilization of the exchange rate and rebuilding of international reserves. - International reserves increased to US$33.9 billion in April. - Trade and investment: - The trade balance registered a surplus of US$5.7 billion in the first five months of the year. - Foreign direct investment inflows remain robust. - Inflation: - Headline inflation increased to 2.3 percent (y/y) in May, reflecting higher food, energy, and administered health care prices. - Core inflation edged up very slightly to 1.9 percent (y/y). ### Authorities’ assessment — Recent economic developments and outlook - Past and near-term growth: - Real GDP growth was 6.7 percent in the previous year. - In the first quarter of 2016, growth moderated to 5.5 percent. - The authorities remain cautiously optimistic of achieving the growth target of 6.7 percent in 2016. - Key downside risks: - Domestic: deeper impact of drought and land salinization on agricultural production; inadequate fiscal consolidation; prolonged non-performing loan (NPL) resolution. - External: more volatile global financial conditions leading to capital outflows and higher domestic interest rates; weak global growth and changes in structure of global trade undermining exports; persistently lower oil prices. - Policy orientation: - The authorities continue to monitor global developments, see merit in accelerating implementation of the Trans-Pacific Partnership and other trade agreements, and view greater exchange rate flexibility as a buffer against external shocks. ### Fiscal policy - Medium-term fiscal framework: - The Ministry of Finance is developing a Medium-term Budget and Finance Plan (MBFP) for 2016-2020 for submission to the government and to the National Assembly for approval in October 2016. - The Plan will provide details on measures to gradually reduce the fiscal deficit to an average of 4 percent of GDP for the period and to 3 percent of GDP by the year 2020. - Aim to keep public and publicly-guaranteed (PPG) debt below 65 percent of GDP. - Revenue trends and structure: - Domestic revenue averaged 13.1 percent of GDP during 2006 - 2010, and 14.1 percent during 2011 - 2015. - Share of domestic revenue to total revenue rose from 52.3 percent during 2001 - 2005 to 68 percent during 2011 - 2015. - In 2015, domestic revenue share was 74 percent and is expected to be higher than 80 percent during 2016 - 2020. - Authorities’ view on PPG debt: - Staff estimates PPG debt to increase to 62 percent of GDP in 2016 and to 70 percent in the medium term, while the authorities aim to maintain PPG debt below the legal limit of 65 percent of GDP and view debt distress risk as under control. - The MBFP for 2016-2020 contains measures to ensure the PPG debt ratio remains below 65 percent of GDP. - Revenue-enhancing and expenditure-efficiency measures under consideration: - Simplification of tax procedures and amendments to corporate income tax incentives. - Broaden the personal income tax base, adjust tax rates, reduce number of goods and services exempt from VAT and reduce number in the 5 percent taxable group with ultimate aim of eliminating this group and applying a common VAT rate. - Increase excise tax coverage, adjust environmental protection tax rates, study introduction of property tax. - On expenditure: lower current expenditure by reducing public sector wage bill, promote financial autonomy in public sector, increase participation of non-state agents in public services (education and healthcare), rationalize public investment expenditure, and improve efficiency of public investment projects. - Plan to request Fund technical assistance on tax policy focusing on revenue strengthening measures. - Bank recapitalization and fiscal consolidation: - Authorities recognize merit in enhancing financial capability of state-owned commercial banks and NPL resolution, but inclusion of bank recapitalization funds in fiscal consolidation is difficult and requires careful consideration. - Staff estimated banks’ recapitalization needs at 2½ percent of GDP; authorities state this amount needs careful calibration and a roadmap approved by authorities before implementation, with total cost to be within budget capacity and consistent with plan to lower fiscal deficit and keep PPG debt below 65 percent. ### Monetary policy and foreign exchange management - SBV policy stance and objectives in 2016: - Support government objective of maintaining macroeconomic stability, achieving economic growth target, keeping inflation rate below 5 percent, and ensuring resilience of the banking system. - SBV will coordinate monetary policy with fiscal and other macroeconomic policies, stand ready to tighten policy should inflationary pressures arise, and may consider easing if growth slows further and underlying inflation stalls. - SBV is undertaking research on establishing an interest-rate corridor as a channel for policy transmission and will implement as conditions warrant. - Credit growth target: - The SBV views the 2016 credit growth rate target of 18 - 20 percent as appropriate given the growth projection of 6.7 percent in 2016 and consistent with keeping inflation below 5 percent; target may be adjusted in line with developments. - Commitment to ensure NPLs remain below 3 percent of total loans. ### Macroprudential and banking policy - Progress and measures: - Progress in developing macroprudential framework and steps taken on banking sector reform. - Measures include macroprudential tightening, tightening regulations on lending and dividend payments at weak banks, and strengthening supervision. - VAMC (Vietnam Asset Management Corporation) has been established with plan to increase its capital. - In March 2016, Decree on establishment, organization and operation of the VAMC was amended to provide legal basis to buy and sell NPLs at market value. - Decision No. 618 of the SBV in April 2016 elaborated detailed plan to improve resolution incentives for VAMC’s operation. - Authorities’ stance on timing and fiscal involvement: - Authorities welcome staff recommendation to tighten macroprudential policies but stress importance of appropriate timing and necessary conditions. - Authorities share staff’s view on accelerated NPL loss recognition and resolution but are cautious about using budget resources to recapitalize state-owned commercial banks and on enhancing equitization of these banks; such actions require careful consideration. - Authorities are finalizing a macroprudential framework and improving systemic risk supervision. ### Structural reforms - Commitment and measures: - Authorities broadly agree with staff’s recommendation to intensify structural reforms and the new government is committed to implementing its policy agenda without delay and increasing market-based mechanisms. - In May 2016, the government issued a Resolution on Supporting and Developing Enterprises by 2020 to develop economic institutions and create an environment conducive to business growth; the Resolution outlines administrative reforms and specific tasks aimed at supporting start-ups and innovative enterprises, ensuring the right to do business, equal access to resources and opportunities, reducing business costs, and protecting legitimate rights and interests of enterprises. - SOE reform to be accelerated in 2016-20, including greater transparency and disclosure, accelerated equitization, improved inter-agency coordination, strengthened supervisory capacity, and established reporting mechanisms for SOE equitization proceeds. - Productivity and demographic challenges: - Authorities recognize need to boost productivity and strengthen spillovers from foreign-invested sector to domestic economy by improving integration between foreign-invested sector and domestic suppliers. - Authorities concur with staff’s analysis on aging population effects and will work on policy measures to increase labor mobility and undertake further measures to enhance productivity. ### Conclusion and forward-looking stance - The authorities will continue pursuing sound macroeconomic policies supporting growth and stability. - Strong fundamentals and commitment to prudent policies are expected to provide a solid foundation to meet future challenges. - Reforms will be paced to achieve desired outcomes while minimizing unintended consequences. - Authorities appreciate ongoing Fund advice and technical assistance and look forward to continued support. *Statement by Mr. Marzunisham Omar, Executive Director and Ms. Pornvipa Tangcharoenmonkong, Alternate Executive Director on Vietnam — June 17, 2016* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16240.pdf_