Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Vietnam
IMF News, November 21, 2007
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- Published: November 21, 2007
Background: recent performance and macro developments
- GDP growth rose to 8.2 percent in 2006.
- Inflation picked up to 8.4 percent (y/y) as of July 2007, up from 6.6 percent in late 2006.
- Gross official reserves rose from US$11½ billion at end-2006 to around US$19 billion (3½ months of imports) as of end-May 2007.
- Import growth picked up to 30 percent (y/y) during the first seven months of 2007.
- Growth of overall credit to the economy picked up from 25 percent in 2006 to 35 percent (y/y) as of end-May 2007.
- Reserve requirements on bank deposits were virtually doubled from June 2007 (to a range of 4 to 10 percent); banks' securities-related lending made subject to a cap equivalent to 3 percent of total loans.
- The Ho Chi Minh City Stock Market Price Index rose by 144.5 percent in 2006, and by another 51 percent in early 2007, before receding by about 20 percent during March-July.
- Stock market capitalization soared from US$0.5 billion at end-2005 to around US$18 billion (25 percent of GDP) as of end-July 2007.
- Fiscal outcomes:
- Overall fiscal deficit compressed to 3.8 percent of GDP in 2006.
- If government fully implements plans for 2007, fiscal deficit could widen to well over 7 percent of GDP in 2007, with the non-oil deficit rising by at least 1-1½ percentage points of GDP.
Near-term outlook and key projections
- GDP is projected to expand by about 8-8¼ percent in 2007-08.
- Current account deficit likely to widen to 3-3½ percent of GDP, expected to be financed by official development assistance, FDI, and other private capital inflows.
- The improved investment climate from WTO accession contributed to continued strong expansion in 2007 (industrial activity, retail sales, and trade).
Risks and vulnerabilities identified
- Inflationary pressures: core inflation trending up and inflation more entrenched than in other countries in the region.
- Monetary policy effectiveness threatened by large foreign exchange inflows.
- Continued rapid credit growth and weak regulatory environment could threaten domestic financial stability.
- Fiscal risks from large increases in public wages and pensions, and heavy on-lending to state-owned enterprises (SOEs), potentially leading to rapid accumulation of public debt.
- Insufficient banking sector and SOE governance, and continued state-sector dominance could reduce investment efficiency and impose future budget burdens.
- Potential external vulnerability from significant portfolio capital inflows given current financial sector development and pegged exchange rate regime.
Executive Board assessment: conclusions and policy advice
- Directors commended Vietnam's record of economic growth, poverty reduction, and WTO accession.
- Directors welcomed recent measures toward greater monetary restraint and supported plans to slow significantly the growth of monetary and credit aggregates.
- Encouraged continued sterilization of foreign currency inflows to meet official monetary and credit targets for end-2007.
- Supported request for technical assistance in the eventual transition to an inflation-targeting framework.
- Exchange rate policy:
- Agreed with staff that the dong is aligned with medium-term fundamentals.
- Welcomed plan to introduce greater exchange rate flexibility as institutional and operational infrastructure is developed.
- Noted benefits of greater flexibility: facilitate disinflation and de-dollarization, reduce need for intervention and sterilization, and create incentives to manage exchange rate risks.
- Fiscal policy:
- Called for a prudent and restrained fiscal policy.
- Non-oil fiscal deficit should be placed on a declining path as soon as possible.
- Welcomed decision to postpone further large increases in public sector wages.
- Most Directors recommended saving any revenue windfalls.
- Encouraged completing pass-through of higher oil prices to domestic administered prices, while ensuring an adequate social safety net for low-income groups.
- Urged that SOE projects not be funded through issuance of new sovereign bonds.
- Highlighted need for medium-term efforts to boost revenues and curb expenditure growth to protect debt sustainability.
- Recommended careful design of planned tax reforms and continued strengthening of tax administration.
- Called for civil service reforms, implementation of a differentiated merit-based wage structure, and rationalization of employment.
- Emphasized improving screening of public projects and encouraging private investment in commercially viable infrastructure.
- Financial sector and SOE reforms:
- Supported plans to equitize main state-owned commercial banks (SOCBs); welcomed approval of equalization plan for Vietcombank.
- Suggested allowing foreign strategic investors to participate in SOCB equitizations to strengthen governance.
- Encouraged expediting plans to grant the State Bank of Vietnam (SBV) adequate autonomy and authority for price stability and effective bank supervision.
- Supported request for technical assistance to build financial sector institutional capacity.
- Supported measures to tighten prudential controls on banks' securities-related lending to address stock market overheating risks.
- Urged improved securities market regulation to discourage insider trading and money laundering.
- Called for faster SOE reform, expanded equitization of SOEs, openness to foreign strategic investors, and prohibition of related-party lending within new SOE groups combining industrial and financial operations.
- Supported steps to implement ahead of schedule WTO-mandated tariff reductions.
- Transparency:
- Welcomed publication of first external debt bulletin by the Ministry of Finance.
- Encouraged further transparency improvements, including strengthened reporting on external debt of SOEs, portfolio capital flows, and government and SOE bond issues.
Selected economic indicators (2002–08) — key figures preserved exactly as presented
- Nominal GDP (2006): US$60.9 billion
- GDP per capita (2006): US$723
- Population (2006): 84.15 million
- Fund quota: SDR 329.1 million
- Real GDP (annual percentage change):
- 2002: 7.1
- 2003: 7.3
- 2004: 7.8
- 2005: 8.4
- 2006: 8.2
- 2007 Prel.: 8.3
- Inflation (annual percentage change), period average and end-of-period:
- Period average 2002–06: 4.0; 3.2; 7.7; 7.5; 8.0
- End-of-period 2002–07: 2.9; 9.7; 8.8; 6.6; 8.0
- General government, official budget balance (percent of GDP):
- 2002: -1.4
- 2003: -1.2
- 2004: 0.9
- 2005: -0.3
- 2006: -3.4
- 2007: -2.1
- Revenue and grants (percent of GDP): 22.7; 24.9; 26.7; 25.9; 27.1; 25.5
- Of which: Oil revenue (percent of GDP): 6.8; 7.0; 7.9; 8.7
- Expenditure (percent of GDP): 24.2; 26.1; 25.8; 27.0; 27.5; 28.9; 28.0
- Off-budget expenditure and net lending (percent of GDP): 3.3; 5.2; 3.7; 4.7; 3.5; 4.5
- Overall fiscal balance including off-budget expenditure (percent of GDP): -4.7; -6.4; -2.8; -5.9; -3.8; -6.9; -6.6
- Non-oil overall fiscal deficit (percent of GDP): -11.5; -13.5; -10.7; -14.6; -14.8; -14.5
- Money and credit (annual percentage change, end-of-period):
- Broad money: 17.6; 29.5; 29.7; 33.6; 36.0; ...
- Credit to the economy: 22.2; 28.4; 41.6; 31.7; 25.4; 29.0
- Reserve money: 12.4; 27.4; 16.1; 23.7; 32.2; 41.0
- Interest rates (in percent, end-of-period):
- Nominal three-month deposit rate (households): 6.3
- Nominal short-term lending rate (less than one year): 9.9; 10.0; 10.7; 12.0; 11.8
- Real three-month deposits rate (households): 2.4; 3.6; -3.0; -0.6; 1.1
- Real short-term lending rate (less than one year): 0.6
- Current account balance (including official transfers) (In millions of U.S. dollars): -676; -1,935; -1,565; -497; -164; -2,199; -2,563
- (In percent of GDP): -1.9; -4.9; -0.9; -3.2
- Exports f.o.b. (annual percentage change, U.S. dollar terms): 11.2; 20.6; 31.4; 22.5; 17.2; 19.1
- Imports f.o.b. (annual percentage change, U.S. dollar terms): 22.1; 26.6; 21.2; 21.4; 19.0
- Foreign exchange reserves (in millions of U.S. dollars, end-of-period), gross official reserves, including gold: 3,692; 5,619; 6,314; 8,557; 11,483; 19,931; 23,658
- (In weeks of next year's imports of GNFS): 9.4; 10.4; 15.2; 15.5
- External debt (in percent of GDP) 1/: 35.0; 33.7; 33.5; 30.2; 30.8
- External debt service due (in percent of exports of GNFS): 8.6; 6.0; 5.6; 5.3; 5.5
- Total public and publicly guaranteed debt (in percent of GDP): 38.2; 42.4; 43.8; 43.3; 43.4; 44.9
- Memorandum items:
- GDP (in trillions of dong at current market prices): 535.8; 613.4; 715.3; 839.2; 973.8; 1,130.0; 1,302.1
- Per capita GDP (in U.S. dollars): 440; 492; 553; 636; 723; 809; 916
Public Information Notice (PIN) No. 07/136, November 21, 2007.