June 9, 2009
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1. Let me first thank the Government for inviting us to this mid-year Consultative Group Meeting. It is certainly a timely meeting and I would applaud the organizers for the agenda they have prepared for us. I would also like to say what a pleasure these mid-year Consultative Group Meetings are. This time last year we were in Sapa, and now we have chance to visit the beautiful central highland region around Buon Ma Thuot. In my remarks today, I will focus mainly on the policy challenges facing Vietnam, as it navigates its way through this current global economic downturn.
2. The latest economic data suggest that while Vietnam has been adversely affected, it is weathering the current global crisis relatively well. Our latest projections indicate that growth would slow to around 3½ percent this year, with activity gradually recovering from the sharp slowdown in the first quarter as the global economy begins to recover. While this growth path is lower than official projections, it compares very favorably with many other countries around the region, some of which have moved into sharp recession. This resilience in the face of the worst global economic environment since the Great Depression is a testament to the economic reforms that the government has put in place over the past decade.
3. As we mentioned at the Consultative Group Meeting in December 2008, one of the principal challenges facing the Government is to keep the economy on an “even keel” during this economic downturn. We suggested that this would require a delicate balancing of growth and stability objectives. While the initial refocusing of policies on supporting growth was warranted, we are of the view that a greater focus on maintaining macroeconomic stability is now necessary. The substantial easing of monetary policy since the last quarter of 2008, which was accelerated by the introduction of interest subsidy schemes, combined with a potentially significant easing of fiscal policy, could put the external position under pressure, and possibly jeopardize the stabilization gains achieved in the latter part of 2008.
4. Some adjustment in macroeconomic policies will be required to address these risks. To this end, we have encouraged the government to take the following steps:
• Refocus monetary policy on ensuring external stability. Specifically some tightening of monetary policy is needed to rein in credit growth, which has started to increase again, and provide greater support to the dong--the latter has been trading at the weaker end of the band for an extended period. This tightening would best initially be achieved by monetary operations to rein in dong liquidity and through an accelerated phasing out of the current interest subsidy schemes, but an adjustment in policy rates may be needed if credit expansion continues to accelerate. In this context, we would urge the State Bank of Vietnam (SBV) to lift the cap on lending rates, which is hindering bank operations, as soon as possible.
• Adopt a revised fiscal plan for 2009 that can be financed in a manner consistent with maintaining macroeconomic stability. We estimate that the current stimulus plan presented to the National Assembly could potentially raise the government's financing requirement to 12½ percent of GDP in 2009, which would be difficult to fund without adding pressure on the balance of payments. To preserve macroeconomic stability, we have recommended that the government's financing requirement, including drawdown of deposits, be limited to 8½ percent of GDP in 2009;1 this covers not only financing of the 2009 budget plan, but also off-budget expenditures, such as the interest subsidy scheme being executed by the SBV. To limit the financing requirement to this level, we would suggest that the expansion of expenditure envisaged under the stimulus plan be reined in and some of the initiatives--especially the interest subsidies and tax measures--be phased out earlier than envisaged.
5. The SBV will need to maintain a close oversight over the banking system. While banks so far have managed to weather the economic downturn, the potential for rising credit risks remains a concern. We would therefore continue to encourage the SBV to further strengthen its capacity to undertake risk-based inspections of banks, with a particular focus on ensuring that banks are properly assessing and reporting credit risks on their loans, including those extended under the interest subsidy schemes. Going forward, the SBV will also need to improve its bank data reporting system to improve its offsite supervision and enhance the public availability of data on the banking system.
6. In this context, I should emphasize the importance of making further improvements in data provision and the government's communication strategy. This is key to bolstering policy credibility. The Government has made commendable progress on this front, however the quality and timeliness of publicly available data--across all sectors--still need to be substantially strengthened. Strengthening the government's communication, especially with respect to its assessments of economic conditions and direction of policies, would also help it manage expectations more effectively and improve investor confidence.
7. I have, perhaps inevitably, focused on the near-term challenges facing Vietnam, but I would like to emphasize the continued importance of pressing ahead with the broader structural reform agenda. Let me highlight in particular the need to press ahead with equitization and reform of state-owned enterprises, and the restructuring of key economic institutions such as the SBV and the Ministry of Finance.
8. With regards to the latter, the government is preparing a number of important pieces of legislation, including a new SBV Law, a new law on Credit Institutions, and a revised Budget Law. These pieces of legislation present an important opportunity to modernize monetary and fiscal management and upgrade bank supervision, all of which will be essential if Vietnam is to realize its goal of becoming a full-fledged emerging market economy in the next decade.
9. Mr. Chairman, let me thank you once again for this opportunity to participate in these discussions this morning. On behalf of the IMF, let me reiterate our continued support for Vietnam and our commitment to ensuring that it comes through this difficult period safely and continues its remarkable economic development.
Thank you.
