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Vietnam Consultative Group Meeting, Remarks by Mr. Benedict Bingham, Senior Resident Representative in Vietnam
June 6, 2008
1. Let me first congratulate the Government for convening this timely session on economic developments and the challenges that lie ahead. On a more personal note, let me say what a pleasure it is to be in Sapa. It is my first visit to this beautiful region, and certainly not my last. As is customary, I will focus today on recent macroeconomic developments and the main policy challenges facing the government.
2. Let me say at the outset, that we remain of the view that the longer term economic reform story that made Vietnam such an attractive destination for foreign direct investment in recent years remains a compelling one. Indeed, the continued strength of foreign direct investment inflows in the first quarter, despite a difficult international and domestic environment, is a testament to the reforms that the government has put in place over the past decade. Also, as the World Bank has noted in its report, the indications are that economic activity has so far remained reasonably robust, buoyed by healthy export growth, and high commodity prices.
3. That said, economic conditions have clearly become more difficult over the past year, with the economy overheating in the context of a weakening global financial environment. In addition to a sharp rise in inflation—headline inflation has risen to 25 percent and we estimate core inflation1 at 14-15 percent—the combination of rapid credit growth, an expansionary fiscal policy, and an aggressive expansion of investment by state-owned enterprises, has also resulted in a significant widening of the external current account deficit. The current account deficit widened to an estimated 10 percent of GDP in 2007, and available data suggests that it rose further in the first quarter of 2008.
4. There are signs that weakening economic indicators are beginning to weigh on investor sentiment. In addition to declines in the stock and property markets, downward pressure on the dong has emerged, and the non-deliverable forward rate in offshore markets is now significantly more depreciated than the official spot rate. Downward revisions in the outlook on sovereign debt ratings and recent investment bank reports raising concerns about Vietnam's economic outlook have further affected sentiment.
5. Let me make one remark at this point, as an aside. The lack of timely data on key economic and financial variables has contributed significantly to the volatility in investor sentiment over the past 12 months. In the absence of information, economic analysis, both here and abroad, will inevitably be based on rumor and speculation. In our view, it is essential that economic data be made available to the public on a more timely basis, to calm the current level of speculation and allow for a more rational debate on the economic outlook.
6. We have been encouraged by recent speeches by the Prime Minister and other senior officials, which have clearly laid out the economic challenges the country faces and the broad policy strategy for addressing them. The thrust of the strategy that the Government has laid out is appropriate in our view. The priority now is to translate that strategy into a concrete and convincing policy package that will bolster investor confidence and restore macroeconomic stability.
7. We would suggest that the package involve four key elements:
• A further tightening of monetary policy. The State bank of Vietnam (SBV) hiked the Base Rate in mid-May, in a substantial move to tighten monetary conditions, but further increases in interest rates are need to provide adequate returns to savers, and bring credit growth and inflation under control. The increase in interest rates should be complemented by strengthened oversight of the banking system to curb imprudent lending practices and address any emerging vulnerabilities in the banking system.
• A clear signal that the expenditure and borrowing by state-owned enterprises (SOE), especially the larger conglomerates, is being reined in, their investment projects prioritized, and their operations limited to their core business. This is essential to ensure that SOE activities pulls in the same direction as the tightening of monetary policy.
• A revision to the fiscal plan for 2008, involving a significantly lower deficit than in 2007. In addition to restraining budget expenditure, a sharp cutback in the planned expansion in off-budget investment is needed. This would help ensure that a significant portion of the likely revenue over-performance in 2008 is saved, and that fiscal policy also support the tighter monetary stance.
• We also remain of the view that greater exchange rate flexibility would simplify monetary management and help the central bank better manage shifts in capital flows more effectively. However, we would caution that any shifts of policy in this direction be implemented following the introduction of a strong policy package to ensure the continued credibility of the exchange rate regime.
8. I have, perhaps inevitably, focused on the near-term macroeconomic challenges, 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 SOE equitization and reform, and the restructuring of key economic institutions such as the SBV, as these reforms are essential to the successful integration of Vietnam into the international economy.
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.
1 Excluding raw food and energy.
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