Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with Vietnam
IMF News, March 17, 2009
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- Published: March 17, 2009
Background and recent developments
- Growth moderated to 6.2 percent in 2008, from a historical average of 7½ percent.
- Growth is expected to slow to 4¾ percent in 2009 due to weaker domestic and external demand.
- Rapid credit growth, massive capital inflows, and a surge in commodity prices contributed to high inflation and large trade deficits in the first half of 2008.
- Inflation pressures subsided with easing food and energy prices, but near-term risks are on the downside as the deteriorating global environment could:
- worsen Vietnam’s growth prospects;
- reduce capital inflows, putting pressure on reserves and the exchange rate;
- heighten banks’ vulnerabilities.
- Spillovers from global turmoil since October 2008:
- Exports of goods and services, private remittances, and foreign direct investment have weakened.
- Foreign investors reduced portfolio exposures, especially in bonds; the stock market lost two-thirds of its value in 2008.
- Depreciation pressures on the dong resurfaced.
Fiscal developments and outlook
- Fiscal policy became accommodative in 2008 with stepped up spending in Q4; overall fiscal balance in 2008 is estimated at a deficit of 4¾ percent of GDP.
- The original 2009 budget plan (excluding the stimulus plan) indicates:
- overall deficit widening to about 8¼ percent of GDP with large domestic financing;
- lower revenue from oil and recent tax reforms; and an increase in off-budget expenditure and net lending.
- The non-oil primary deficit is projected to rise slightly.
- Executive Directors’ view:
- An accommodative fiscal stance in 2009 to mitigate the downturn is appropriate.
- Caution that without additional concessional external financing, a large stimulus could further weaken the external position, crowd out private sector activity, and undermine fiscal sustainability.
- Most Directors encouraged revising the 2009 budget to ensure stimulus measures are well targeted and effective.
- Longer-term revenue and expenditure reforms are needed to preserve fiscal sustainability, including efforts to broaden the tax base and review expenditure structure to ensure efficient public investment and protection of vulnerable groups.
- Directors welcomed the initiative to revise the state budget law.
Monetary and exchange rate policy
- State Bank of Vietnam (SBV) actions in 2008:
- Rapidly eased monetary policy in Q4 by lowering policy rates by 7 percentage points to 7 percent and reducing reserve requirements sharply.
- Devalued the dong and widened the dong-U.S. dollar trading band; the dong continued to trade at the weaker end of the band.
- Authorities later announced a broad economic stimulus plan.
- Directors advised:
- Assess effects of recent monetary adjustment before further easing.
- Improvements in open market operations and liquidity management to strengthen the monetary framework.
- Welcome for intention to allow greater exchange rate flexibility, supported by appropriate macroeconomic policies.
- Staff assessment: the dong appears somewhat overvalued compared with its estimated medium-term equilibrium level, though the precise degree is difficult to ascertain.
Banking sector and financial stability
- Strains in 2008:
- Banks have high loan-to-deposit ratios and rely heavily on short-term interbank funding.
- Profit margins squeezed by higher funding costs and caps on lending rates.
- Smaller joint-stock banks were reportedly most affected; some obtained liquidity support from the SBV.
- Nonperforming loans (NPLs) doubled to 3 percent in October 2008 from end-2007 level.
- Some banks likely to face a substantial increase in NPLs with a slowing economy.
- Executive Directors’ view:
- Strengthened capital position and improved provisioning practices may provide a buffer, but loan portfolios could come under pressure as growth slows.
- Encourage development of a more comprehensive contingency plan to help the banking sector confront global financial turmoil.
- Welcome recent efforts to improve bank supervision, but call for further improvement to ensure timely and effective assessment of bank vulnerabilities.
- Encourage advancing financial sector reform, in particular strengthening the operational autonomy of the State Bank of Vietnam.
Structural reforms and data
- Directors welcomed authorities’ intention to press ahead with reform of state-owned enterprises (SOEs); equitization has been postponed partly due to unfavorable market conditions.
- Planned reforms aim to strengthen SOE performance and governance to sustain rapid economic development.
- Directors welcomed steps to improve data provision and emphasized that better data and effective public communication will help bolster investor confidence.
- Encouraged continued improvement in quality and timeliness of data, especially fiscal accounts, SOEs, and banking.
Executive Board assessment — outlook and risks
- Directors commended authorities for progress in stabilizing the overheating economy in 2008 and welcomed improvements in inflation and the trade balance.
- Noted substantial near-term challenges from the sharp deterioration in global economic and financial conditions; risks are tilted firmly to the downside.
- Economic growth expected to slow in 2009 with likely significant declines in capital inflows, exports, and private remittances; current account deficit will remain large.
- Slower growth could heighten banking system vulnerabilities.
- Medium-term outlook considered favorable; Vietnam remains an attractive destination for foreign investment.
Key statistics from "Vietnam: Selected Economic Indicators, 2005–09"
- Real GDP (annual percentage change):
- 2005: 8.4
- 2006: 8.2
- 2007: 8.5
- 2008 (actual): 6.2
- 2009 (Proj.): 4.8
- Gross saving (in percent of GDP):
- 2005: 34.5
- 2006: 36.5
- 2007: 31.8
- 2008: 31.2
- 2009: 25.1
- Private saving (in percent of GDP):
- 2005: 26.7
- 2006: 28.1
- 2007: 26.2
- 2008: 26.1
- 2009: 23.0
- Public saving (in percent of GDP):
- 2005: 7.8
- 2006: 5.6
- 2007: 5.1
- 2008: 2.1
- Gross investment (in percent of GDP):
- 2005: 35.6
- 2006: 36.8
- 2007: 41.6
- 2008: 41.5
- 2009: 33.2
- Inflation (annual percentage change, CPI period average):
- 2005: 8.3
- 2006: 7.5
- 2007: 23.1
- 2008: 8.0
- 2009: (not listed)
- CPI (end of period):
- 2005: 8.8
- 2006: 6.7
- 2007: 12.6
- 2008: 19.9
- 2009: 6.0
- GDP deflator:
- 2005: 7.3
- 2007: 21.7
- Official fiscal balance (in percent of GDP):
- 2005: -0.1
- 2006: 1.1
- 2007: -2.2
- 2008: -1.6
- 2009: -4.1
- Off-budget expenditure and net lending:
- 2005: 4.4
- 2006: 2.2
- 2007: 3.1
- 2008: 4.1
- Overall fiscal balance (includes off-budget expenditure and net lending):
- 2005: -4.5
- 2006: -1.1
- 2007: -5.3
- 2008: -4.7
- 2009: -8.2
- Non-oil primary fiscal balance:
- 2005: -11.7
- 2006: -8.8
- 2007: -11.1
- 2008: -9.4
- 2009: -9.7
- Broad money (annual percentage change, end of period):
- 2005: 29.7
- 2006: 33.6
- 2007: 46.1
- 2008: 20.3
- Credit to the economy (annual percentage change, end of period):
- 2005: 31.7
- 2006: 25.4
- 2007: 53.9
- Nominal three-month deposit rate (households, end of period):
- 2005: 7.9
- 2006: 7.4
- 2007: 8.1
- Nominal short-term lending rate (less than one year):
- 2005: 12.0
- 2006: 11.8
- Current account balance (including official transfers, in billions of U.S. dollars):
- 2005: -0.6
- 2006: -0.2
- 2007: -7.0
- 2008: -9.2
- 2009: -7.3
- Current account balance (in percent of GDP):
- 2005: -0.3
- 2006: -9.8
- 2007: -10.3
- 2008: -8.1
- Exports f.o.b. (annual percentage change, U.S. dollar terms):
- 2005: 22.5
- 2006: 22.7
- 2007: 21.9
- 2008: 29.5
- 2009: -15.5
- Imports f.o.b. (annual percentage change, U.S. dollar terms):
- 2005: 15.0
- 2006: 22.1
- 2007: 38.3
- 2008: -19.9
- Gross official reserves, including gold (in billions of U.S. dollars, end of period):
- 2005: 8.6
- 2006: 21.0
- 2007: 20.7
- Gross official reserves (in months of next year's imports of GNFS):
- 2005: 3.0
- 2006: 3.3
- External debt (in percent of GDP):
- 2005: 32.5
- 2006: 31.4
- 2007: 33.3
- 2008: 31.9
- External debt service (in percent of exports of GNFS):
- 2005: 4.5
- 2006: 4.2
- 2007: 3.8
- 2008: 3.4
- Total public and publicly-guaranteed debt (in percent of GDP):
- 2005: 44.5
- 2006: 44.1
- 2007: 46.3
- 2008: 44.4
- 2009: 47.5
- Dong per U.S. dollar exchange rate (end of period, interbank exchange rate):
- 2005: 15,907
- 2006: 16,068
- 2007: 16,003
- 2008: 17,486
- Nominal effective exchange rate (end of period, 2000 annual average=100):
- 2005: 83.6
- 2006: 77.3
- 2007: 73.3
- 2008: 75.4
- Real effective exchange rate (end of period, 2000 annual average=100):
- 2005: 99.8
- 2006: 96.8
- 2007: 100.5
- 2008: 121.9
- Memorandum item: GDP (in trillions of dong at current market prices):
- 2005: 839
- 2006: 974
- 2007: 1,144
- 2008: 1,479
- 2009: 1,623
Public Information Notice (PIN) No. 09/36 — March 17, 2009. Sources: Data provided by the Vietnamese authorities; and IMF staff estimates and projections.