Consultative Group Meeting for Vietnam

IMF News, December 4, 2009

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Vietnam is "weathering the global crisis better than many other countries."
Real GDP growth projection for 2009: 5¼ percent.
Drivers of resilience:
- Private sector strength.
- Government stimulus program (monetary policy easing and a sizable fiscal package) boosting domestic demand, underpinning recovery in industrial production and maintaining robust retail sales.
Costs and emerging risks from stimulus:
- Trade deficits: $3½ billion in the third quarter.
- Residents shifted portfolios toward gold and other foreign currency assets.
- Dong depreciation pressure, with parallel market exchange rates recently trading up to 10 percent outside of the official band.
- Gross international reserves fallen to below 2½ months of imports.
- Difficult access to foreign exchange, imposing costs on enterprises and affecting investor sentiment.

Near-term view: likely to remain challenging; global recovery supportive but uncertain, posing risks to exports, private remittances, and FDI.
IMF projections for 2010:
- Growth: 6 percent.
- Inflation: likely to rise to double digits from around 7 percent in 2009.
- Balance of payments:
- Assumes government narrows current account deficit to 7½ percent of GDP from an estimated 8¾ percent in 2009.
- Assumes reversal of resident portfolio shift toward foreign currency assets.
- If FDI and official development assistance flows remain firm, modest recovery of gross international reserves in 2010 is possible.
Risks:
- Downside risk from global recovery uncertainty.
- Greater risk: re-emergence of macroeconomic instability similar to 2008, which would constrain stimulus scope.

Immediate priority: address emerging risks without disrupting economic activity and restore normal business conditions.
Monetary and exchange rate policy:
- Tighten monetary policy and restore orderly conditions in the foreign exchange market.
- Welcomed SBV steps: increase in policy interest rates and exchange rate adjustment.
- Phase out short-term interest subsidy scheme on schedule at end-December 2009.
- SBV should remain vigilant, be given greater authority to adjust monetary and exchange rate policy in a timely manner.
- Remove the cap on lending rates.
- Combine clear signals with a sound fiscal framework to boost credibility of monetary policy and restore confidence in the dong.
Fiscal policy:
- IMF preliminary estimate: overall fiscal deficit (including off-budget expenditures and net lending) could widen from an estimated 4½ percent of GDP in 2008 to about 9 percent of GDP in 2009.
- 2010 budget plan welcomed; IMF estimates it will reduce the overall fiscal deficit by about 2 percentage points of GDP to around 6½ percent of GDP.
- Fiscal policy should be implemented flexibly; further tightening may be needed if external pressures intensify.

Banks' position:
- Vietnamese banks have come through the global crisis relatively well so far, due to strong profits, capital-raising efforts, and limited exposure to global financial markets.
Concerns:
- Absence of reliable information on the banking system.
- Capital base of some large banks remains weak.
- Profit margins squeezed by a lending rate cap and increasing deposit rates.
- Loan portfolio strength and liquidity positions may be tested if liquidity tightens and conditions weaken.
Recommendation:
- Authorities' willingness to participate in a financial sector assessment program (FSAP) is welcomed to provide a clearer picture and guide reforms of the regulatory regime and enhance confidence of rating agencies and other observers.

Maintain momentum of structural reforms in the next ten-year strategy and five-year plan to modernize infrastructure and management of the economy.
Encourage using pending banking and budget legislations to modernize frameworks for monetary and fiscal management and develop institutions for a 21st century economy.
Information and communication improvements:
- SBV steps to improve quality and timeliness of monetary and reserve data are encouraging.
- Significant shortcomings remain in data on fiscal, state-owned enterprise, and banking operations.
- Improving the government’s communication strategy by regularly presenting clear assessments of the economic situation and policy direction would help manage market expectations and prevent disorderly adjustments.

IMF reiterates continued commitment to providing Vietnam with policy advice and support at this difficult juncture.

Statement by Mr. Shogo Ishii, Assistant Director, Asia and Pacific Department — Hanoi, December 3–4, 2009