September 8, 2010
IMF Executive Board Concludes 2010 Article IV Consultation with Vietnam
IMF Executive Board Concludes 2010 Article IV Consultation with Vietnam
Public Information Notice (PIN) No. 10/127
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Executive Board Assessment
In concluding the 2010 Article IV consultation with Vietnam, Executive Directors endorsed staff’s appraisal, as follows:
Vietnam has managed to ride out difficult challenges in recent years, which deserves international acknowledgment. As soon as an overheated economy in 2007, owing to rapid capital inflows, was successfully cooled down, an external demand shock triggered by the global crisis had to be countered in 2009 by a sizable stimulus package. As the stimulus policy began to threaten macroeconomic stability toward end-2009, a successful exit (monetary and fiscal tightening) was made. The fact that most fiscal measures were introduced with a sunset clause also helped the timely exit.
Macroeconomic stability is maintained for now. The policy tightening that started at end 2009 has stabilized economic and financial conditions, and helped restore market confidence, as evidenced by the stable dong exchange rates in both the interbank and the parallel markets. Whether the current stability can be sustained through the rest of 2010 and beyond depends on whether the government can maintain and enhance market confidence by limiting, for instance, deterioration in the trade deficit or a decline in the U.S. dollar liquidity in the financial system. Thus the repeated announcements by the government about the need to lower the commercial lending rates may be counter-productive.
Maintaining a solid economic recovery will require the government to prioritize among its multiple goals. The government has stated that in 2010 it aims at the growth target (6.5 percent), inflation target (7 percent, now officially projected at 8 percent), credit growth target (25 percent), and money supply growth target (20 percent), while maintaining a stable dong exchange rate. It may be difficult to convince the market that the government can achieve all these objectives with relatively blunt policy tools, namely OMOs and budget, especially if there’s no apparent hierarchy of objectives. A lack of coordination between monetary and fiscal policies, or the appearance thereof, would amplify market skepticism. The government, therefore, needs to convince market participants that its priority rests with macroeconomic stability. For this purpose, staff believes that maintaining the current stable exchange rate, and taking the opportunity to rebuild GIR, should be the immediate goal for the government. Once the government’s credential for macroeconomic stability is established, and GIR is further built up, staff believes that the government will be able to adopt a more flexible exchange rate regime without risking resurgent devaluation pressures.
Monetary policy should be prudent and its effectiveness should be further strengthened. Further loosening, real or perceived, could disrupt the existing macroeconomic stability, and could inflict substantial damage to the growth prospect, not just for 2010, but even for the medium term. To enhance the effectiveness of monetary policy, the operational improvement in OMOs, and the gradual normalization of the interest rate, structure should also progress. The early indications are that the new SBV Law, approved in late June, strengthened operational authority of the SBV, though the details have yet to be clarified.
Exchange rate regime should be reformed over the medium term. In the medium term, a move from the current regime that focuses on the bilateral dong/U.S. dollar exchange rate to a system that is based on a basket of currencies including those of regional trading partners may be appropriate. In the process, a wide use of the U.S. dollar in the economy (partial dollarization) could be wound down. In addition, further exchange rate flexibility is encouraged once necessary infrastructure, particularly in terms of hedging instruments, is readily available for the private sector to manage foreign exchange rate risks effectively.
There is room for further reduction in the budget deficit in the medium term. In 2010, total investment spending is expected to decline by 3 percentage points of GDP from the 2009 level to about 11 percent of GDP. Staff believes that there is room for further reduction in investment spending, for example, by project prioritizing, increased cost efficiency, and the use of PPP and other innovative financing methods. This would enable the government to reduce both the budget deficit and the public and publicly-guaranteed debt levels over the medium term.
Strengthening the financial sector requires further reform. While welcoming the ongoing efforts to strengthen supervisory capacity, more could, and should be done. An FSAP is expected to help the authorities establish a reform agenda and a concrete timeline. One of the fundamental problems facing Vietnam is over-banking: while the introduction of the minimum capital requirement at end-2010 could promote consolidation of smaller banks, further streamlining should be pursued in the medium term. The equitization (privatization) of SOCBs should also be advanced. As the economy is driven more by market principles, the government is required to change its style of policy conduct. For instance, moral suasion could create distortions that need to be addressed later at a higher cost. Reforms of SOEs and SOCBs would not only provide a level playing field, but also raise the efficiency of the economy. Most importantly, transparency in government intentions, based on higher quality data published timely, should be further advanced to provide market players predictability.
