IMF Executive Board Concludes 2011 Article IV Consultation with Vietnam

Public Information Notice (PIN) No. 11/81

June 23, 2011
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n April 29, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the
Article IV consultation with Vietnam.
1

Background
Vietnam has weathered the global crisis well: GDP growth for 2010 is estimated at 6 percent,
higher than the governments target. But macroeconomic risks stemming from expansionary
policies adopted during the global crisis have materialized. Even as most fiscal stimulus
measures expired end-2009, monetary policy has remained accommodative, contributing to
continued strong credit growth (35 percent y/y in February), rising inflation (17.5 percent y/y in
April), and downward pressures on the exchange rate as residents hoard foreign currency and
gold outside the financial system. International reserves declined from already low levels.
In contrast to the emphasis on growth in the past few years, the authorities priority is now
shifting to restoring macroeconomic stability. Key policy interest rates were raised in several
steps since late 2010 and reached 13 percent by late April, with a further rise to 14 percent
effective May 1. In February the dong was devalued by 8.5 percent to narrow the gap between
the official rate and unofficial rates. In late February, the government announced a
comprehensive stabilization package which lists measures such as a reduction of credit growth
in 2011 to below 20 percent, compared to the previous target of 23 percent, a proactive use of
policy interest rates, and a reduction of the budget deficit by around percentage point of GDP
from the budget plan approved in November. In addition, 10 percent of nonwage recurrent
spending is to be frozen until the second half of the year, investments by the state and the
state-owned enterprises (SEs) are to be reviewed, reprioritized, and in some cases cut. The
authorities have also announced plans to ban trading of gold bars to curb gold hoarding. To
address financial sector risks, elevated by the recent high credit growth, the authorities have
introduced new prudential regulations, and are preparing a limit on the credit-to-deposit ratio.
They have also requested an assessment under the IMF-World Bank Financial Sector
Assessment Program (FSAP).
As for the economic outlook, output growth in 2011 is expected to slow somewhat, to around
6 percent. With lower demand and favorable base effects, and assuming no further rise in
international commodity prices, inflation is projected to rise to about 13 percent y/y by end-
2011 before declining to 6 percent by end-2012. The current account deficit is projected to
widen slightly, but remains more than covered by continued strong direct investment inflows.
Reserves are expected to recover somewhat but remain low. However, this scenario depends on
steadfast implementation of stabilization policies and, if necessary, stepped-up measures to
restore confidence in the dong. Fiscal consolidation is being accelerated, but a more rapid
reduction of the fiscal deficit and build-up of fiscal cushions are feasible if the bulk of the
anticipated revenue overperformance is saved. ver the medium term, the foundations for
sustained growth remain solid, provided sound macroeconomic policies are maintained.
Executive Board Assessment
Executive Directors commended the authorities on the economys strong growth performance
during the global crisis. However, the stimulus measures taken during the crisis are now posing
overheating and external stability risks, as evidenced by high credit growth and rising inflation.
Directors, therefore, supported the recent shift of the authorities policy stance towards
stabilization.
Directors welcomed the tightening of monetary policy over the past few months and the
announcement of a comprehensive monetary and fiscal stabilization package to rein in inflation
and stabilize the exchange rate. They stressed that rapid implementation is essential to
maintain momentum and restore confidence in macroeconomic management. They
recommended sustaining stabilization measures until lower inflation expectations are firmly
established and reserves rebuilt, and to be ready to take additional steps if necessary.
Directors considered that monetary tightening should be achieved mainly through market-based
instruments. In the short term, administrative measures could play a supportive role, but they
should be compatible with increasing confidence in the dong. Directors also considered that
strengthening the autonomy of the State Bank of Vietnam would support achieving inflation
targets. They observed that maintaining stability in the foreign exchange market will require
disciplined monetary policy. In the next few years, it would be desirable to simplify the
exchange regime with steps towards a more market-determined exchange rate.
Directors supported the planned fiscal consolidation measures and urged the authorities to
implement them in full. In view of high public and publicly guaranteed debt and sizable
contingent liabilities, and to support the stabilization effort, Directors recommended acceleration
of fiscal consolidation by saving the bulk of anticipated revenue overperformance in 2011. ver
the medium term, fiscal deficits need to be reduced further to close to pre-crisis levels.
Directors noted the increasing risks in the financial sector and stressed the need for timely
action to help safeguard financial stability in the wake of rapid credit growth and potential
vulnerabilities from connected lending. They urged the authorities to increase buffers in the
financial system while steadfastly enforcing existing regulations. Weak banks should be
restructured or merged with stronger entities, while protecting small depositors and taking care
to avoid system-wide repercussions. Directors encouraged efforts to improve coordination
among supervisory agencies, set up an effective crisis management framework, and prepare
contingency plans. They also encouraged addressing longstanding safeguards assessment issues
and AML/CFT deficiencies. Directors welcomed the authorities request for an FSAP.
Directors observed that greater efforts to meet international standards regarding the quality,
timeliness, and coverage of data collection and publication, and to improve communications with
markets will help reduce uncertainty and enhance Vietnams economic potential.


Vietnam: Selected Economic Indicators, 2007-12


Est. Projections
2007 2008 2009 2010 2011 2012

utput
Real GDP (percent change)
8.5 6.3 5.3 6.8 6.1 6.8
Saving and investment (in percent of GDP)

Gross national saving
33.3 27.8 31.6 34.3 32.4 33.2
Private
27.0 20.2 27.0 28.6 27.2 27.7
Public
6.3 7.6 4.5 5.7 5.2 5.5
Gross investment
43.1 39.7 38.1 38.1 36.4 37.1
Private
32.6 29.9 23.9 26.2 27.4 28.2
Public
10.6 9.9 14.2 11.9 9.0 8.9
!rices (percent change)
CPI (period average)
8.3 23.1 6.7 9.2 16.6 7.8
CPI (end of period)
12.6 19.9 6.5 11.8 13.8 6.2
Core inflation (end of period)
8.0 16.3 6.1 8.8 ... ...
GDP deflator
8.2 22.1 6.0 11.9 14.5 7.1
eneral government finances (in percent of !)
Revenue and grants
28.7 29.0 26.7 28.2 27.8 28.1
Expenditure
31.2 30.2 35.7 34.6 31.7 31.9
Current
20.3 19.7 20.9 21.2 21.8 22.0
apital 10.9 10.5 14.7 13.5 9.9 9.8
verall balance
1
-2.5 -1.2 -9.0 -6.4 -3.9 -3.8
Public and publicly guaranteed debt (end of period)
44.6 42.9 51.2 52.8 51.5 51.0
Money and credit (percent change, end of period)
Broad money (M2)
46.1 20.3 29.0 33.3 20.3 19.8
Credit to the economy
53.9 25.4 39.6 32.4 19.2 15.1
Interest rates (in percent, end of period)
Nominal three-month deposit rate (households)
7.8 8.1 10.7 11.6 ... ...
Nominal short-term lending rate (less than one year)
11.8 11.5 12.7 14.0 ... ...
Balance of payments (in percent of !, unless otherwise
indicated)

Current account balance (including official transfers)
-9.8 -11.9 -6.6 -3.8 -4.0 -3.9
Exports f.o.b.
68.3 69.4 61.3 69.7 75.4 80.6
Imports f.o.b.
82.9 83.6 70.2 76.6 81.8 87.0
Capital and financial account
15.4 14.0 12.2 10.7 8.9 8.6
Gross international reserves (in billions of U.S. dollars, end of
period)
2

21.0 23.0 14.1 12.4 14.0 22.0
In months of prospective GNFS imports
3.0 3.8 1.9 1.4 1.4 1.9
Total external debt (end of period)
3
32.4 33.4 41.6 42.3 41.6 41.1
Nominal exchange rate (dong/U.S. dollar, end of period)
16,017 17,483 18,479 19,498 ... ...
Nominal effective exchange rate (end of period)
4
91.1 92.0 80.8 78.8 ... ...
Real effective exchange rate (end of period)
4
106.0 125.8 115.9 114.0 ... ...
Memorandum items:
GDP (in trillions of dong at current market prices)
1,144 1,485 1,658 1,981 2,408 2,754
GDP (in billions of U.S. dollars)
71.1 90.3 93.2 103.6 118.6 128.5
Per capita GDP (in U.S. dollars)
835 1,048 1,068 1,174 1,327 1,422

Sources: Vietnamese authorities; and IMF staff estimates and projections.
1
Excludes net lending of the Vietnam Development Bank.
2
Excludes government deposits.
3
Uses interbank exchange rate.
4
2000 annual average=100.

1
Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with
members, usually every year. A staff team visits the country, collects economic and financial
information, and discusses with officials the country's economic developments and policies. n
return to headquarters, the staff prepares a report, which forms the basis for discussion by the
Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the
Board, summarizes the views of Executive Directors, and this summary is transmitted to the
country's authorities. An explanation of any qualifiers used in summings up can be found
here:http://www.imf.org/external/np/sec/misc/qualifiers.htm.