* How do you evaluate achievements and experiences of the Governmentin realising the first three-year implementation of the five-year planfor 2011-2015?

We evaluate below achievements ofthe 2011-15 Five-Year Plan (FYP) within the mandate of the IMF. Thismandate relates to macroeconomic policies and structural reforms.

Growth in Vietnam has been lower in 2011-13 compared to the targetsset in the FYP. The slowdown in the global economy has contributed tothis outcome. Domestic imbalances and inefficiencies which have built upover several years have been important as well.

2011 was a difficult year in which inflation peaked at over 20 percent,the exchange market was unstable, and international reserves fell touncomfortable levels. The adoption of Resolution 11 in February 2011 wasan important step towards regaining macroeconomic stability.

Vietnam regained macroeconomic stability in 2012 and 2013. Headlineinflation declined to single digits, the official exchange rate wasstable, and international reserves rose. Exports performed well, with astrong contribution from foreign-invested enterprises. The currentaccount moved into a substantial surplus in 2012, supported byremittances. FDI inflows remained robust. The SBV reduced policy ratesby a total of 800 basis points since March 2012. Banking systemliquidity eased, with higher deposit growth and lower funding costs. Thedecline in inflation allowed for a reduction in policy, deposit andlending rates. Calm returned to financial markets after the State Bankof Vietnam (SBV) provided liquidity and facilitated the merger ofseveral small, weak banks in late 2011, 2012 and 2013.

However, growth slowed to 5.2 percent in 2012 (6.2 percent in 2011).Real GDP growth is expected to rise somewhat in 2013. The domesticsector, though improving, has yet to find a solid footing because ofseveral factors, including low productivity, structure of resourceallocation, impaired bank and corporate balance sheets and inefficiencyin several economic groups (EGs) and SOEs.

Problemsremain in the real estate sector which is still reeling from the burstof a property bubble, the result of several years of excessive creditgrowth and overinvestment. In the financial sector, weak banks stillcannot access the interbank market and must rely on the central bank’sstanding facilities for liquidity support.

Moreover,financial fragility continues to hamper the ability of banks tointermediate credit. Credit growth picked up only modestly in realterms, mostly concentrated in export-oriented and agricultural sectors,despite a significant decline in lending rates. The budget deficitincreased in 2012 and 2013, with lower than planned revenue collectiondue to the weak economy, tax reduction and deferrals.

* Would you please give your comments on the Government’s solutionsto stabilizing the macroeconomy, curbing inflation and restructuring theeconomy?

The Government’s efforts in regainingmacroeconomic stability have been successful. Low inflation and a stableexchange rate are very important elements of this achievement. TheSBV’s role has been key in monetary and exchange rate policyimplementation. The SBV has, appropriately, reduced policy rates in linewith declining inflation. Stabilisation of the gold market is animportant part of stabilising the foreign exchange market and,therefore, the value of the dong. In the financial sector, thegovernment’s bank restructuring plan is ambitious. It is now importantthat its provisions are fully implemented to achieve the objectives ofdeveloping the “modern, safe, sound, and efficient” operations of thefinancial sector compliant with “international banking standards andpractices”. Specifically, operationalisation of the Vietnam AssetManagement Company (VAMC) is a step, but only the first step, in theright direction.

* Would you please give yourrecommendations for the Vietnamese Government to achieve objectives andtasks for the economic development in the years 2014 and 2015?

The Government must not weaken it resolve to maintain macroeconomicstability. Calls for a loosening of macroeconomic policies often arisein many countries under the circumstances that Vietnam is nowundergoing. Sound policy management stands up to these pressures. At thesame time, it takes credible, visible, and measurable actions. Thechoices are admittedly not easy, but the government must move quicklyand decisively to implement the reform agenda and meet the publicexpectations.

Following this approach may well involvesome cost and sacrifice in the short run. The cost would be in terms oflower growth and/or a longer period of difficulties in the enterprisesector. But if this cost is borne in the short run, the economy canemerge stronger over the longer term. The economy is right sizing itselfafter an extended period of very rapid and unsustainable credit growthwhich generated excessive borrowing by the corporate sector, loweredlending standards in the banking system, fueled a real estate pricebubble and created excess supply in the real estate and constructionsectors.

These developments have created largeimbalances in the balance sheets of banks and corporates. Theseimbalances will take some time to unwind, as we have seen in severalother countries around the world.

Monetary andexchange rate policies: The SBV must continue to monitor closelyinflationary pressures, including those arising from global food andfuel prices. Benefits from further policy rate cuts are likely to belimited while banking sector weaknesses persist, can jeopardise hard wongains, and reduce confidence in the government’s determination tomaintain macroeconomic stability. The level of international reserveshas risen, but needs to be larger to comfortably deal with large shocks.

Fiscal policy: Vietnam should revert back to apath of fiscal consolidation. On the revenue side, it would be prudentto refrain from further tax cuts and require profitable SOEs to paydividends. Social spending should be maintained while public investmentis prioritised and reduced to sustainable levels. The budget must makeroom to cover contingent liabilities and provide for the cost ofstructural reforms to speed up the process.

Structural reforms: Much remains to be done and on an accelerated pace.Reform delays would undermine confidence, raise the likelihood ofincreased contingent liabilities, prolong the productivity stagnation ofthe past several years, and keep growth at levels insufficient tocreate jobs for a rapidly growing labor force and raise livingstandards.

Banking sector reform is a top priority.Addressing weaknesses—poor asset quality, high level of NPLs,underprovisioning, and undercapitalisation—is critical to creating anenvironment in which the banking sector intermediates national savingsto productive investment. Problems need to be addressed at all banks,large and small, state-owned or joint stock. More broadly, efforts needto be made to further develop capital markets, to supplement bankingsystem, provide alternative risk-return opportunities to investors,attract stable foreign portfolio inflows, and to reduce the holdings ofgold as a store of wealth.

The VAMC should notbecome a vehicle for extended liquidity support for insolvent banks asthis would delay necessary banking sector recapitalisation. Once theNPLs and recapitalisation needs have been determined, recapitalisationmust be done promptly together with full implementation of NPL workoutschemes. The government needs to overcome its reluctance to use publicfunds to recapitalize state-owned commercial banks, unwind insolventbanks in an orderly fashion, and accept more substantial privateparticipation in the banking system.

The SBV mustsignificantly enhance its supervisory capacity over banks, effectivelyimplement current guidelines and end forbearance towards banks that donot meet prudential norms. The SBV must be allowed to do this with moreoperational independence. A strong SBV and banking system are in theinterest of the whole economy.

Reform of EGs andSOEs is critical. The true financial condition of the EGs and SOEs mustbe disclosed to the public, including their audited income statementsand balance sheets, and their borrowings from the banking system. Theseenterprises use public money for their operations and the public needsto be informed of their operations. Once the true financial condition ofthese enterprises has been revealed, steps can be taken to improvetheir operations and governance structures. These plans must beformulated and implemented in a time bound manner.

Restructuring public investment is essential to ensure that thetaxpayers receive a good “return” on their contribution to the budget.Better schools and health facilities create conditions for improvementsin human capital. Better infrastructure reduces the cost of doingbusiness, among other things.

🧸 Successfully designingand implementing a broad set of policies—staying the course onmacroeconomic stabilisation while restructuring banks and SOEs—will havea noticeable impact. Vietnam is a country endowed with severaladvantages, including a young and hardworking population. Utilisingthese endowments to achieve a high demographic dividend over the nextdecade is the responsibility of Vietnam ’s policymakers.-VNA