IMF Executive Board Concludes 2007 Article IV Consultation with Vietnam
Public Information Notice (PIN) No. 07/136
November 21, 2007
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On October 26, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Vietnam.
Vietnam has recorded continued strong economic performance since the conclusion of the last Article IV consultation. GDP growth rose to 8.2 percent in 2006, with non-oil exports remaining an important engine of growth. Private investment has also expanded briskly, led in large part by accelerated foreign direct investment (FDI) disbursements in the wake of Vietnam’s historic World Trade Organization (WTO) accession. Industrial activity, retail sales, and trade data point to a continued strong expansion so far in 2007.
However, rising inflation points to tightening capacity constraints. Inflation picked up to 8.4 percent (y/y) as of July 2007, up from 6.6 percent in late 2006. While this pick-up was due partly to food supply shocks, rising world commodity prices, and overdue adjustments in administered prices, Vietnam’s core inflation has remained on an upward trend, and its inflation seems higher and more entrenched than in other countries in the region.
The balance of payments has remained sound. Import growth picked up to 30 percent (y/y) during the first seven months of 2007, but high oil prices, booming non-oil exports, and buoyant remittances helped to restrain the current account deficit. With rapidly growing FDI and portfolio inflows, gross official reserves rose from US$11½ billion at end-2006 to around US$19 billion (3½ months of imports) as of end-May 2007.
The surge in reserves has contributed to an easing of monetary conditions. Despite increased sterilization, the growth of overall credit to the economy picked up from 25 percent in 2006 to 35 percent (y/y) as of end-May 2007. Reserve requirements on bank deposits were virtually doubled from June 2007 (to a range of 4 to 10 percent), and banks’ securities-related lending made subject to a cap equivalent to 3 percent of total loans. Interbank rates and real time deposit rates, however, have remained low.
The overall fiscal deficit was lower than budgeted in 2006, but the budget plan for 2007 suggests that the fiscal stance appears set to be eased. A better-than-expected revenue outturn, together with slow implementation of off-budget investment plans, helped to compress the overall deficit to 3.8 percent of GDP. However, if the government fully implements its plans for 2007, the fiscal deficit could widen to well over 7 percent of GDP in 2007, with the non-oil deficit rising by at least 1-1½ percentage points of GDP.
Vietnam’s exchange rate continues to be pegged de facto to the U.S. dollar, with the dong/U.S. dollar rate depreciating by about 1 percent a year. In January 2007, in the face of large capital inflows, the trading band of the dong versus the U.S. dollar was widened from +/-0.25 percent to +/-0.5 percent around the daily reference rate set by the State Bank of Vietnam (SBV), and the dong was temporarily allowed to appreciate modestly. However, this appreciation has been more than reversed since March. The nominal effective exchange rate (NEER) of the dong has depreciated by about 8 percent since end-2005, but the real effective exchange rate (REER) has been broadly stable, and remains close to its long-run average.
The improved investment climate generated by WTO accession contributed to an unprecedented boom in the stock market. The Ho Chi Minh City Stock Market Price Index rose by 144.5 percent in 2006, and by another 51 percent in early 2007, before receding by about 20 percent during March-July. A rapid expansion of the number of listed companies spurred rising foreign and domestic investment in shares, with the latter partly financed by local banks. The stock market’s capitalization soared from US$0.5 billion at end-2005 to around US$18 billion (25 percent of GDP) as of end-July 2007.
The near-term outlook remains broadly favorable, and Vietnam has good prospects for sustained growth and poverty reduction over the medium term, provided that the government can take timely action to rein in demand pressures. GDP is projected to expand by about 8-8¼ percent in 2007-08, underpinned by continued strong growth in exports, investment, and private consumption. The increase in domestic demand would likely lead to a widening of the current account deficit to 3-3½ percent of GDP, but that deficit would continue to be comfortably financed with official development assistance, FDI, and other private capital inflows.
However, this favorable outlook is subject to risks. Large foreign exchange inflows could prevent an effective tightening of monetary policy, and continued rapid credit growth, together with a weak regulatory environment, could threaten domestic financial stability. On the fiscal front, large increases in public wages and pensions, and heavy on-lending to state-owned enterprises (SOEs), could compound inflationary pressures, and lead to a rapid accumulation of public debt. Insufficient improvement in banking sector and SOE governance, and continued state-sector dominance of key industries, could pose additional risks, as sub-optimal lending and investment by these sectors would weaken the efficiency of investment and possibly place additional future burdens on the budget.
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