WB calls for prudence in economy driving, reform of SOEs

HANOI, May 24, 2012. The World Bank (WB) has just warned that Vietnam should prudently weigh the two goals of stabilizing the macro-economy and stimulating the economic growth on the verge of downturn.

Victoria Kwakwa, WB country director for Vietnam, said that the economy has no choice but to either grow or remain stable. The country leaders must balance these two objectives and this is a challenge for Vietnam.

“Previously, we said economic stability is the main target, and now economic stability needs greater focus,” she said.

WB chief economist added: “Growth and inflation are not a tap to turn on and off at any time. It is a game of balance.”

Such a warning is given when the Government has recently issued Resolution 13 with a VND29-trillion bailout package to support the economy that only grew 4% in the first quarter, the lowest level in the same period of many years, except 2009.

This move of the Government is in response to the stagnant economy as a result of Resolution 11 released in February last year.

Kwakwa observed that the macro-economic indices are going in the right direction thanks to Resolution 11, but inflation of over 10% is still high. Therefore, it is not a right time to remove all macro-economic stabilization policies.

In the East Asia and Pacific Economic Update report released on Wednesday, WB said the near-term policy challenge for Vietnam is to maintain macro-economic stability and restore confidence among investors, while addressing longer-term structural reforms.

The report stated the largest source of uncertainty to debt sustainability comes from State-owned enterprises, whose implicit obligations are not captured under the Government and the Government-guaranteed debt statistics. No reliable estimate of such liabilities is available, which limits the Government’s ability to manage associated risks.

Commenting on the case of Vinalines, Kwakwa said: “When the Vinashin incident occurred, people said that there would be similar cases. Now, it is true that there are other Vinashins. This is a great problem of the State economic sector.”

Therefore, the Government needs to take further actions to restructure State-owned enterprises to hedge against the risks to the financial sector and the entire economy, she said.

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Additional background

According to the Committee for Enterprise Reform and Development and the Ministry of Planning and Investment, state-owned enterprises hold 70% of the total real property in the economy, account for 20% of investment capital throughout society, and devour a staggering 60% of the credit in the commercial banking system, 50% of state investment capital and 70% of official development aid capital.

However, these same enterprises are responsible for only 25% of total sales revenues, 37% of pre-tax profits and 20% of the value of national industrial output. The rate of credit use by state-owned businesses to generate revenue is definitely higher than that of other enterprises. It takes VND2.2 in capital to create VND1 in revenue compared to VND1.2 in capital spent by businesses outside the state corporate sector and VND1.3 in capital expenditures by foreign enterprises operating in Vietnam.


Executive Summary: World Bank East Asia and Pacific Update May 2012

Press Release: World Bank East Asia and Pacific Update May 2012

Vietnam Outlook: World Bank East Asia and Pacific Update May 2012

Vietnam Economic Indicators: World Bank East Asia and Pacific Update May 2012