Vietnam’s growth slowed in the first half of 2011, as the government’s priority turned to containing inflation and maintaining macroeconomic stability. In early February the government introduced a stabilization package called Resolution 11, which includes a wide range of monetary, fiscal and structural policy reforms intended to fight inflation, stabilize the economy and ensure social safety. Following its implementation, both deposit and lending rates have increased, and credit growth has slowed as commercial banks have curtailed new loans, mainly to real estate and securities trading. Fiscal policy has been tightened by reducing non-wage recurrent spending by 10 percent and cancelling or postponing less urgent capital expenditure, amounting to an estimated 80 trillion dong or about 3 percent of GDP. Activities in the construction sector have slowed down considerably as a result of this, containing the real estate bubble and reducing the high cost of inputs. The Manufacturing Production Index rose 10.7 percent year on year (y-o-y) in August 2011, but over the same period, the inventory of manufacturing products increased by 17.8 percent. The real GDP growth rate was 5.6 percent in the first half of 2011, and is expected to be about 5.8 percent for the whole year, compared with 6.8 percent in 2010.
Slower than expected growth and renewed signs of macroeconomic risks will test the confidence of investors and the commitment of authorities to macroeconomic stability. In a recent meeting with selected development partners, the Prime Minister of Vietnam reaffirmed the government’s commitment to continue to implement Resolution 11. He noted that controlling inflation will remain the government’s top priority, and that Vietnam would not “chase after” high growth. A target of single-digit inflation and moderate growth of 6.5 percent have been set for 2012. The Prime Minister highlighted a number of priorities for the remainder of 2011, including: (i) continued tight monetary and credit policy; (ii) a prudent fiscal stance; (iii) accelerating the restructuring of the SOE and banking sectors; and (iv) ensuring social security and welfare to maintain political stability for the country.
Vietnam’s stabilization gains remain fragile and any premature loosening of policy will risk repeating the recent pattern of recurring instability. Vigorous implementation of fiscal consolidation and structural elements of Resolution 11, including restructuring and reform of the state enterprise sector and the financial sector should help Vietnam return to a more sustainable macroeconomic environment while laying the foundations for greater efficiency and productivity to drive medium and longer term growth. But undertaking these deep, structural reforms will require strong leadership, careful implementation, support from development partners and foreign investors, and some short-term pains.