As the current National Assembly session proceeds, the Government of Vietnam should maintain a steadfast focus on maintaining hard-won macroeconomic stability even as it seeks higher growth. Monetary policy must maintain a supportive stance while exchange rate stability in the near term would help maintain confidence in the dong. A growth friendly fiscal consolidation is needed to reduce the public debt to GDP ratio. Structural reforms in the banking and SOE sectors need to be accelerated to make growth sustainable through efficiency gains.
1. Growth and macroeconomic stability
Since the adoption of Resolution 11 in early 2011, Vietnam had regained macroeconomic stability. There are also signs now that growth is recovering.
Real GDP growth is rising gradually, supported by robust exports and foreign direct investment. Domestic demand also seems to be recovering, with higher capital formation and a slight rebound in consumption. There are signs that the real estate and construction sectors, which had been lagging, are recovering. Inflation has remained in the low single digits now for an extended period, partly assisted by the decline in global oil prices. The exchange rate has been stable since 2012, the external current account balance has been in surplus and international reserves have increased substantially from the low levels of 2011. Progress is being made in the reform of the banking sector, resolution of NPLs, and SOE equitization. Several international rating agencies recognized these achievements and upgraded Vietnam’s sovereign rating.
All these achievements need to be preserved and further solidified. With the recovery in growth, the focus should still be on stability, especially in the important years of 2015 and 2016. The experience of 2010 and 2011 must not be repeated, and it needs to be demonstrated decisively that Vietnam has broken the “stop-and-go” cycles of growth and instability with a mature implementation of macroeconomic policies and acceleration of structural reforms as it has graduated into middle income country status. Stability with lower—but high quality, inclusive and sustainable—growth is preferable to macroeconomic instability with higher growth.
2. Macroeconomic policies
Appropriate macroeconomic policy settings have played an important role in regaining and preserving macroeconomic stability since 2011.
The SBV has reduced policy and other interest rates in the banking system as inflation has fallen. This has helped to significantly reduce funding cost for businesses from the very high levels of 2011. At the same time, a stable exchange rate has provided a valuable nominal anchor and helped to improve confidence in the dong. The small, calibrated step deprecations have helped towards keeping the dong competitive. The recent one percent adjustment of the official exchange rate and the SBV’s determination to maintain the official exchange rate at the current level should be seen in this context. Subject to a surplus in the overall balance of payments, this goal should be achievable without undue pressures on international reserves. At the same time, a tempering of growth which moderates the growth of imports would be helpful towards achieving this objective. On a related issue, the use of international reserves to finance public investment should be strictly avoided, and the SBV’s strong unwillingness to this proposal is well grounded. Vietnam still needs to further build up external buffers to ensure that it is in strong position to withstand external shocks. Over the medium term, greater flexibility in the exchange rate would provide an important shock absorber to external shocks and global volatility.
On the fiscal front, budget deficits have been relatively high and the public debt to GDP ratio has increased in recent years. In this context, the recent strong performance of budget revenue collection is welcome. Some of this is due to better collection of VAT, corporate income and trade taxes, and higher SOE dividend payments. In part, it could also be reflecting the improvement in the economy. Looking forward, the continued economic recovery should help to sustain revenue performance. But more can be done by broadening the tax base, making SOE dividend payments to the budget permanent, strengthening tax administration, and reducing exemptions. On the expenditure side, the process of closely reviewing the efficiency of public investment, initiated in 2011, must continue. The current restriction on the MOF to issue government bonds only at longer maturities is proving to be counterproductive and needs to be reviewed in the face of low market appetite.
3. Banking sector reforms and NPL resolution
After almost three years of bank restructuring, several gains have been made. Systemic risk in the banking sector has been contained and reduced, liquidity has improved significantly, interest rates have fallen, and steps have been taken to reduce and resolve NPLs.
Operationalization of the VAMC in 2013 was an important first step in recognizing that NPLs in the banking system needed a systemic approach (regardless of the varying estimates of NPLs—by commercial banks, SBV and others—which depend on incentives and specific assumptions while there are significant data quality issues). Since then, the VAMC has been active in purchasing NPLs from banks but the pace needs to be accelerated. Banks have an extended period to provision against NPLs sold to the VAMC, while significant legal hurdles remain for the transfer of loan titles and collateral which impede NPL resolution. To move this process forward quickly, the VAMC needs greater authority over the disposition of collateral and legal impediments to disposition of collateral in the distressed asset market need to be resolved. The VAMC also needs a larger pool of resources—financial and human—to process NPLs that enter the distressed assets market. Such a market in turn needs enough buyers and sellers to be functional, and may need external participation and expertise.
Several bank mergers have taken place or are planned for 2015, and this would reduce the administrative burden on the SBV. Nevertheless, while the merger of weak banks solves immediate problems, a comprehensive bank resolution strategy still needs to be clearly articulated. These plans should be based on thorough on-site bank examination which should reveal the true extent of NPLs and recapitalization needs. The plans should differentiate between illiquid and insolvent banks, force existing shareholders to take losses before receiving new capital injections, and dispose of bad assets. The SBV initiative to take over two weak banks is welcome, but should be only the first step towards a proper framework for bank resolution and liquidation through which market discipline is strengthened from the perspectives of both shareholders and depositors.
Budgetary provisions need to be made for the cost of bank recapitalization (and SOE restructuring and reforms, including consequences of possible labor redundancies). International experience shows that banking reforms typically involve significant contingent liabilities which have to be eventually borne by the budget. This will especially be the case for state-owned commercial banks.
A considerable part of the banking sector loans are to the Economic Groups (EGs) and SOEs. Banking system problems cannot be addressed without dealing with the problems of the banks’ borrowers. Therefore, reform of EGs and SOEs is important. As a first step, the true financial condition of the EGs and SOEs must be disclosed to the public, including their audited income statements and balance sheets, and their borrowings from the banking system. These enterprises use public money for their operations and the public needs to be informed of their operations. Once the true financial condition of these enterprises has been revealed, steps can be taken to improve their operations and governance structures. These plans must be formulated and implemented in a time bound manner.
Sanjay Kalra
IMF Resident Representative for Vietnam