IMF praises Vietnam’s macroeconomic stability

The IMF Executive Board released its Article IV consultation with Vietnam on August 9, saying that the export sector is performing well—especially foreign-invested enterprises—but the domestic sector, though improving, has yet to find a solid footing because of several factors, including low productivity, structure of resource allocation, impaired bank balance sheets, and inefficiency in several state-owned enterprises (SOEs).

Credit growth has picked up modestly in real terms, mostly concentrated in the export-oriented and agricultural sectors. Headline inflation has declined significantly, but underlying pressures persist, said the IMF.

The current account surplus surged to US$9.1 billion in 2012 from US$0.2 billion in 2011 given a slowdown in imports and the strong export performance.

The exchange rate has been stable, and gross international reserves more than doubled in February 2013 from end-2011, although they are still inadequate at about 2½ months of prospective imports.

According to the IMF, during the next two years, the current account surplus is expected to remain sizable, and foreign direct investment (FDI) inflows would remain strong, supporting international reserves. This outlook depends on an improvement in the global economy, broadly unchanged monetary and exchange rate policies, and a measured withdrawal of fiscal stimulus.

The authorities have made significant progress in macroeconomic stabilization and containing vulnerabilities in the banking sector and advancing reforms in the SOE sector. Calm has returned to financial markets after the State Bank of Vietnam (SBV) provided liquidity and facilitated the merger of several small, weak banks over the past two years.

Moreover, the IMF said, to reduce bank balance sheet risks from gold speculation, the SBV has also implemented a measure to stop gold deposit taking and lending activities. While some weak banks cannot meet the required conditions to access the interbank market and must rely on the SBV’s refinancing facility and open market operations for liquidity support when needed, the interbank market’s function has largely been restored. Banking system liquidity has eased, as evidenced by higher deposit growth and significantly lower funding costs.

IMF Executive Directors commended the authorities for significant progress in stabilizing the economy over the past two years, but cautioned that Vietnam faces important internal and external risks in the period ahead.

They underscored the importance of reforming SOEs to enhance Vietnam’s growth potential and reduce fiscal risks. The establishment of a high-level steering committee would be critical to foster SOE restructuring. Equitization of SOEs could be accelerated, and accountability and financial discipline strengthened. Directors encouraged the creation of a level playing field for private and state firms, ensuring equal access to capital, and introducing greater competition into state-dominated sectors, including infrastructure, they added.