The Executive Board of the International Monetary Fund (IMF) has concluded its Article IV Consultation with Vietnam.
It holds bilateral discussions with members under Article IV of its Articles of Agreement, usually every year. A staff team visits the country, collects economic and financial information, and discusses the country’s economic developments and policies with officials. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
Trade tensions and financial volatility affecting emerging economies in 2018 were also felt in Vietnam, it found, including through a stock market correction. Nevertheless, the economy has remained resilient to date and growth reached a ten-year high of 7.1 per cent in 2018. The expansion has been broad-based, fueled by healthy growth in incomes and consumption among the growing and urbanizing middle class, a strong harvest, and a surging manufacturing sector. Inflation averaged 3.5 per cent in 2018.
The strong economic momentum is expected to continue in 2019, aided by competitive labor costs and other strong fundamentals, including a diversified trade structure and recently-signed free trade agreements, which are spurring reforms. However, a soft landing in growth is expected, to 6.5 per cent in 2019 and over the medium term, reflecting weak external conditions. Inflation is expected to pick up slightly this year on the back of administered price increases but should remain below authorities’ 4 per cent target.
Macroeconomic policies have been tightened in recent years. A reduction in the State budget deficit and strict limits on new government guarantees and robust growth during 2016-2018 contributed to reducing public debt to 55.5 per cent of GDP at end-2018, from 60 per cent at end-2016. The State Bank of Vietnam (SBV) has continued to reduce credit growth, but liquidity was again ample in 2018, aided by external inflows and a growing capital market. The SBV is guiding banks to adopt Basel II standards in 2020 and developing plans to recapitalize systemic State-owned commercial banks. The external position in 2018 was substantially stronger than warranted by fundamentals. Authorities intervened in both directions to keep the Vietnam Dong (VND) within a narrow band and reserve accumulation continued.
Reforms continue along a wide front. The monetary and fiscal systems are being gradually modernized and blocks of shares in large State-owned enterprises (SOEs) continue to be offered for sale. The fight against corruption since 2016 has resulted in significant sentences, a new anti-corruption law has been approved, a Public Investment Management Assessment (PIMA) has been completed, and the AML/CFT system is about to be reviewed. But the list of reforms is even longer and the strong economy provides an opportunity for more ambitious reforms to level the playing field for the domestic private sector and increase investment by reducing administrative and licensing procedures and trade barriers. IMF staff remain engaged in a wide-ranging capacity development program with Vietnam.
Executive Directors commended Vietnamese authorities for their prudent policies, which have contributed to economic resilience and impressive growth amid rising trade tensions and external uncertainties. Directors welcomed authorities’ continued commitment to macroeconomic stability and wide-ranging reforms and agreed that policy priorities should continue to focus on building buffers, strengthening governance, and boosting productivity and private sector-led growth.
Directors welcomed authorities’ fiscal consolidation efforts, especially improvements in tax policy and administration, including higher environmental taxes, the tightening of government guarantees, and lower current spending, which helped reduce public and publicly-guaranteed debt.
The IMF welcomed the current monetary and credit policy stance, in particular declining credit growth, which is helping Vietnam cement macroeconomic stability. They encouraged authorities to continue to limit interventions to maintain orderly market conditions and efforts towards greater exchange rate flexibility while gradually building reserves. Directors called for reforms to reduce remaining barriers to investment, including improving access to land and credit, which would boost private investment and raise workplace productivity and growth. They looked forward to a well-sequenced modernization of the monetary framework with technical assistance from the Fund.
Directors noted ongoing reforms in the financial sector, including the shift of bank business models to lending to households and private firms, accompanied by more prudent aggregate credit growth limits and the deepening of bond and equity markets, which has reduced financial stability risks, improved the quality of financial intermediation and boosted economic growth. They welcomed the adoption of Basel II standards and encouraged swift recapitalization of systemic State-owned banks and the construction of a modern macroprudential framework to replace quantitative credit limits and deal with potential financial stability risks.
Directors welcomed the reforms to modernize economic institutions and improve governance. They highlighted that priority needs to be given to strengthening anti-corruption legislation further, reforming and improving oversight of SOEs, implementing PIMA recommendations, and improving statistical systems and data provision and transparency. Directors welcomed authorities’ plans to strengthen the AML/CFT regime and address any related issues to be identified by the forthcoming peer review by the Financial Action Task Force’s Asia Pacific Group.