Gov’t succeeds in regaining macroeconomic stability: IMF
He stressed the point in an exclusive interview with the Vietnam Government Portal on the occasion that Prime Minister Nguyen Tan Dung presented a report on the socio-economic situation in 2013, results of the first three-year implementation of the five-year plan in 2011-2015 and the tasks for 2014-2015 at the 6th session of the 13th National Assembly.
* How do you evaluate achievements and experiences of the Government
in realising the first three-year implementation of the five-year plan
for 2011-2015?
We evaluate below achievements of
the 2011-15 Five-Year Plan (FYP) within the mandate of the IMF. This
mandate relates to macroeconomic policies and structural reforms.
Growth in Vietnam has been lower in 2011-13 compared to the targets
set in the FYP. The slowdown in the global economy has contributed to
this outcome. Domestic imbalances and inefficiencies which have built up
over several years have been important as well.
2011 was a difficult year in which inflation peaked at over 20 percent,
the exchange market was unstable, and international reserves fell to
uncomfortable levels. The adoption of Resolution 11 in February 2011 was
an important step towards regaining macroeconomic stability.
Vietnam regained macroeconomic stability in 2012 and 2013. Headline
inflation declined to single digits, the official exchange rate was
stable, and international reserves rose. Exports performed well, with a
strong contribution from foreign-invested enterprises. The current
account moved into a substantial surplus in 2012, supported by
remittances. FDI inflows remained robust. The SBV reduced policy rates
by a total of 800 basis points since March 2012. Banking system
liquidity eased, with higher deposit growth and lower funding costs. The
decline in inflation allowed for a reduction in policy, deposit and
lending rates. Calm returned to financial markets after the State Bank
of Vietnam (SBV) provided liquidity and facilitated the merger of
several small, weak banks in late 2011, 2012 and 2013.
However, growth slowed to 5.2 percent in 2012 (6.2 percent in 2011).
Real GDP growth is expected to rise somewhat in 2013. 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 and corporate balance sheets and inefficiency
in several economic groups (EGs) and SOEs.
Problems
remain in the real estate sector which is still reeling from the burst
of a property bubble, the result of several years of excessive credit
growth and overinvestment. In the financial sector, weak banks still
cannot access the interbank market and must rely on the central bank’s
standing facilities for liquidity support.
Moreover,
financial fragility continues to hamper the ability of banks to
intermediate credit. Credit growth picked up only modestly in real
terms, mostly concentrated in export-oriented and agricultural sectors,
despite a significant decline in lending rates. The budget deficit
increased in 2012 and 2013, with lower than planned revenue collection
due to the weak economy, tax reduction and deferrals.
* Would you please give your comments on the Government’s solutions
to stabilizing the macroeconomy, curbing inflation and restructuring the
economy?
The Government’s efforts in regaining
macroeconomic stability have been successful. Low inflation and a stable
exchange rate are very important elements of this achievement. The
SBV’s role has been key in monetary and exchange rate policy
implementation. The SBV has, appropriately, reduced policy rates in line
with declining inflation. Stabilisation of the gold market is an
important part of stabilising the foreign exchange market and,
therefore, the value of the dong. In the financial sector, the
government’s bank restructuring plan is ambitious. It is now important
that its provisions are fully implemented to achieve the objectives of
developing the “modern, safe, sound, and efficient” operations of the
financial sector compliant with “international banking standards and
practices”. Specifically, operationalisation of the Vietnam Asset
Management Company (VAMC) is a step, but only the first step, in the
right direction.
* Would you please give your
recommendations for the Vietnamese Government to achieve objectives and
tasks for the economic development in the years 2014 and 2015?
The Government must not weaken it resolve to maintain macroeconomic
stability. Calls for a loosening of macroeconomic policies often arise
in many countries under the circumstances that Vietnam is now
undergoing. Sound policy management stands up to these pressures. At the
same time, it takes credible, visible, and measurable actions. The
choices are admittedly not easy, but the government must move quickly
and decisively to implement the reform agenda and meet the public
expectations.
Following this approach may well involve
some cost and sacrifice in the short run. The cost would be in terms of
lower growth and/or a longer period of difficulties in the enterprise
sector. But if this cost is borne in the short run, the economy can
emerge stronger over the longer term. The economy is right sizing itself
after an extended period of very rapid and unsustainable credit growth
which generated excessive borrowing by the corporate sector, lowered
lending standards in the banking system, fueled a real estate price
bubble and created excess supply in the real estate and construction
sectors.
These developments have created large
imbalances in the balance sheets of banks and corporates. These
imbalances will take some time to unwind, as we have seen in several
other countries around the world.
Monetary and
exchange rate policies: The SBV must continue to monitor closely
inflationary pressures, including those arising from global food and
fuel prices. Benefits from further policy rate cuts are likely to be
limited while banking sector weaknesses persist, can jeopardise hard won
gains, and reduce confidence in the government’s determination to
maintain macroeconomic stability. The level of international reserves
has risen, but needs to be larger to comfortably deal with large shocks.
Fiscal policy: Vietnam should revert back to a
path of fiscal consolidation. On the revenue side, it would be prudent
to refrain from further tax cuts and require profitable SOEs to pay
dividends. Social spending should be maintained while public investment
is prioritised and reduced to sustainable levels. The budget must make
room to cover contingent liabilities and provide for the cost of
structural reforms to speed up the process.
Structural reforms: Much remains to be done and on an accelerated pace.
Reform delays would undermine confidence, raise the likelihood of
increased contingent liabilities, prolong the productivity stagnation of
the past several years, and keep growth at levels insufficient to
create jobs for a rapidly growing labor force and raise living
standards.
Banking sector reform is a top priority.
Addressing weaknesses—poor asset quality, high level of NPLs,
underprovisioning, and undercapitalisation—is critical to creating an
environment in which the banking sector intermediates national savings
to productive investment. Problems need to be addressed at all banks,
large and small, state-owned or joint stock. More broadly, efforts need
to be made to further develop capital markets, to supplement banking
system, provide alternative risk-return opportunities to investors,
attract stable foreign portfolio inflows, and to reduce the holdings of
gold as a store of wealth.
The VAMC should not
become a vehicle for extended liquidity support for insolvent banks as
this would delay necessary banking sector recapitalisation. Once the
NPLs and recapitalisation needs have been determined, recapitalisation
must be done promptly together with full implementation of NPL workout
schemes. The government needs to overcome its reluctance to use public
funds to recapitalize state-owned commercial banks, unwind insolvent
banks in an orderly fashion, and accept more substantial private
participation in the banking system.
The SBV must
significantly enhance its supervisory capacity over banks, effectively
implement current guidelines and end forbearance towards banks that do
not meet prudential norms. The SBV must be allowed to do this with more
operational independence. A strong SBV and banking system are in the
interest of the whole economy.
Reform of EGs and
SOEs is critical. 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.
Restructuring public investment is essential to ensure that the
taxpayers receive a good “return” on their contribution to the budget.
Better schools and health facilities create conditions for improvements
in human capital. Better infrastructure reduces the cost of doing
business, among other things.
Successfully designing
and implementing a broad set of policies—staying the course on
macroeconomic stabilisation while restructuring banks and SOEs—will have
a noticeable impact. Vietnam is a country endowed with several
advantages, including a young and hardworking population. Utilising
these endowments to achieve a high demographic dividend over the next
decade is the responsibility of Vietnam ’s policymakers.-VNA