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IMF: Stability and growth return

Released at: 08:08, 26/06/2015

IMF: Stability and growth return

Mr. Sanjay Kalra, the IMF Resident Representative, discusses macro-economic and banking sector issues.

Growth and macroeconomic stability

Since the adoption of Resolution No. 11 in early 2011, Vietnam has regained its macro-economic stability and there are also signs 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 for an extended period now, 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, the resolution of non-performing loans (NPLs), and in State-owned (SOE) equitization. Several international ratings agencies have recognized these achievements and upgraded Vietnam’s sovereign rating.

All of 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.

Macro-economic policies

Appropriate macro-economic policy settings have played an important role in regaining and preserving macroeconomic stability since 2011.

The State Bank of Vietnam (SBV) has reduced policy and other interest rates in the banking system as inflation has fallen. This has helped to significantly reduce funding costs 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 Vietnam dong. Small, calibrated deprecations have helped in keeping the currency competitive. The recent 1 per cent adjustment to the official exchange rate and the SBV’s determination to maintain it at the current level should be seen in this context.

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.

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.

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.

The introduction of the Vietnam Asset Management Company (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, the 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 the disposition of collateral in the distressed asset market need to be resolved.

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.

Budgetary provisions need to be made for the cost of bank recapitalization (and SOE restructuring and reforms, including the consequences of possible labor redundancies). International experience shows that banking reforms typically involve significant contingent liabilities that have to be eventually borne by the budget. This will especially be the case for State-owned commercial banks.

A considerable part of banking sector loans are to 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.

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