2015 In Review
2015 has been a year of solid growth with low inflation. Exports, FDI and domestic demand have all been strong, although growth in manufacturing and exports has moderated towards year-end, reflecting slowing external demand. Agriculture has been affected by drought and arable land salinization in early 2016. Rising imports have caused the current account surplus to reduce. International reserves declined in H2 2015, before recovering in early 2016.
Although government revenues have been rising strongly, expenditure has been higher than expected and public debt has risen sharply. With inflation falling for most of last year, monetary policy has been accommodative and credit growth has been robust. However, liquidity conditions tightened towards the end of 2015, as global financial volatility increased and the exchange rate regime was made more flexible.
2016 Outlook
For 2016, growth is expected to slow to around 6%, as the drought impacts agriculture and external demand weakens. Inflation is expected to rise moderately, reserves are expected to increase to around two months of imports, and public debt is expected to reach c. 62% of GDP.
Whilst the near-term outlook is broadly positive, the IMF sees downside risks from high and rising public debt, slow progress in NPL resolution within the banking system, the drought, and the more challenging external environment. On the other hand, the IMF sees upside opportunities should recently signed trade agreements be implemented rapidly.
Executive Board Assessment
The Board has commended Vietnam’s recent economic performance and sees the outlook as broadly favourable. However, it cautions risks exist mainly from rising public debt, rapid credit growth and slow banking sector reforms.
It has underscored that growth-friendly fiscal consolidation is key to reversing the rise in public debt and creating space for critical social and development expenditures, and it has urged the government to take steps to reduce the fiscal deficit to 3% of GDP by 2020. On the revenue side, it has suggested rationalizing tax exemptions and incentives, broadening the tax base and strengthening revenue administration. It also sees scope to use equitisation receipts to fund the deficit. On the expenditure side, it advocates rationalising the public wage bill and improving spending efficiency.
The Board supports Vietnam’s current monetary stance and welcomes the shift to a more flexible FX regime. It suggests there is a need to continue to build reserves and to strengthen the monetary policy framework—particularly by shifting gradually towards using inflation as the nominal anchor.
On credit, the Board has welcomed proposals to tighten macro-prudential policy and has suggested further tightening might be needed. It stresses the need for further banking sector reforms, including measures to resolve NPLs, to recapitalize banks by existing shareholders, to enhance risk management, governance and supervision, and to adopt international reporting standards.
Finally, the Board has encouraged the government to intensify the pace of reforms to boost productivity. It welcomes progress on the legal framework for SoE reforms, but is advocating further steps to improve transparency and level the laying field with the private sector. It is also recommending improvements be made in education and skills development.
Please use the following link to read the full text of the press release posted to the IMF website:
http://www.imf.org/external/np/sec/pr/2016/pr16307.htm
