IMF Article IV Economic Update

The IMF Board has just published its most recent assessment of the health the Vietnamese economy under the Article IV consultation process.

Overall, it reports the economy is performing well, underpinned by strong manufacturing activity and FDI, robust domestic demand, and a rebound in agricultural output. Whilst inflation has risen, this is “due to increases in administered prices for health care and education.” Meanwhile, the current account surplus has rebounded, and international reserves have risen substantially.

The IMF Board has welcomed Vietnam’s “broad” reform agenda and its plan for “an appropriate amount of fiscal consolidation starting this year.” It also notes that some progress has been made on bank reform and on the legal framework for SOE reforms, although its says implementation in certain areas has been “sluggish.”

For 2017, growth is projected at 6.3% and headline inflation is expected to stabilize at around 5%, as administered prices continue to be adjusted. The current account surplus is expected to decline somewhat as imports strengthen.

Overall, the near-term outlook is “positive.”

There are downside risks associated with high public debt, slow NPL resolution, and a potentially more difficult external environment. The Board also comments that Vietnam needs to build a sustainable, modern economy before its demographic tailwinds fade.

On the upside, the Board thinks the implementation of the authorities’ “ambitious” reform agenda could raise growth potential and increase resilience to shocks. Fast implementation of the Vietnam-EU and other bilateral trade agreements would fuel exports and FDI.

Executive Board Assessment

Whilst commending Vietnam for achieving robust growth with low inflation, and for pushing ahead with its reforms, the Board notes that risks remain from the “slow pace” of banking sector reform, “continued rapid credit growth”, and limited fiscal and external buffers. They have therefore encouraged the authorities to expand the scope of reforms further.

Fiscal Policy—Vietnam’s fiscal tightening stance is seen as “appropriate” and “growth friendly.” The IMF concurs with a plan to reduce the deficit to 3½% GDP by 2020, and to keep public debt below 65% of GDP. Specifically, the Board has commented on:

the importance of revenue-enhancing measures (eg. unifying VAT rates, higher excise and environmental taxes, and a property tax)
the need to reduce exemptions and incentives, and to improve tax administration
ensuring efforts to raise cost recovery in public services are equitable, protect the poor, and raise service quality
the need to improve spending efficiency in order to create room for priority infrastructure and social spending

The IMF has also noted that its economic projections do not fully reflect the authorities’ consolidation targets, because more concrete measures need to be identified.

Monetary Policy—The Board thinks policy should remain on hold, but says a close watch should be kept on signs of rising core inflation. At the same time, it notes that

credit growth remains “rapid”, and would be more efficient if it were more market-based
greater exchange rate flexibility and a gradual shift to making inflation the anchor of policy would enhance resilience to external shocks
the external position is “substantially stronger than warranted by fundamentals and desirable policies” and should be addressed through stronger domestic demand and investment, a lower savings rate, and greater exchange rate flexibility

Banking Sector Reform—Whilst commending reforms made to date, the Board thinks they need to be accelerated and their scope broadened:

to include the development of a legal framework for bank resolution
to strengthen the Vietnam Asset Management Company
to strengthen debt enforcement and market discipline
to enhance the Anti-Money Laundering / Counter-Financing of Terrorism framework and its implementation

Building a Modern Sustainable Economy—The working-age share of the population has already peaked in 2013 and, although it is starting from low levels, the share of the population aged 65 and over is expected to increase much faster in Vietnam than in most advanced economies. The IMF also notes that, compared to other countries, the challenges associated with ageing are likely to arise when Vietnam has still low levels of per capita income.

In the light of this, it is the Board’s view that “extensive” policy action is needed to reform institutions and raise potential growth before Vietnam’s demographic tailwinds fade. In particular, it highlights the need for reform of the SOE sector and the need to improve vocational and tertiary education.

(Vietnam’s long-term demographic challenges are outlined by the IMF in more detail in its report “Vietnam: Selected Issues”, which was also posted to its website at the start of July.)

Environmental Issues—Vietnam is commended for ratifying the Paris Agreement and for putting climate change at the centre of its Sustainable Development Goals. However, the Board has also suggested that higher environmental taxes and gradually raising energy prices “to fully price externalities associated with fossil fuels” can help promote a green, more resilient economy.

In its “Vietnam: Selected Issues” report, the IMF has commented in more detail on Vietnam’s vulnerability to climate change and how its resource-intensive development has resulted in significant, and potentially costly, environmental degradation and destruction of natural capital.

For more detailed information readers are referred to the following link to the IMF’s website, and also to a presentation on the IMF’s recent reports on the economy, which has been posted to the “Presentations” section of this website.

http://www.imf.org/external/country/VNM/index.htm