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Vietnam's economy back on track, says IMF
Publication Date : 13-08-2013
Vietnam regained macro-economic stability over the past year, but the economy faced potential risks in the coming months, according to an International Monetary Fund (IMF) report released late last week.
The export sector is performing well, especially foreign-invested enterprises, but domestic companies, though improving, have yet to find a solid footing.
Problems facing the domestic sector include low productivity, improper structure of resource allocation, impaired bank balance sheets and inefficiency in some state-owned enterprises (SOEs).
Credit growth has picked up modestly, mostly concentrated in the export-oriented and agricultural sectors.
Inflation has declined significantly but underlying pressures persist, with domestic and import-related fiscal revenue weakening during recent months.
The current account surplus surged to US$9.1 billion in 2012 from $0.2 billion in 2011, given a slowdown in imports and the strong export performance.
The exchange rate has been stable and gross international reserves more than doubled in February 2013 from the end of 2011, although they are still inadequate, covering just two and a half months of prospective imports.
During the next two years, the current account surplus is expected to remain sizable, and foreign direct investment (FDI) inflows will remain strong, supporting international reserves.
Economic growth is projected to be over 5 per cent this year, fuelled by exports.
"This outlook depends on an improvement in the global economy, broadly unchanged monetary and exchange rate policies, plus a measured withdrawal of fiscal stimuli," said the IMF Executive Board.
The board said Vietnamese authorities had made significant progress on macro-economic stabilisation, as they were containing vulnerabilities in the banking sector and advancing reforms in the SOE area.
"Calm has returned to financial markets after the State Bank of Viet Nam provided liquidity and facilitated the merger of several small and weak banks over the past two years," it said.
"Banking system liquidity has eased, as evidenced by higher deposit growth and significantly lower funding costs."
But the board said there was little scope for further interest cuts in the near term and this could put the State Bank's inflation-fighting credibility at risk.
The government has outlined a restructuring plan that requires SOEs to divest non-core assets and improve internal controls. About 1,200 SOEs are due to be reorganised, of which, some are loss making or just breaking even.
The reform strategy until 2015 focuses on retaining full ownership of roughly 50 per cent of SOEs, which mostly operate in public service areas or are of strategic interest. Around 43 per cent of SOEs will be equitised and the rest will be restructured, sold or liquidated.
"The financial and SOE sectors, however, remain key sources of vulnerability," the board said. "As a result of past policies, part of the banking system is under-capitalised, under- provisioned and has low profitability."
It noted that data limitations and challenges in the regulatory and supervisory framework hampered an understanding of the true state of the financial system. SOEs dominated key industries and appeared to have had high profit margins, though their true financial state remained publicly unknown.
IMF executive directors said Viet Nam needed to avoid loosening its policy stance and should accelerate structural reforms.
They said the State Bank should remain focused on achieving low and stable inflation, supporting the exchange rate anchor and replenishing international reserves.
Measures should be put in place to recapitalise banks, strengthen banking supervision and deal with non-performing loans. Strengthening credit risk governance by promoting greater transparency should continue to be a top priority.
The directors emphasised that the establishment of a high-level steering committee would be critical to fostering SOE restructures.