Vietnam Economy - 12 Month Look Ahead: Time For Restructuring – May 2011

SE Asia Regional Economic Team Singapore

Summary

Over the year ahead, the Government of Vietnam will continue its macroeconomic stabilization agenda with a focus on reducing inflation to 10% and reforming the troubled banking sector (both problems stem from a past credit boom). State Owned Enterprise Reform while much needed, looks likely to take a back seat once again.

The Economic Inheritance  

2011 was not a great year for Vietnam. There were worrying macroeconomic indicators such as a lower growth rate (5.9% - second lowest since 2000), high inflation (peaked at 23% in August and reduced to 18% in December – the highest in Asia), high trade deficit (8% of GDP), and budget deficit (4.9% of GDP) and low foreign currency reserves (roughly 2 months of import cover).

But the new (July 2011) government has started a more serious economic reform process to address structural problems. Here is a quick report card against their stated objectives.

Lower inflation. On track, inflation continues its downward path. Achieved through interest rate hikes and strict credit growth requirements on banks (from 18% in December 2011 to 10.5% in April 2012).

Banking stability. Positive progress, but plenty more to do.  Banks instructed to reign in credit after rampant growth of previous years, plus forced mergers of three weak banks in December 2011.

Exchange rate stability.  On track.  Since the devaluation in February 2011, the Dong has not devalued: the longest period of stability since 2007.

Reigning-in public investment.  On track.  A big cut took total investment to 34.6% of GDP in 2011 (down from over 40% of GDP in the last five years).

Year Ahead – Macroeconomic Management

Inflation is expected to continue to slide with most expecting Vietnam to meet its target of single-digit CPI at year end. This is impressive considering price hikes in food (+10%), power (+5% in December 2011) and fuel (+10% in March 2012) and reflects the effectiveness of the credit control and (much delayed) interest rate hikes in 2011 (which have a lagged impact).

Tight monetary and fiscal policies and an emphasis on price stability come at the expense of growth. GDP in the first quarter of 2012 only grew by 4%, compared with 5.6% in the same period last year and 6.1% in Q4/2011. With global economic recession and low domestic productivity, it is doubtful whether Vietnam can achieve its growth target of 6- 6.5% in 2012. Growth similar to last year (5.5 - 6%) is more feasible.    

The State Bank of Vietnam (SBV) was able to cut 2% rates in March and April thanks to the slowdown of inflation plus the stability of the Dong. With the decreasing inflationary trend, it is likely that the SBV will continue cutting rates.

Foreign reserves are still low, but analysts are less worried than last year thanks to the gradually narrowing trade deficit. Although risks remain (double-digit inflation, negative real interest rates and a sizable trade deficit), things are improving. We expect that the SBV will be able to keep their promise not to devalue Dong by more than 2-3% by year end. 

Year Ahead - Economic Reform

Banking sector reform will likely continue based on the plan approved by the Prime Minister in March 2012. The IMF and others believe it to be a good plan. According to the Governor, a further five to eight domestic banks will soon be merged. The worst debts lie in real estate borrowings which are estimated at 5 – 10% GDP.

Public investment will continue to be cut in 2012, while Vietnam tries to reduce budget deficit and keep public debt to a sustainable level. Reduced investment is not as bad an idea as it sounds: much public investment is done by State Owned Enterprises (the shipbuilder Vinashin being one such example) – and is thought by most to be “crowding out” more efficient private investment. The government is keen to pursue public private partnership (PPP) which will provide infrastructure investment, without the debt. A pilot program endorsed by Deputy Prime Minister Hoang Trung Hai is already underway. But progress is very slow partly due to legal issues.

State – owned enterprise (SOE) reform is long awaited, but no bold moves are expected in the year ahead. Recently a series of big State corporations have committed to cut 5 – 10% of their operational costs in 2012 – sceptics see this is a superficial measure rather than a real improvement of efficiency.

Comment

The year ahead will be challenging for Vietnam: to overhaul the economy in the face of an ongoing slump in the global economy. But to fail to do so will be a missed opportunity given the momentum from the tough measures introduced over the past year 

The UK has been helping with reform and we are playing an active role in helping the government succeed. For instance, DFID is funding a “Vietnam Governance, Economic Management and Social Inclusion” program as well as supporting a Public Private Partnership framework.  And the Embassy has signed an MOU with the Ministry of Finance to support public governance reform. This is financed by the Prosperity Fund and includes work streams on Public Private Partnership, and macroeconomic management.  In addition, we are looking for funding to support a similar work stream for the State Bank of Vietnam’s banking sector reform – an area where the UK has considerable experience to share. 

So while the GDP statistics and stock market indicators over the year ahead are likely to look subdued, the more important story is one of deeper-rooted reform. Linked to this is the bigger question of SOE reform, as well as the need to improve labour productivity and capital efficiency. A more productive labour force will make Vietnam more attractive to UK investors. There are important opportunities here for UK education – ones which we sought to showcase through the Foreign Secretary’s recent visit to Vietnam. The new UK – ASEAN Education Partnership presents a great opportunity for us here.

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