IMF: Gov't succeeds in regaining macroeconomic stability
Mr. Sanjay Kalra: We evaluate below achievements of the 2011-15 Five Year Plan (FYP) within the mandate of the IMF. This mandate relates to macroeconomic policies and structural reforms.
Growth in Viet Nam has been lower in 2011-13 compared to the targets set in the FYP. The slowdown in the global economy has contributed to this outcome. Domestic imbalances and inefficiencies which have built up over several years have been important as well.
2011 was a difficult year in which inflation peaked at over 20%, the exchange market was unstable, and international reserves fell to uncomfortable levels. The adoption of Resolution 11 in February 2011 was an important step towards regaining macroeconomic stability.
Viet Nam regained macroeconomic stability in 2012 and 2013. Headline inflation declined to single digits, the official exchange rate was stable, and international reserves rose. Exports performed well, with a strong contribution from foreign-invested enterprises. The current account moved into a substantial surplus in 2012, supported by remittances. FDI inflows remained robust. The SBV reduced policy rates by a total of 800 basis points since March 2012. Banking system liquidity eased, with higher deposit growth and lower funding costs. The decline in inflation allowed for a reduction in policy, deposit and lending rates. Calm returned to financial markets after the State Bank of Viet Nam (SBV) provided liquidity and facilitated the merger of several small, weak banks in late 2011, 2012, and 2013.
However, growth slowed to 5.2% in 2012 (6.2% in 2011). Real GDP growth is expected to rise somewhat in 2013. The domestic sector, though improving, has yet to find a solid footing because of several factors, including low productivity, structure of resource allocation, impaired bank and corporate balance sheets and inefficiency in several economic groups (EGs) and SOEs. Problems remain in the real estate sector which is still reeling from the burst of a property bubble, the result of several years of excessive credit growth and overinvestment. In the financial sector, weak banks still cannot access the interbank market and must rely on the central bank's standing facilities for liquidity support. Moreover, financial fragility continues to hamper the ability of banks to intermediate credit. Credit growth picked up only modestly in real terms, mostly concentrated in export-oriented and agricultural sectors, despite a significant decline in lending rates. The budget deficit increased in 2012 and 2013, with lower than planned revenue collection due to the weak economy, tax reduction and deferrals.
Would you please give your comments on the Government's solutions to stabilizing the macroeconomy, curbing inflation and restructuring the economy?
Mr. Sanjay Kalra: The Government's efforts in regaining macroeconomic stability have been successful. Low inflation and a stable exchange rate are very important elements of this achievement. The SBV's role has been key in monetary and exchange rate policy implementation. The SBV has, appropriately, reduced policy rates in line with declining inflation. Stabilization of the gold market is an important part of stabilizing the foreign exchange market and, therefore, the value of the dong. In the financial sector, the government's bank restructuring plan is ambitious. It is now important that its provisions are fully implemented to achieve the objectives of developing the "modern, safe, sound, and efficient" operations of the financial sector compliant with "international banking standards and practices". Specifically, operationalization of the Viet Nam Asset Management Company (VAMC) is a step, but only the first step, in the right direction.
Would you please give your recommendations for the Vietnamese Government to achieve objectives and tasks for the economic development in the years 2014 and 2015?
Mr. Sanjay Kalra: The Government must not weaken it resolve to maintain macroeconomic stability. Calls for a loosening of macroeconomic policies often arise in many countries under the circumstances that Viet Nam is now undergoing. Sound policy management stands up to these pressures. At the same time, it takes credible, visible, and measurable actions. The choices are admittedly not easy, but the government must move quickly and decisively to implement the reform agenda and meet the public expectations. Following this approach may well involve some cost and sacrifice in the short run. The cost would be in terms of lower growth and/or a longer period of difficulties in the enterprise sector. But if this cost is borne in the short run, the economy can emerge stronger over the longer term. The economy is right sizing itself after an extended period of very rapid and unsustainable credit growth which generated excessive borrowing by the corporate sector, lowered lending standards in the banking system, fueled a real estate price bubble and created excess supply in the real estate and construction sectors. These developments have created large imbalances in the balance sheets of banks and corporates. These imbalances will take some time to unwind, as we have seen in several other countries around the world.
Monetary and exchange rate policies: The SBV must continue to monitor closely inflationary pressures, including those arising from global food and fuel prices. Benefits from further policy rate cuts are likely to be limited while banking sector weaknesses persist, can jeopardize hard won gains, and reduce confidence in the government's determination to maintain macroeconomic stability. The level of international reserves has risen, but needs to be larger to comfortably deal with large shocks.
Fiscal policy: Viet Nam should revert back to a path of fiscal consolidation. On the revenue side, it would be prudent to refrain from further tax cuts and require profitable SOEs to pay dividends. Social spending should be maintained while public investment is prioritized and reduced to sustainable levels. The budget must make room to cover contingent liabilities and provide for the cost of structural reforms to speed up the process.
Structural reforms: Much remains to be done and on an accelerated pace. Reform delays would undermine confidence, raise the likelihood of increased contingent liabilities, prolong the productivity stagnation of the past several years, and keep growth at levels insufficient to create jobs for a rapidly growing labor force and raise living standards.
Banking sector reform is a top priority. Addressing weaknesses-poor asset quality, high level of NPLs, underprovisioning, and undercapitalization-is critical to creating an environment in which the banking sector intermediates national savings to productive investment. Problems need to be addressed at all banks, large and small, state-owned or joint stock. More broadly, efforts need to be made to further develop capital markets, to supplement banking system, provide alternative risk-return opportunities to investors, attract stable foreign portfolio inflows, and to reduce the holdings of gold as a store of wealth.
The VAMC should not become a vehicle for extended liquidity support for insolvent banks as this would delay necessary banking sector recapitalization. Once the NPLs and recapitalization needs have been determined, recapitalization must be done promptly together with full implementation of NPL workout schemes. The government needs to overcome its reluctance to use public funds to recapitalize state-owned commercial banks, unwind insolvent banks in an orderly fashion, and accept more substantial private participation in the banking system.
The SBV must significantly enhance its supervisory capacity over banks, effectively implement current guidelines and end forbearance towards banks that do not meet prudential norms. The SBV must be allowed to do this with more operational independence. A strong SBV and banking system are in the interest of the whole economy.
Reform of EGs and SOEs is critical. The true financial condition of the EGs and SOEs must be disclosed to the public, including their audited income statements and balance sheets, and their borrowings from the banking system. These enterprises use public money for their operations and the public needs to be informed of their operations. Once the true financial condition of these enterprises has been revealed, steps can be taken to improve their operations and governance structures. These plans must be formulated and implemented in a time bound manner.
Restructuring public investment is essential to ensure that the taxpayers receive a good "return" on their contribution to the budget. Better schools and health facilities create conditions for improvements in human capital. Better infrastructure reduces the cost of doing business, among other things.
Successfully designing and implementing a broad set of policies-staying the course on macroeconomic stabilization while restructuring banks and SOEs-will have a noticeable impact. Viet Nam is a country endowed with several advantages, including a young and hardworking population. Utilizing these endowments to achieve a high demographic dividend over the next decade is the responsibility of Viet Nam's policymakers.
(Source: News.chinhphu.vn)
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