Vietnam's Recent Economic Development 2013

Hanoi, July10, 2013

TAKING STOCK

AN UPDATE ON VIETNAM’S

RECENT ECONOMIC

DEVELOPMENTS

AN UPDATE ON VIETNAM’SRECENT ECONOMICDEVELOPMENTS

TAKING STOCK

This report has been prepared by Deepak Mishra and Viet Tuan Dinh with contributions from James Anderson, Reena Badiani, Quang Hong Doan, Sameer Goyal, Duc Minh Pham, Habib Rab, Gregory Smith and Viet Quoc Trieu, under the general guidance of Victoria Kwakwa and Sudhir Shetty. Administrate assistance was provided by Linh Anh Thi Vu.

The World Bank

Hanoi, July 10, 2013

CDS Credit Default SwapCIT Corporate Income TaxCPI Consumer Price IndexEAP East Asia and PacificECB European Central BankEU European UnionFDI Foreign Direct InvestmentGDP Gross Domestic ProductGI Government InspectorGSO General Statistics OfficeIIP Index of Industrial ProductionIMF International Monetary FundIPO Initial Public OfferingM&A Mergers and AcquisitionMDG Millennium Development GoalsM&E Monitoring and EvaluationMOF Ministry of FinanceMPI Ministry of PlanningNCERD National Steering Committee for Enterprise Retructuring and DevelopmentNPL Non-performing LoansODA Official Development AssistancePMI Purchasing Manager IndexQE Quantitative EasingROW Rest of the WorldSBV State Bank of VietnamSEDP Socio-Economic Development PlanSME Small Medium EnterpriseSOCB State-owned Commercial BankSOEs State-owned EnterprisesUSA United State of AmericaVAT Value Added TaxVAMC Vietnam Asset Management CompanyVHLSS Vietnam Household Living Standards SurveyWTO World Trade Organization

ACRONYMS ANDABBREVIATIONS

CURRENCY EXCHANGE RATE: US$ = VND 21,036Government Fiscal Year: January 1 to December 31

PART I: GLOBAL AND REGIONAL ECONOMIC ENVIRONMENT 5

A. Global Growth is Consolidating 5B. Financial Market Conditions have Seen Significant Improvements 6C. Inflationary Pressures Remain Benign, Promoting Monetary Policy Easing 7D. Trade Remains Volatile, Though Commodity Prices are Easing 9E. Medium-Term Growth Outlook 10F. Risks to Outlook 11

PART II: VIETNAM RECENT ECONOMIC ENVIRONMENT 15

A. Macroeconomic Conditions Continue to Improve, but Growth Remains Sluggish 15B. The Real Sector: Is Slow Growth Here to Stay? 17C. Performance of The External Sector Continues to be Impressive 21D. Inflation Has Stabilized, But Inflationary Expectation are Not 27E. Monetary Policy Effectiveness Has been Hindered by Banking Sector Problems 28F. Fiscal Development and Policies 29G. Near-term Outlook 33 PART III: AN UPDATE ON THE RESTRUCTURING AGENDA 35

A. Banking Sector Update 35B. State-Owned Enterprise Reforms 39

ACRONYMS ANDABBREVIATIONS

TABLE OF CONTENTS

CURRENCY EXCHANGE RATE: US$ = VND 21,036Government Fiscal Year: January 1 to December 31

5

A. GLOBAL GROWTH IS CONSOLIDATING

1. The global economy appears to be transitioning toward a period of more stable albeit moderate pace of growth. Global GDP, which slowed in mid-2012, is recovering and a modest acceleration in quarterly GDP is expected during the course of 2013 (left panel, figure 1). In the United States, GDP rose 2.4 percent in the first quarter of 2013, supported by a recovering housing market, an increase in payroll jobs, and robust investment demand, especially in durable goods orders. In Japan, a dramatic relaxation of macroeconomic policy has prompted a sharp acceleration in GDP in the short-term, which grew at a 4.1 percent annualized pace in the first quarter of 2013. However in the Euro Area, growth is being held back by weak confidence and continued banking sector and fiscal restructuring, with GDP contracting at a 0.8 percent in the first quarter.

2. In the developing world growth remains solid, but there are some signs of easing. Most developing countries have more or less fully recovered from the 2008 global financial crisis and are growing in line with underlying potential growth. During the first several months of 2013, however, the pace of growth in developing countries appears to have slowed, particularly in East Asia, where quarterly growth in China and Indonesia has eased and turned negative in Malaysia and Thailand. Elsewhere signs are more mixed. Growth has slowed down in Chile, India, Mexico, and South Africa, but strengthened in Philippines, Turkey, and Ukraine.

3. More than four years after the financial crisis started, global industrial output is only 5.3 percent higher than its pre-crisis peak. Industrial output in high-income countries is still 6.5 percent below pre-crisis levels, with output in the Euro area and Japan sharply lower and output in the United States having almost regained pre-crisis levels. Industrial growth in developing countries has been most dynamic in East Asia and Pacific mainly reflecting double-digit growth in China, where output is 67.9 percent higher than the pre-crisis high, versus 12 percent for the other countries in the region. Industrial output in South Asia and Europe and Central Asia are 19.6 and 2 percent higher respectively than their pre-crisis peaks.

PART I: GLOBAL AND REGIONAL ECONOMIC ENVIRONMENT01

6

B. FINANCIAL MARKET CONDITIONS HAVE SEEN SIGNIFICANT IMPROVEMENTS

4. While the global financial market conditions continue to improve, eventual phasing out of quantitative easing in advanced economies is beginning to worry investors. The improvement in financial conditions can be seen in lower yields on long-term debt, higher stock market returns and near-record flow of gross capital to developing countries. This reflects the extraordinary monetary policy easing undertaken by the Federal Reserve Bank in the United States, the Bank of England, the ECB, and most recently the Bank of Japan, as they have flooded global capital markets with liquidity. At the same time, the slightest hint of a scaling back of the U.S. stimulus program did send panic through many emerging markets in June 2013, underscoring the volatile nature of global capital markets.

5. Gross capital flows to developing countries have been robust. During the first five months of 2013, gross capital flows (international bond issuance, cross-border syndicated bank loans and equity placements) to developing countries rose by 63 percent year-on-year and reached a historic high at $306 billion (left panel, figure 2). International bond flows to developing countries have been particularly robust, reaching a historically high level at $158 billion for the first five months of the year with the record monthly issuance of $45 billion in April. Syndicated bank lending to developing countries totaled $91 billion during the first five months of 2013, 69 percent higher compared to a year ago. There has also been a steady increase in equity flows—initial public offerings (IPOs) and follow-on issuance—due to the strong follow-on issuance from East Asia, Europe and Central Asia, and Latin America and the recovery of IPO activity from last year’s lows.

6. Despite increased flows, capital costs are rising, reflecting reduced high-income country risks. Developing countries’ sovereign credit default swap (CDS) rates and yields (right panel, figure 2) have been rising, despite their improved ratings and stronger investor appetite for developing-country bonds. Part of the decline in developing-country risk premiums over the past five years was due to the increased riskiness of high-income country debt. Now that those risks are receding, investors are shifting their portfolios back into high-income country assets, resulting in an increase in developing-country yields and spreads and better stock-market performance in high-income countries. These developments may also reflect concern on the part of investors about inflation of asset prices in some developing countries (such as Brazil, Indonesia, Philippines, Thailand, and Turkey) and the recent easing of commodity prices.

Figure 1: While global growth is stabilizing, recovery in industrial production has been uneven

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6

7

8

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2010Q1 2011Q1 2012Q1 2013Q1

Quarterly GDP growth, annualized (in %)

Developing Countries

World

High-income countries

100

167.9

119.6

112.0

105.3

102.093.5

90

110

130

150

170

Pre-crisis peak 2013 (latest)

China

South Asia

East Asia (ex China)

Global

Europe and Central Asia


Industrial production since global crisis (Index=100)

Source: Global Economic Prospects: June 2013; Developing Trends: June 2013.

7

Figure 2: More capital is flowing to developing countries, but cost of capital is starting to rise


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Implied developing country yield

US 10 year treasury yield

Spread

Soverign 10 year bond yields and spreads, in basis points

C. INFLATIONARY PRESSURES REMAIN BENIGN, PROMPTING MONETARY POLICY EASING

7. Global inflationary pressures remain relatively subdued in most countries. Inflation in high-income countries has remained low and within the comfort zone of their central banks except perhaps in UK. Inflationary pressures in China appear to have eased somewhat but may be intensifying in Indonesia and Lao PDR following years of rapid growth and relatively accommodative macroeconomic policy, and core inflation remains high in Vietnam. In the Middle East & North Africa, high prices reflect both efforts to reduce the fiscal burden of price subsidization by raising some regulated prices, as well as supply disruptions caused by civil and armed strife. In South Asia, as well as in Vietnam, increases in administrative prices have also played a role, as have tight market conditions despite the relatively slow pace of growth.

8. Monetary policy in developing countries continues to ease including in Albania, Azerbaijan, Belarus, Colombia, Georgia, India, Kenya, Mongolia, Mexico, Sri Lanka, Thailand, Turkey, Uganda, and Vietnam. Only five developing countries (Brazil, the Arab Republic of Egypt, Gambia, Ghana, and Tunisia) have raised interest rates in 2013; Serbia raised and then cut rates. Although global inflationary pressures remain benign, given the lags in monetary policy transmission, this additional easing may add to a strengthening activity already under way, resulting in additional inflationary pressures in countries operating close to full capacity, without commensurate payoff in additional output.

8

Box 1: Japan’s monetary easing and implications for developing countries

In November 2012, the Bank of Japan (BoJ) signaled that it would undertake monetary easing measures to fight against deflation. The BoJ announced the actual quantitative and qualitative easing measures on April 4th this year. These measures include the monthly purchase of ¥7.5 trillion ($75 billion) of the Japanese government bonds aiming to double its monetary base in two years. It will also expand the average maturity of bonds that it purchases from three to seven years. More importantly, the BoJ announced that it would continue these “as long as necessary”. The BoJ’s quantitative easing (QE) program is broadly similar to the QE3 program in the US.

While the immediate beneficiary of the program is domestic assets, its spillover into international capital markets is inevitable, especially because the Japanese bond market is relatively small—only 22 percent and 8 percent of US bond and equity market respectively. The bulk of these flows are likely to go to other high-income countries, though Japanese investors have been actively investing in local currency bond and equity markets in some developing countries (see table). According to the Investment Trusts Association of Japan, Japanese portfolio investment in local debt securities increased in Mexico (by 34 percent), Turkey (28 percent) and Thailand (17 percent) during the first two months of 2013, and at a less pronounced rate in Philippines (5.9 percent) and South Africa (4.4 percent).

The Japanese QE program might also increase direct investment by lowering the cost of capital for Japanese multinationals. Rising outward FDI flows from Japan in recent years have been particularly important for Thailand and Vietnam, accounting for 40 percent and 55 percent of those countries in 2012.

FDI Portfolio Investment Total capital flows from Japan

Total Total PI: Equity PI: Debt

3,279 647 2632 4,214

Developed Countries 742 3203 619 2,585 3,945

Developing Countries 193 76 28 47 269

P.R. China 73.5 10.3 9.8 0.5 84

Brazil 30 28.1 5.6 22.4 58

Thailand 31 2.3 1.5 0.9 33

Indonesia 13.9 5.8 3.3 2.6 20

India 13.6 5 3.4 1.6 19

Malaysia 9.9 4.3 1.6 2.7 14

Mexico 2.6 11.6 0.5 11.1 14

Philippines 9 2.7 0.3 2.5 12

Vietnam 5.6 0.1 0.1 0 6

Box 1: Japan’s monetary easing and implications for developing countries

Japanese outward investment position by destination, 2011 ($ billion)

935


9

D. TRADE REMAINS VOLATILE, THOUGH COMMODITY PRICES ARE EASING

9. After a cyclical rebound in global trade, the pace of trade expansion has started to decelerate again. Following the slump in Q2 2012, global trade began a cyclical rebound in Q3, led by acceleration in developing country imports, which sparked increase in exports from both high-income and developing countries (left panel, figure 3). South-South trade continued its rapid growth during this period (see box 2). However, reflecting ongoing fragility in the global economic recovery, the pace of trade expansion has slowed in recent months. Indeed, in the three months of 2013, global trade expansion had decelerated to a below trend pace of 0.8 percent compared with 10.9 percent in March.

10. Commodity prices have weakened in response to new capacity and changing consumption patterns. Despite the strengthening of the global economy, the prices of most industrial and agricultural commodities have been declining (right panel, figure 3). While it is still too early to be certain, the declines appear to result from both increased supply and increased substitution on the demand side induced by the high prices of the past several years. Expectations are that prices will continue to ease over the medium term. The World Bank forecast, which calls for the price of a barrel of oil to ease to $102 in 2013, and to $101 in 2015, reflects a technical assumption that oil prices will slowly decline between now and 2025 to a level consistent with the real cost of producing a barrel of oil from the Canadian tar sands using existing technology. Metals prices are expected to decline in real terms by 3.7 and 1.4 percent in 2013 and 2014, respectively, reflecting increased supply and a gradual reduction in the metals intensity of developing-country (especially Chinese) growth. Food prices are also projected to decline (7.7, 6.0, and 5.5 percent over 2013–15), reflecting a gradual improvement in supply conditions and reduced production costs due to lower energy and fertilizer prices.

Figure 3: Trade has seen cyclical recovery and deceleration, while commodity prices are steadily declining


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35

Jan '11 Jul '11 Jan '12 Jul '12 Jan '13

Export and import volumes, percent growth, 3m/3m sa

150

160

170

180

190

200

210

220

230

240


Agricultural goodsEnergy

Metals & Minerals

USD price indexes, January 2005=10

Developing-country Imports

Euro Area Exports

Other High-income Exports

10

Box 2: South-South Trade Grows Faster than South-North Trade By A Wide Margin

More than half of developing country trade is now with other developing countries, up from 37 percent in 2001. China has played a big role in this transformation, with 26 percent of total exports from all developing countries now going to China, up from 14 percent in 2001. But even excluding China’s trade with other developing countries, growth of trade between developing countries has also outpaced their trade with high-income countries by a wide margin in the last decade (see adjacent figure). The U.S. dollar value of trade between developing countries has grown annually by an average of 19.3 percent over the past decade (17.5 percent if trade with China is excluded); whereas growth is about 11 percent for developing-country exports to high income countries. Interestingly, the rapid expansion of intra-developing-country trade reflects more than just commodity trade, with the value of developing-country exports of manufactures rising at about the same rate as the value of commodities.

Source: Global Economic Prospects: June 2013

Figure 3: Trade has seen cyclical recovery and deceleration, while commodity prices are steadily declining


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Export and import volumes, percent growth, 3m/3m sa

150

160

170

180

190

200

210

220

230

240


Agricultural goodsEnergy

Metals & Minerals

USD price indexes, January 2005=10

Developing-country Imports

Euro Area Exports

Other High-income Exports

East Asala&Paci�c

0

5

10

15

20

25

Europe&Central Asla

Average annual growth 2000-2011, percent

Average all developing countries

All developing Developing (exd. China)

Average (exd. China) Average exports toHigh Income countries

High-Income Imports

LatinAmerican&Caribbean

Middle-east&northAfrica

Sub-saharanAfrica

South Asla

E. MEDIUM-TERM GROWTH OUTLOOK

11. The global economy is slowly getting back on its feet, though the recovery remains hesitant and uneven. Global GDP is projected to grow at 2.2 percent during 2013, marginally slower than in 2012. The recovery is expected to strengthen, with the global economy growing at 3.0 percent in 2014 and 3.3 percent in 2015 (left panel, figure 4). However, the prospects for individual countries and regions will vary widely (right panel, figure 4). Here is a brief discussion of the economic outlook for a select set of advanced and developing countries.

Figure 4: Global Growth will be Less Volatile, But Outlook Differs Across Regions


4.0

2.82.2 2.2

3.0 3.3

7.6

6.2

4.8 5.15.6 5.7

2.9

1.71.3 1.2

2.0 2.3

0

1

2

3

4

5

6

7

8

2010 2011 2012 2013 2014 2015

2.23.0 3.3

5.15.6 5.7

1.2

2.0 2.3

2013 2014 2015

World

Developing Countries


Annual GDP growth, %

012345678

East

Asi

a &

Pa

ci�c

Euro

pe &

Cent

ral A

sia

Latin

Am

eric

a &

Ca

ribbe

an

Mid

dle

East

& N

. A

fric

a

Sout

h A

sia

Sub-

Saha

ran

Afr

ica

2012 2013 2014 2015

Annual GDP growth, %

Box 2: South-South Trade Grows Faster than South-North Trade By A Wide Margin

11

12. In the United States, the private sector recovery appears to be relatively robust as reflected in an improving labor market (unemployment has fallen to 7.6 percent) and recovery in the housing market. Policymakers have extended both the debt ceiling and spending authorizations well into the future, thereby reducing the likelihood of a debt-ceiling confrontation and the threat of default. On the downside, both the tax increases agreed at the beginning of the year and the spending sequester will be a drag on growth in coming quarters, offsetting some of the strength from the private sector recovery. Overall, GDP growth for the year is projected to slow somewhat, compared with 2012, to about 2.0 percent in 2013, before strengthening to 2.8 percent in 2014 and 3.0 percent in 2015.

13. The economy of the Euro Area remains weak despite improved financial conditions and some signs of strengthening. The funding costs in core Euro Area countries have declined, and lending has started to grow again. Imports, exports, and industrial production have all returned to positive (albeit modest) growth. However, borrowing costs in high-spread economies remain very high; unemployment is crushingly high in periphery economies; and weak growth is compromising progress on the fiscal front. GDP for the Euro Area is projected to contract by 0.6 percent in 2013, with annual growth slowly strengthening to 0.9 percent in 2014 and to about 1.5 percent by 2015.

14. The strength in the Japanese economy reflects the effects of a large quantitative easing, fiscal stimulus and structural reforms. The structural measures announced include deregulation of the agriculture and electricity sectors, a relaxation of rules in health care, investment tax incentives, (including FDI); some corporate governance reforms; and a partial relaxation of restrictions on the investment behavior of pension funds. Growth is projected to come in at 1.4 percent this year and in 2014 and at 1.3 percent in 2015.

15. Prospects for developing countries vary widely, reflecting local economic and policy conditions. Overall, growth in developing-country is expected to firm somewhat in the years ahead, with GDP growing by 5.1 percent in 2013 and gradually rising to 5.6 percent in 2014 and 5.7 percent in 2015. This aggregate story, however, masks considerable regional and country-level variation. At least four classes of developing countries can be identified:

Several countries in East Asia, Sub-Saharan Africa and a few in Latin America are growing rapidly and are already close to or above potential, and therefore at risk of overheating.

Several large middle-income countries, such as Brazil, India, Russia, South Africa, Turkey and Vietnam, have struggled to regain pre-crisis growth rates despite significant stimulus.

Some countries are dealing with high unemployment and economic slack due to the severity of the post-crisis downturn (developing Europe) or due to social and political turmoil (Middle East & North Africa).

The majority of developing countries are performing well, with output gaps closed or closing.

12

F. RISKS TO OUTLOOK

16. Although the risk of a major crisis in Europe has subsided, a new set of risks is gaining prominence:

Withdrawal of quantitative easing in the United States. The eventual tapering of quantitative easing in the United States and other high income economies is likely to cause interest rates to rise for developing countries. Higher rates may generate difficult adjustments and possibly domestic crises, especially in countries where public and private sector indebtedness has been on the upswing.

A faster than expected decline in commodity prices. Over the past year, energy and metals prices have been easing in response to supply and demand-side substitution induced by high prices (metal and energy prices are down 30 percent and 14 percent since their early 2011 peak). If commodity prices were to decline faster towards their long-term equilibrium than envisaged in the baseline, commodity exporting developing countries could experience serious fiscal setbacks and weaker GDP growth, although commodity importers would stand to gain.

Implications of a radical relaxation of fiscal and monetary policy in Japan. The 21 percent real effective depreciation of the yen between September and April could dampen developing country exports to Japan as well as in third markets where they compete with Japanese exports. However, some developing countries (especially in East Asia) could gain from yen’s (real) depreciation and higher demand for Japanese exports and larger FDI flows to the extent that they supply parts and components to Japan’s production networks. Finally, by adding to the looseness of global monetary conditions, this policy could lead to strong capital flows and potentially add to overheating pressures, especially in East Asia.

13

2011 2012 2013e 2014f 2015f

Global Conditions

World Trade Volume (GNFS) 6.2 2.7 4.0 5.0 5.4

Consumer Prices

G-7 Countries 5.3 -0.6 -0.1 0.9 1.0

United States 2.4 2.1 2.4 2.5 2.5

Commodity Prices (USD terms)

Non-oil commodities 20.7 -9.5 -4.7 -1.1 -1.5

Oil Price (US$ per barrel) 104.0 105.0 102.4 101.0 101.0

Interest Rates

$, 6-month (percent) 0.8 0.5 0.7 1.1 1.4

Real GDP growth

World 2.8 2.3 2.2 3.0 3.3

High income 1.7 1.3 1.2 2.0 2.3

Euro Area 1.5 -0.5 -0.6 0.9 1.5

Japan -0.5 2.0 1.4 1.4 1.3

United States 1.8 2.2 2.0 2.8 3.0

Developing countries 6.0 5.0 5.1 5.6 5.7

East Asia and Pacific 8.3 7.5 7.3 7.6 7.5

ANNEXGLOBAL AND REGIONAL ECONOMIC ENVIRONMENT

Table 1: Global Economic Outlook

Table 2: East Asia and Pacific: GDP Growth Projections

Source: Global Economic Prospects: June 2013. The World Bank

Source: Global Economic Prospects: June 2013. The World Bank

2010 2011 2012 2013/f 2014/f 2015/f

Developing East Asia 9.6 8.3 7.5 7.3 7.6 7.5

China 10.4 9.3 7.8 7.7 8.0 7.9

Indonesia 6.2 6.5 6.2 6.2 6.5 6.2

Malaysia 7.2 5.1 5.6 5.1 5.1 5.3

Philippines 7.6 3.9 6.6 6.2 6.4 6.4

Thailand 7.8 0.1 6.5 5.0 5.0 5.5

Vietnam 6.4 6.2 5.2 5.3 5.4 5.4

Developing EAP excluding China 6.9 4.6 6.2 5.7 5.9 6.0

14

15

A. MACROECONOMIC CONDITIONS CONTINUE TO IMPROVE, BUT GROWTH REMAINS SLUGGISH

17. Vietnam’s macroeconomic conditions continue to improve as its economy enters the third year of relative stability. With moderate inflation, a stable exchange rate, increased reserves and reduced country risks, Vietnam is trying to put an end to the recurrent episodes of macroeconomic instability that started in 2007. Inflation (year-on-year, henceforth, y/y) has fallen from a peak of 23 percent in August 2011 to 6.7 percent in June 2013 (top-left panel, figure 5). The official exchange rate has been relatively stable and, in a welcome move when the dong came under pressure recently, authorities widened the exchange rate band by 1 percent rather than continue to defend the currency (top-right panel, figure 5). The stock of reserves with the Central Bank has more than doubled in the past two years, with reserves covering up to 2.8 months of imports at the end of the first quarter of 2013 (middle-left panel, figure 5). Vietnam’s sovereign spreads and country default swaps are hovering at their lowest levels since the onset of global economic crisis (middle-right panel, figure 5).

18. However, macroeconomic stability, in the absence of broad structural reforms, has not been sufficient to lift the economy from its long spell of slow growth. Policymakers have been consumed in recent years with trying to stabilize the economy, with the hope that once macroeconomic stability is achieved, growth will automatically resume. But even as the economy has stabilized, growth has slumped. In fact growth has been below 7 percent for the sixth consecutive year, with the economy expected to grow in 2013 at its second slowest pace since the early-1990s (bottom panel, figure 5). Efforts to stimulate the economy through tax breaks and accommodative monetary policy have faced diminishing returns, while raising fiscal deficits and creating new contingent liabilities (see Section F). Without accelerating structural reforms, especially in the banking and SOE sectors, Vietnam faces the risk of a prolonged period of slow growth (see Part III).

19. Unless broader and deeper structural reforms are pursued, the recent gains in macroeconomic front could prove to be fragile for a number of reasons. First, slower growth may intensify demand for further loosening of monetary and fiscal policies, with the risk of stoking inflationary pressures and reversing the recent gains in macroeconomics stability. Second, if the implementation of structural reforms is delayed further, investors’ confidence would be undermined, further worsening growth prospects. On the external side, Vietnam’s economy remains susceptible to a further slowdown in the global economy, since its declining revenue performance and rising public debt which leaves little room for significant counter-cyclical policies.

PART II: RECENT ECONOMIC DEVELOPMENTS IN VIETNAM02

16

Figure 5: Macroeconomic Conditions Remain Stable, but Growth Is Weakening

Source: SBV, GSO, IMF, and the World Bank

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Resolution 11

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Resolution 11

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Real GDP Growth (%)

annual

3-year moving average

East Asian CrisisGlobal Economic Crisis

Break-up of Soviet Union ????44

17

B. THE REAL SECTOR: IS SLOW GROWTH HERE TO STAY?

20. Vietnam’s economy is experiencing its longest spell of slow growth since the onset of economic reforms in the late-1980s. Real GDP grew by 5 percent in 2012, the lowest level since 1998 1. The economy extended its slow growth into the first half of 2013, registering a growth rate of 4.9 percent in the first quarter and 5 percent in the second quarter (left panel, figure 6). This is the first time that Vietnam has experienced two consecutive years of sub-5 percent growth in the first half of the year since it started publishing quarterly GDP. In fact what had distinguished Vietnam from other countries is its ability to recover rapidly after an economic shock—be it during the East Asian crisis in 1999 or the global financial crisis in 2009. However, Vietnam has found it harder to take timely and decisive actions to jumpstart its economy from the current growth slowdown.

21. Vietnam is the only large developing country in the East Asia and Pacific region other than China whose post-crisis growth rate has been lower than its pre-crisis level. The economies of Indonesia, Malaysia, Philippines and Thailand have all grown faster in the post-crisis period (2010-13) than prior to the crisis (2005-08) as can be seen in the right panel of figure 6. And China’s pre-crisis growth rate was exceptionally high. On the other hand, Vietnam’s post-crisis growth rate (5.8 percent) has been one percentage point lower than its pre-crisis level (6.8 percent). Indonesia and Philippines—two countries that had historically grown at a much slower pace than Vietnam—have been growing more rapidly than Vietnam since 2010.

22. Growth has been uniformly decelerating in all the sectors, though agriculture and industry seem to be particularly hard hit. The services sector expanded by 5.9 percent in 2012 and contributed 2.2 percentage points to overall growth. Growth in the agriculture, forestry and fishery sector decelerated to 2.7 percent in 2012 from 4 percent in 2011 due to unfavorable weather conditions, diseases in livestock and falling prices of most agricultural products. Manufacturing growth also slowed down, reflecting weakening domestic demand and rising inventories. Agriculture and industry, which together account for 70 percent of labor force, contributed just around 3 percentage points to growth, compared to a 3.8 percentage point contribution during the 2005-11 period (left panel, figure 7).

Figure 6: Vietnam’s Declining Economic Growth: From the Perspective of Its Own History and In Comparison With Its Regional Peers

Source: GSO (GDP based on 2010 price); World Development Indicators

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Growth rate (quarterly )

Growth rate (annual )11.9

8.8

5.9 6.35.2

6.16.8

5.85.4 5.74.3 4.8

0

2

4

6

8

10

12

14

Pre-Crisis Post-Crisis

China IndonesiaPhilippines VietnamMalaysia Thailand

Real GDP growth rate (in %)

1 Vietnam recently revised its GDP series and used 2010 as the base year. According to the new series, the economy grew by 5.25 percent in 2012.

18

23. All demand side components of GDP except net exports have also been growing slowly. Private consumption and investment, which account for over 90 percent of Vietnam’s GDP, showed a sharp decline. Private consumption grew 3.5 percent while investment rose merely 1.9 percent in 2012, compared to 5.3 percent and 9.8 percent respectively during the 2009 -2010 period. Net exports turned positive in 2012 due to strong export performance and slowing import growth. Merchandise exports grew by 18.2 percent in 2012, driven by stronger growth in the foreign-invested (FDI) sector. Reduced consumption growth and a slowdown in investment meant that merchandise imports grew at a subdued rate of 6.6 percent in 2012 (right panel, figure 7).

Figure 7: Contribution to Growth: Production Versus Demand


1.5 1.2 1.3 1.0 0.6

2.92.5 2.4

2.02.0

3.2

2.8 2.62.2

2.3

-1

0

1

2

3

4

5

6

7

8

2005 2010 2011 2012 Q1 -13

GDP growth

Contribution to growth by production/supply (in %)

Services

Industry &Construc�on

Primary0.1 -0.4 -0.5 -0.2 0.1

2.1 1.9 2.3 2.0 1.6

0.40.3

0.40.4

0.3

4.9

3.5

4.34.1

3.4

-1

0

1

2

3

4

5

6

7

8

2005 2009 2010 2011 2012e

Net exports

Investment

Govt. consumption

Private consumption

GDP growth

Contribution to growth by sources of demand (in %)

Box 3: Government’s Response to the Growth Slowdown

In January 2013 the Government issued Resolution No. 2, announcing a number of measures to assist enterprises and individuals to deal with the current economic difficulties. These measures included: (i) delayed payment of corporate income tax (CIT): 6 months for payments due in Q1 2013 and 3 months for Q2 and Q3/2013; (ii) deferring payment of value added tax (VAT): 6 months for payments due in Q1 2013. The tax incentives were intended for: (i) Small and medium enterprises (SMEs); (ii) Labor-intensive enterprises in certain sectors; (iii) Enterprises engaging in sale, leasing, financial leasing of houses; and (iv) Enterprises that produce iron, steel, cement, construction tiles. The government’s estimates show that total deferred tax payment will amount to about 9.1 trillion dong in the first four months of 2013. In addition, the Prime Minister has also authorized the Ministry of Finance to propose to the National Assembly a lowering of Corporate Income Tax (CIT) to 20 percent for SMEs and to 10 percent for enterprises engaging in investment, sale and lease of social housing (for low-income households), starting from July 1, 2013. These measures have subsequently been approved by the National Assembly.

Despite these measures the corporate sector remains in difficulty. In the first four months of 2013, nearly 16,600 firms closed or suspended their operations, up 16.9 percent from last year. At the same time, nearly 23, 800 new enterprises were established, down 1.2 percent compared to the same period last year. High borrowing costs, an unfavorable business environment and accumulated inventory are often cited as the reasons for shutdown or bankruptcy of many enterprises.

Source: MPI, MOF, Various sources from media

Box 3: Government’s Response to the Growth Slowdown

19

24. One of the worrying signs is the steady and across the board decline in investment rates. Total investment in the first quarter of 2013 is estimated at 29.6 percent of GDP, nearly 13 percentage points below the peak achieved in 2007 (left panel, figure 8). While a 40 percent or higher investment rate was neither sustainable nor desirable—it was based on excessive lending by banks to inefficient SOEs—a reduction of nearly 10 percentage points over a period of three years seems hasty and unplanned. Some decline in state sector investment was expected given the stimulus spending during 2009-10, spending that was intended to be temporary to begin with. The declining investment ratio from the Non-State (domestic) sector is, however, worrisome, as this sector has been hit hard by falling domestic demand, rising interest rates and a slowdown in credit growth during the last two years.

25. While foreign direct investment remains high, it is declining progressively as a share of the economy. In the past five years, implemented (or disbursed) FDI has hovered between $10.5 to $11.5 billion (right panel, figure 8). This has been viewed as a sign of foreign investors’ continued commitment to Vietnam, that they are undeterred by problems of macroeconomic instability or slowdown in structural reforms. Implemented FDI as a share of GDP, however, has been steadily falling over the past six years, from a peak of 12 percent of GDP in 2008 to 7 percent in 2012. Despite a falling FDI/GDP ratio, and continued macroeconomic problems, Vietnam is still considered to be one of the most attractive destinations for foreign investors in the East Asia region (see box 4), largely on account of its low wages, favorable demography, ideal location and political stability.

Figure 8: Contribution to Growth: Production Versus Demand Side Components

Source: GSO (GDP based on 2010 prices; World Development Indicators

15.9 12.9 15.9 14.7 12.3 11.5 10.9

16.4

13.413.3 13.9

12.8 11.9 10.9

10.4

11.810.0 9.9

8.27.1 7.8

42.7

38.2 39.2 38.5

33.330.5 29.6

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012 q1-13

Total

Foreign

Non- state(domestic)

State

Investment by ownership (% of GDP)

8.0

11.5

10.011.0 11.0

10.5

10%12%

10% 10%

8%7%

0

2

4

6

8

10

12

14

0%

2%

4%

6%

8%

10%

12%

14%

2007 2008 2009 2010 2011 2012

FDI Implemented

FDI/GDP (left scale) FDI in USD Billion(right scale)

20

Box 4: Vietnam Remains An Attractive Destination for Foreign Investors

Two recent surveys reflect continued interest of foreign investors in Vietnam.

According to the 2012/13 ASEAN Business Outlook Survey by AmCham Singapore and US Chamber of Commerce, Vietnam remains the most popular location for expansion within the ASEAN region by a wide margin. Thailand is ranked second, followed by Singapore and the Philippines (see adjacent figure).

Similarly, the 2012/13 National Business Survey of the Singapore Business Federation (SBF) showed that Vietnam is the second most keen overseas investment destination for its members after Myanmar (see adjacent figure). The traditionally popular investment destinations such as China and India seem to be less favored than in the past. Indonesia and Thailand remain close competitors to Vietnam as the other overseas ventures of interest to SBF members.

Source: ASEAN Business Outlook Survey, 2012/13; SBF National Business Survey 2012/13.

Vietnam

Vietnam

Thailand

Thailand

Americas

India

0% 5%

9%12%

12%8%

15%12%

14%18%

20122011

17%

21%

24%

21%

11%

11%

11%

18%

10% 15% 20% 25% 30%

China (including Hong Kong)

Singapore Philippines

Philippines

Indonesia

Indonesia

Myanmar

Myanmar

Cambodia

Cambodia

Malaysia

Malaysia

Laos

Location of Expansion in ASEAN

Top 10 keen Overseas Venture

1%2%2%6%6%7%8%

11%

57%

26. The problems facing the industrial sector seem to be coming largely from domestic enterprises catering mostly to the domestic market. Production slowdown is reflected quite clearly in modest growth in the Jan-May index of industrial production (IIP), which grew at only 5.2 percent, compared to 6.2 percent a year ago. Similarly, the purchasing manager index (PMI) for the manufacturing sector shows a rather sobering picture with PMI remaining below 50 marks (implying contraction) for most of 2012 and 2013. In June 2013, PMI slumped to 46.4, its lowest level since July 2012 (left panel, figure 9). The lackluster PMI score is consistent with a weakening of household consumption, with total retail sales of goods and services in the first five months of 2013 up a mere 4.8 percent in real terms compared to 6.6 percent during the same period of 2012 (right panel, figure 9). On the other hand, exports are still growing at a healthy pace, indicating that production problems seem to be largely confined to enterprises producing for the domestic market.

Box 4: Vietnam Remains An Attractive Destination for Foreign Investors

21

C. PERFORMANCE OF THE EXTERNAL SECTOR CONTINUES TO BE IMPRESSIVE

Exports

27. Vietnam’s export performance continues to be strong and resilient to domestic problems. Exports grew at 16 percent during the first four months of 2013 after achieving a growth rate of 18.2 percent in 2012 and 34.2 percent in 2011. While earnings from commodity exports are declining, due to falling prices, Vietnam traditional labor-intensive manufacturing exports such as garments, footwear and furniture continue to sustain rapid growth. A noteworthy addition to the export basket has been the exports of hi-tech and high-value products (e.g., cell phones and parts, computers, electronics and accessories, automobile parts), that have emerged as the largest and fastest growing export items in 2012. As table 3 shows, Vietnam exported $12.7 billion worth of cell-phones and accessories in 2012, compared to $3.7 billion of rice, $6.1 billion of seafood and $7.3 billion of footwear. In 2013, exports of cell phones and accessories are expected to exceed $18 billion, overtaking garments as the largest export item from Vietnam.2

2 According to South Korean Embassy, with Samsung’s rapid expansion in Vietnam, exports of cellphones are expected to exceed US$30 billion by 2015. Following Samsung’s success, LG Electronics is establishing a cell phone factory in Vietnam as well. With their entry, a number of ancillary units have started to relocate to Vietnam, giving rise to the prospect that Vietnam could emerge as one of the largest exporters of cell phones in the world.

Figure 9: Both PMI and Retail Sales Growth Point to a Slowdown in Domestic Demand


42

44

46

48

50

52

54

M-11 S-11 J-12 M-12 S-12 J-13 M-13

Expansion

Contraction

Purchasing Manager Index (PMI)

0

4

8

12

16

20

24

28

32

36

M-08 M-09 M-10 M-11 M-12 M-13

Retail Sales and Services (in %)

Real growth (%)

Nominal growth (%)

22

Export Turnover 2012 Value Change in %

US$ Bln Share (%) 2011 2012 4M-13

Total export value (f.o.b price) 114.6 100.0 34.2 18.2 16.0

Crude oil 8.2 7.2 44.2 13.6 2.1

Non-oil 106.3 92.8 33.4 18.6 17.0

Agriculture

Rice 3.7 3.2 12.6 0.4 -5.2

Other Agricultural Commodities 9.9 8.6 39.9 9.2 -11.3

Seafood 6.1 5.3 21.9 -0.3 -3.5

Low cost manufacturing

Garment 15.1 13.2 25.3 7.5 18.0

Footwear 7.3 6.3 27.9 10.9 14.2

Wood products 4.7 4.1 13.7 17.9 13.1

Hi-tech

Electronics and computers 7.8 6.8 30.1 68.1 44.5

Cell phones and accessories 12.7 11.1 98.4 98.8 97.0

Transport vehicles and parts 4.6 4.0 49.2 32.2 18.5

Others 34.6 30.2 34.0 8.7 3.1

Domestic sector 42.3 36.9 26.5 1.2 3.8

Foreign sector (including oil) 72.3 63.1 40.8 31.1 23.7

Table 3: Merchandise Exports

Figure 10: Vietnam’s Exports Basket has Changed Considerably in the Past Ten Years

Crude oil20%

Rice4%

Agriculture20%

Garments16%

Footwear11%

Electronics &

computers3%

Other26%

2002Crude oil

7% Rice3%

Agriculture9%

Garments13%

Footwear7%

Electronics &

computers7%

Phones and parts

11%

Tranport vehicles

and parts4%

Machinery and parts

4%

Plastic products

3%

Other32%

2012

Source: General Department of Customs

Source: General Department of Customs, General statistics Office, the World Bank

23

Figure 11: Vietnam’s Export Destinations Have Changed Little in the last Ten Years

28. Vietnam’s export basket has quietly undergone a significant transformation in the last ten years. Crude oil and agriculture including rice, which accounted for 44 percent of Vietnam’s total export value in 2002, have seen their share plummet to 19 percent in 2012. In the same period, the share of low-value manufacturing exports (garments and footwear) also fell from 27 percent to 20 percent. Hi-value export items, which had a negligible share in 2002, now account for more than a fifth of Vietnam’s exports (see figure 10).

29. While the export basket has transformed, export destinations have barely changed in the past decade. Vietnam’s top three export markets in 2002 were Europe, the US and Japan, accounting for 49 percent of its exports. The corresponding number in 2012 was 46 percent (see figure 11). The modest decline in the share of exports going to advanced countries has been captured by its neighbors, namely China and ASEAN. Given that South-South trade is increasing at 1.5 times the rate of growth of North-South trade (see box 2), it is important for Vietnam to continue to diversify its export destinations and explore new markets in Africa, South Asia and Latin America.

China9%

Japan15%

USA14%

EU20%

ASEAN14%

East Asia (excl.

Japan)10%

18%

2002China11%

Japan11%

USA17%

EU18%

ASEAN15%

East Asia (excl.

Japan)10%

18%

2012Rest of the WorldRest of the World

Imports

30. Import growth slowed considerably in 2012, but is picking up again in 2013. Lower demand for capital investment and intermediate goods, as well as weaker private consumption, caused import values to increase at a moderate rate of 6.6 percent in 2012. Imports from the domestic sector contracted by 7 percent during 2012, reflecting a substantive cut in public investment and weak domestic retail sales, whereas imports from the FDI enterprises grew at 22.7 percent during 2012—constituting 52.7 percent of the total import bill. Imports have revived in recent months, growing at 17 percent (y/y) during April 2013. The restoration of import growth, especially positive growth for the domestic sector, indicates an improvement of both investment and consumption demand in the near term. Imports of machinery, equipment, raw materials and intermediate goods has been rising faster in 2013 compared to 2012, implying that a new cycle of investment and production may be underway—offsetting to some extent the pessimism about investment demand discussed earlier. Imports of automobiles contracted by 2.8 percent in April 2013 compared to a much bigger contraction of 32.2 percent during 2012.

Source: General Department of Customs, General Statistics Office, the World Bank

24

Table 4: Merchandise Imports

Figure 12: Vietnam’s main imports

Import Turnover 2012 Growth in % US$ bn Share (%) 2011 2012 4M-13

Total import value (c.i.f price) 113.8 100.0 25.8 6.6 17.0 Capital Goods 9.0 7.9 61.6 -9.3 -22.9

Machinery and Equipment 16.0 14.1 13.0 3.2 10.0 Intermediate Goods

Garment and Leather Materials 3.2 2.8 12.5 7.1 13.4 Computer and Electronics 13.1 11.5 53.1 67.0 61.0 Phones and Parts 5.0 4.4 82.0 85.3 92.6

M aterials Steel 6.0 5.2 4.5 -7.2 12.6 Plastics 4.8 4.2 26.1 0.9 14.5 Fabrics 7.0 6.2 25.5 4.6 16.1 Chemicals 2.8 2.4 27.2 2.3 -5.0 Fibers and Weaving Yarns 1.4 1.2 30.4 -8.4 3.9 Cotton 0.9 0.8 56.1 -16.7 37.0 Fertilizer 1.7 1.5 46.1 -4.8 13.2 Pesticides 0.7 0.6 16.6 8.1 22.1

Products Petrol and Gasoline 9.0 7.9 61.6 -9.3 -22.9 Chemical Products 2.4 2.2 16.6 2.1 9.1 Pharmacy 1.8 1.6 19.3 20.7 8.7 Paper 1.2 1.0 15.4 9.0 12.7 Automobiles 2.1 1.8 6.8 -32.2 -2.8

Domestic Sector 53.8 47.3 21.0 -7.0 6.6 Foreign Sector 59.9 52.7 32.1 22.7 27.0

Source: General Department of Customs

Motor vehicles

8%

Machinery &

equipment26%

Petro products

14%Agricultural Metal11%

Chemicals6%

Plastics4%

Textile material

22%

Hi-tech intermediat

e5%

2002Motor

vehicles3%

Machinery &

equipment20%

Petro products

11%

Agricultural materials

4%Metal11%

Chemicals6%

Plastics6%

Textile material

16%

Hi-tech intermediat

e23%

2012Motor vehicles

6%Machinery

& equipments

19%

Petro products

10%


3%Metals

8%Chemicals5%

Plastics3%

Textile materials

16%

Hi-tech intermediat

es3%

Other27%

2002Motor

vehicles2% Machinery

& equipments

14%

Petro products

8%


3%Metals

8%Chemicals

5%Plastics

4%Textile

materials11%

Hi-tech intermediates

16%

Other29%

2012


25

Figure 13: Vietnam’s Imports by Sources

31. The composition of Vietnam’s imports has changed, largely reflecting the changes in its exports basket and move to a more high-tech industrial landscape. The share of machinery and equipment, petroleum products, textile materials, plastics, and motor vehicles in total import value has gradually fallen, while the share of high-tech intermediate products has increased nearly five times—from 3 percent of the total import bill in 2002 to 16 percent in 2012 (figure 12). The share of many other items such as agricultural materials, metals and chemicals in total imports has remained unchanged in the last one decade.

32. Vietnam’s imports from China have significantly increased, while shares of other countries in the import bill have commensurately declined. Vietnam imported one-quarter of its import needs from China in 2012, compared to only 11 percent in 2002 (figure 13). This trend is similar to what we observe in many other developing countries, where China has gradually displaced advanced economies to emerge as their primary trading partner. This process has been facilitated by growing intra-enterprise trade by multi-national companies, a dramatic decline in logistics costs and the move to increasingly form efficient global supply chains. The rise of Chinese share in Vietnam’s imports has meant a smaller share for most other countries, but mostly by Japan, EU and ASEAN countries.

China11%

Japan13%

USA2%

EU10%

ASEAN24%

East Asia (excl.

Japan)28%

12%

2002

China25%

Japan10%

USA4%

EU8%

ASEAN18%

East Asia (excl.

Japan)22%

Rest of the WorldRest of the World13%

2012

Trade Balance

33. Vietnam is expected to continue to enjoy a surplus in its trade balance in the near-term, though the size of the trade surplus may shrink. Vietnam used to have a problem of persistent trade deficits. The level of trade deficit peaked in 2008 at $18 billion, equivalent to 20 percent of GDP. The trade balance has since improved and Vietnam posted a trade surplus in 2012—the first time since 1992—thanks to strong growth in exports and subdued imports. It is also important to note that while the economy as a whole is running a deficit in its trade account, the foreign direct investment sector has been recording a trade surplus. With imports starting to pick up in the first half of 2013, Vietnam’s trade surplus is expected to get smaller in the coming years.


26

-2.7 -4.0 -2.4 -2.7 -1.4-3.6 -3.0 -4.2

-6.4-8.9 -9.4

-11.6

-20.2-24.7

-17.2-14.8 -16.1

-11.5

-4.3

-0.1

0.2 0.0 0.6 1.2 2.5 1.8 1.2 1.33.4 4.9

6.5 6.1 6.64.3

2.2

6.3

12.3

3.6

-25

-20

-15

-10

-5

0

5

10

15

1995 1997 1999 2001 2003 2005 2007 2009 2011 4m -13

Domestic sector

FDI sector

Total

Figure 14: Vietnam’s Trade Balance (in US$ billion): Domestic Versus Foreign Sectors

Figure 15: External Accounts (% of GDP) Figure 16: Foreign Reserves (months of imports)

Source: General Department of Customs (exports in f.o.b and imports in c.i.f price)

Source: SBV, IMF and World Bank Staff Estimates

Current Account Balance and International Reserves

34. Vietnam posted its largest ever current account surplus in 2012, though future surpluses are likely to be considerably smaller. Booming exports, a sustained flow of external capital (private and official) and remittances and lackluster import performance all contributed to Vietnam’s record current account surplus of 5.9 percent of GDP in 2012. With a capital account surplus of 5.8 percent of GDP, its balance of payments was in surplus by 9.3 percent of GDP, with the remaining amount accounted for by errors and omissions (figure 15). The surplus in the balance of payments helped in building up its international reserves, which went from 2.2 months of import cover at the beginning of 2012 to 2.8 months by the end of first quarter 2013. The reserve build up was one of the factors contributing to the stable macroeconomic environment (figure 16).

Figure 12: External accounts (% of GDP) Figure 13: Foreign reserves (months of imports)

1.61.9 1.8

1.6

2.2 2.3 2.32.7 2.8

0

1

2

3

Q1-11 Q3-11 Q1-12 Q3-12 Q1-13

-11.9

-6.6-4.1 0.2

6.4

13.712.1

6.7 5.2

5.9

-15

-10

-5

0

5

10

15

2008 2009 2010 2011 2012

Capital accountCurrent accountOveral balance

SURPLUS

DEFICIT

- 11

.0 -6.0 -3.8 0.2

5.9

12.6 11.16.1 5.3

5.8

-15

-10

-5

0

5

10

15

2008 2009 2010 2011 2012e

Capital accountCurrent accountOverall balance

Surplus

De�cit

27

Source: GSO

Source: GSO

D. INFLATION HAS STABILIZED, BUT INFLATIONARY EXPECTATIONS HAVE NOT

35. Inflation is in single digit and relatively stable. Headline inflation (y/y) was at 6.7 percent in June 2013, a steep deceleration from 18.1 percent in December 2011. The decline of inflation has been largely contributed by the easing of food prices and the effect of stabilization measures. Food prices grew by just 1 percent (y/y) in December 2012 and 1.5 percent in June 2013, generally due to an adequate supply of agricultural products and reduced growth in household consumption throughout the year. However, core inflation averaged around 10 percent, reflecting a series of increases in the prices of goods and services that are administratively managed.

36. A large part of inflation has been due to administrative price hikes, which are likely to continue in the foreseeable future. In the past six months, increases in prices of healthcare, transport and education services alone account for about 40 percent of the inflation rate. On the other hand sectors where prices have been largely determined by market forces have seen marginal or negative price increases (figure 18). Since user charges for many of the government provided services remain below cost, one would expect further increase in the inflation rate during the remaining months of 2013 as these prices are adjusted to market levels.

-5

0

5

10

15

20

25

-1.0

0.0

1.0

2.0

3.0

4.0

May -11 Nov-11 May -12 Nov-12 May -13

Monthly

year -on-year

0

10

20

30

40

May -11 Nov-11 May -12 Nov-12 May -13

HeadlineFoodCore

Figure 17: Inflation has been Low and Relatively Stable in Recent Months

Figure 18: CPI across different goods and services

0

10

20

30

40

50

60

May-10 Feb-11 Nov-11 Aug-12 May-13

Beverage & tobacco

Garment, hats, footwear

Household appliancies

0

10

20

30

40

50

60

May-10 Feb-11 Nov-11 Aug-12 May-13

HealthcareTransportEducation

28

E. MONETARY POLICY EFFECTIVENESS HAS BEEN HINDERED BY BANKING SECTOR PROBLEMS

37. Efforts by the authorities to support growth through monetary policy relaxation have had limited impact. The easing of inflation in the past twelve months has provided the State Bank of Vietnam the space to gradually ease monetary policy to support growth. The State Bank of Vietnam has slashed its key policy rates by 800 basis points and lowered the deposit rate cap on local currency accounts by 650 basis points since March 2012 (figure 19). Policy rates are now below the level where the tightening cycle began and deposit rates have fallen sharply as well. The growth of money supply has also been fast, with broad money (M2) rising at 25.7 percent (y/y) in May 2013. In spite of substantial loosening of monetary policy, total credit to the economy from the banking system is estimated to have grown by only 2.9 percent in May 2013 (y/y) compared to the annual target of 12 percent (figure 20).

38. Low credit growth can be attributed to several factors. First, with their balance-sheet impaired by rising NPLs, the commercial banks have been cautious in extending further credit to a stagnant real sector. They have also been more aggressive in collecting debt. Therefore, as reported by the SBV, credit institutions loaned VND570 trillion in January and more than VND400 trillion in February, but loan collection was still large enough to offset these increases, resulting in negative credit growth in the first two months of 2013. Second, flushed with extra liquidity, the credit institutions have turned to bonds as an alternative to lending to the real sector. The first four months of 2013 saw an approximately VND82 trillion government and government-guaranteed bonds being sold (out of a target of VND208 trillion of revenue from bond sales in 2013), much of which were subscribed by the credit institutions.

39. The effectiveness of monetary easing will continue to be constrained by the poor health of the banking system. The interest rate cuts have yet to boost lending and the flow of capital to private sector, mainly SMEs, which continue to complain about their limited access to bank credit. Credit activity remains subdued as banks have become more reluctant to lend due to increased risk perception, while credit demand has waned in light of weaker business prospects. Under such circumstances, further monetary easing is likely to have only limited impact on growth, but could add to concerns surrounding credit quality and negative consequences on macroeconomic instability. Therefore, in order to restore the functions of the credit market and make monetary policy more effective, restructuring of the banking sector (and the associated restructuring of SOEs) continues to be an imperative.

4

12

14

16

Jun -10 Mar-11 Dec -11 Sep -12 Jun -13Discount rate Re�nancing Rate

0

10

20

30

40

Apr-10 Jan-11 Oct-11 Jul-12 Apr-13Total Credit Total Liquidity (M2) Total Deposit

6

8

10

Figure 19: Key Policy Rates Figure 20: Growth in Monetary Aggregates (in %)

Source: SBV

29

F. FISCAL DEVELOPMENTS AND POLICIES

Aggregate Fiscal Discipline

40. Vietnam’s public finances have come under stress during the past few years on account of slower growth, lower revenue buoyancy and increased stimulus spending. During 2012 fiscal deficit increased to 4.8 percent of GDP (under GFS definition) as revenue collection to GDP ratio fell to a record low of 22.8 percent (left panel, figure 21) and despite government’s effort to reign in capital spending.3 Primary deficit, which excludes interest payments, was closer to 3.6 percent of GDP in 2012. As a result of higher deficits, government’s debt increased from 48 percent of GDP in 2011 to 52 percent in 2012, with domestic debt to GDP ratio rising to a record level of 23 percent. With government set to borrow nearly VND 208 trillion during 2013, domestic debt is expected to hit a new high this year.

Figure 21: Vietnam’s Fiscal Deficits and Public Debt have been Rising in Recent Years

Source: World Bank staff estimates based on MOF published data

0.4

3.6

2.2

7.2

3.03.5

4.84.5

-0.4

2.5

1.1

6.1

1.82.2

4.03.3

-1

0

1

2

3

4

5

6

7

8

2006 2007 2008 2009 2010 2011E 2012E 2013B

Deficit to GDP ratio (in %)

Fiscal deficit

Primary deficit19 21

26 30 29 27 27 26 29 30 28 29

4

8

9

13 14 16 18 17

18

22

20

23

23

29

35

42 44 43 45 4347

5248

52

0

10

20

30

40

50

60

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

ExternalDebt

Domes�cDebt

TotalDebt

Debt to GDP ratio (in %)

3 Vietnamese accounting standards suggest that at 4.3 percent of GDP, this is still just within the government’s medium-term target of maintaining the overall fiscal deficit at below 4.5 percent of GDP per year from 2011 to 2015.

30

Steadily Declining Revenue Performance

41. Revenue collection has been steadily declining in the past five years. Vietnam used to have one of the highest revenue to GDP ratios in the East Asia region; but the situation has changed in more recent years. Total revenue has been on a declining trend since mid-2000s when it peaked at around 30 percent of GDP and has been gradually dropping since then to an all-time low of 22.8 percent of GDP in 2012 (left panel, figure 22). The spike in 2010 (29.6 percent of GDP) was due to rapid economic recovery from the post crisis stimulus and high oil prices. Total revenue collection in 2012 grew by 10 percent in nominal terms compared to an average growth rate of 20 percent in 2010 and 2011. Revenue outturn in 2012 is estimated at close to 100 percent. The general tendency in the past has been to overshoot the revenue target due to underestimation in the annual State Budget.

42. Slowdown in revenue collection has been due to a combination of a slowing economy and the government’s response in terms of tax breaks for small and medium enterprises. One of reasons for weak revenue performance appears to be the declining share of fees, charges, non-tax revenue and capital revenue, which are related directly or indirectly to revenue from land and oil. Their combining share has fallen from 5.4 percent of GDP in 2007 to 2.2 percent of GDP in 2012. Tax collection as a share of GDP has also declined over time from its peak level of 24.4 percent of GDP in 2008 to 20.5 percent in 2012, largely on back of a slowing economy. CIT collections have fallen from 6.9 percent of GDP to an estimated 6.7 percent of GDP between 2010 and 2012 and VAT collections from 7.2 percent to 6.6 percent over the same period. Revenue from oil is estimated to have declined from 3.8 percent of GDP in 2011 to 3.2 percent of GDP in 2012, though collections were higher than projected – average price per barrel of crude was $105 in 2012 compared to an $85 estimate in the budget.

43. Around one quarter of total revenue are estimated to be collected from State Owned Enterprises and another quarter from foreign invested enterprises. The latter have to some extent helped to sustain CIT and VAT collections. Many private domestic firms on the other hand have closed down in 2012 as noted earlier. In addition to these, revenues from selling and leasing of land for industrial development fell, as did revenues from trade taxes due to scheduled tariff reductions and lower imports in 2012.

Figure 22: Revenue Performance and Composition of Tax Revenue


24.3

23.5

24.4

20.6 22

.4

21.1

20.5

19.8

2.8 2.7 2.0

2.51.9

1.4 1.0 1.2

1.8 2.7 2.2

2.22.4

1.61.2 1.1

29.7 29.4 29.3

25.827.3

24.322.8 22.1

0

5

10

15

20

25

30

35

Total

Grant

Capital

Fees, non-tax and charges

Tax

42.2

30.2

23.3

35.5

11.1

11.1

11.3

4.5

2.2

7.5

9.9

11.1

0

20

40

60

80

100

20062007

20082009

20102011

20122013

Othertaxes

Personal Income TaxNat. Res. taxTrade taxes

Value Added Tax

Corporate Income Tax

Breakdown of Tax Revenue (%)Revenue to GDP Ratio (in %)

31

Composition of Spending is Increasingly Skewed Against Investment

44. In response to these developments, and in line with its policy to enhance public investment efficiency, the government has continued to consolidate capital spending. Total capital spending (including off-budget) is estimated to have fallen from around 12.6 percent of GDP in 2010 to 9.4 percent in 2011 and 7.8 percent in 2012. This could potentially fall further as the government has already frontloaded its spending on capital projects through off-budget funds. On the latter, the government had targeted to spend a maximum of VND 225 trillion through off-budget funds between 2011 and 2015, with VND180 trillion budgeted for 2011-2013.

45. The growth in recurrent spending has fallen over the course of 2012, but recurrent spending on the social sectors has remained a priority in the State Budget. The ratio of capital to recurrent spending has consistently declined in the past three years from 62 percent in 2010 to 44 percent in 2011 and 38 percent in 2012 (figures 23). This partly reflects the relative priority accorded by the government to the social sectors. Recurrent spending on both education and health as a share of the total recurrent budget and as a share of GDP has steadily risen since 2010. The government maintains a policy of ensuring that at least 20 percent of the State Budget is spent on education and that the health budget grows by at least as much as the overall rate of growth of the budget.

46. Notwithstanding social sector needs, and given ongoing efforts to consolidate capital spending, the government will need to find savings from recurrent spending. Vietnam’s current surplus has declined in the last two years to an estimated 2.3 percent of GDP in 2012. Similarly, the primary deficit has also increased from an estimated 1.4 percent of GDP in 2011 to an estimated 3.4 percent of GDP in 2012. This suggests, as noted below, that maintaining fiscal sustainability may require further efforts at promoting spending efficiency.

16.9

17.9

18.5 20

.3

19.7

18.1

18.7

19.3

20.3

19.5

9.2 9.

4 9.1 9.

1

11.8

14.9

11.6

8.5 7.8

7.1

Expenditure to GDP ratio (%)

Capital

Recurrent

4.4 3.64.8 4.3 4.6 4.6 4.5

1.61.2

1.91.6 1.7 1.7 1.6

3.1

3.0

3.33.0 2.9 2.9 2.7

0.6

0.6

0.7

0.6 0.6 0.60.5

Budget Actual Budget Actual Budget Estimate Budget

2010 2012 2013

Social Sector Recurrent Spending (% of GDP)

Education Health Social Security Other Social Expenditure

2011

0

5

10

15

20

25

30

35

Figure 23: Composition of Expenditure: Capital and Recurrent


32

2013 State Budget

47. The 2013 State Budget approved by the National Assembly in December 2012 projects more moderate revenue and spending growth compared to recent years. Revenue is expected to grow at 10 percent in nominal terms (1 percent real growth compared to projected real GDP growth of 5.5 percent in 2013). Spending is expected to grow at 8 percent in nominal terms (1 percent contraction in real terms) compared to an average nominal growth of 15.2 percent in 2010-2012. Implementation of the 2013 State Budget in the first quarter has been broadly in line with target. Revenue collection is at around 21 percent of budget at the end of the first quarter, but will likely pick up over the course of the year. Similarly capital spending is at around 20 percent of budget, though this may be due to project start up time.

Debt Sustainability Analysis

48. The latest joint World Bank-International Monetary Fund Debt Sustainability Analysis (DSA) assesses Vietnam at low risk of debt distress, but there are important downside risks. Public external debt (domestic and external) has increased slightly to 51.5 percent of GDP in 2012 from 47.9 percent of GDP in 2011. Public sector debt dynamics over the medium to long-term have deteriorated somewhat compared to last year’s DSA, largely on account of slower growth projections, lower revenue buoyancy and higher fiscal deficits. Public and external debt sustainability indicators are projected to remain below their applicable debt thresholds.

49. Despite this, the government will need to maintain its ongoing control over spending growth to ensure medium-term fiscal sustainability. The above DSA results hinge on a baseline macroeconomic scenario in which government reduces the pace of spending considerably below historical levels. Even a small increase in the pace of spending growth, or maintaining primary deficits at the current levels, will lead to a rapid deterioration in debt dynamics. Most importantly, the baseline scenario assumes no realization of contingent liabilities and little progress on structural reforms. Therefore any systemic shock may also contribute to a rapid rise in public debt.

Debt indicator Government target 2012

Public Debt/GDP < 65 percent by 2020 51.5 percent

Public External Debt/Export Revenue < 25 percent

Total Public Debt Service/Revenue < 25 percent

Table 5: Debt burden indicators4

4 Government targets are taken from Prime Minister’s Decision 929 on Public Debt Management approved on July 17, 2012

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50. With a slowing economy, the government needs to manage tighter fiscal conditions with potentially large needs for economic restructuring. Economic restructuring is necessary for sustained economic growth over the medium to long-term. It will however have short-term challenges both in terms of potentially lower growth and in terms of fiscal costs. The latter are currently not accounted for in the 2013 State Budget. Some of these fiscal could be met through the government’s ongoing efforts to consolidate capital spending, though attention also needs to be paid in generating efficiencies on the recurrent side. Similarly, any reduction in tax rate should be done in a revenue-neutral way to ensure that the government can continue to mobilize adequate resources to meet is growing infrastructure and social sector needs.

G. NEAR-TERM OUTLOOK

51. Vietnam’s economy is expected to grow at a moderate rate of around 5.3 percent during 2013 and 5.4 percent in 2014. The slower than potential growth projection is based on the fact that it will take several years to address the structural problems facing the country. However, in our baseline scenario (see table 6) we assume continuation of the good spell of macroeconomic stability, a reasonable export growth and no imminent threat of a financial or economic crisis. Inflation is expected to increase during the second half of the year on account of planned rise in administrative prices, hike in civil servants salary, and the year-end seasonal factors, with inflation ending the year at around 8.2 percent.

2010 2011 2012/e 2013/p 2014/p

Real GDP (% change, y-y %) /1 6.4 6.2 5.2 5.3 5.4

Consumer Price Index (% change, year-end) 11.7 18.1 6.8 8.2 7.9

Government Fiscal Balance (% GDP) /2 -2.8 -2.9 -4.8 -4.0 -4.0

Public sector debt (% GDP) /3 51.7 47.9 51.5 50.4 50.5

Current Account Balance (% of GDP) -3.8 0.2 5.9 5.6 3.3

1/ GDP based on 2010 price

2/ Includes off-budget items

3/ Public and public-guaranteed debt

52. There are however several downside risks to our projections. First, slower growth may intensify demand for further loosening of monetary and fiscal policies, with the risk of stoking inflationary pressures and reversing the recent gains in macroeconomics stability. Second, if the implementation of structural reforms is delayed further, investors’ confidence would be undermined, further worsening growth prospects. On the external side, Vietnam’s economy remains susceptible to a further slowdown in the global economy, since its declining revenue performance and rising public debt which leaves little room for significant counter-cyclical policies.

Table 6: Vietnam’s Key Economic Indicators

34

35

A. BANKING SECTOR UPDATE

Financial Sector Fragility Remains, but Risk of a Systemic Crisis Has Receded

53. During 2012 the banking sector saw a significant deterioration in its financial situation as well as in the quality of its assets. Non-performing loans (NPLs) as reported by commercial banks increased from 2.9 percent at the end of 2011 to 4.5 percent by March 2013. SBV reported an NPL ratio of 8.6 percent for the banking sector at the end of June 2012. Indicating that the banks have aggressively used provisioning for their NPL treatment, SBV lowered the NPL estimate to 7.8 percent in December 2012 and further to 6 percent in February 2013.5 The reliability of these numbers, however, remains a matter of concern given the low quality of financial data. Independent estimates show the NPLs to be significantly higher than the official estimates. 6 The profitability of banks has also deteriorated considerably in 2012. The return on assets for the banking sector has fallen from 1.2 percent in 2011 to 0.79 percent in 2012, with JSBs seeing a bigger decline than the SOCBs during the same period.

54. The structural weaknesses in the system, coupled with the increased economic and financial volatility of past years, had heightened the risks facing the banking sector. A combination of several inter-related factors—weak governance, excessive exposure to and cross-ownership with state-owned enterprises (SOEs), and a fragmented regulatory and supervisory architecture—have gradually undermined the robustness of the sector. Weaknesses in corporate governance, lax internal controls and management practices, and complex shareholding structures among Joint Stock Banks (JSBs) that promote poor lending practices are known to have been the source of many of these vulnerabilities. In addition, the regulatory and supervisory architecture is fragmented—spread across several departments in SBV and MOF—with no single agency being responsible for monitoring systemic risks.

PART III: AN UPDATE ON THE RESTRUCTURING AGENDA03

5 As per the reported financial statements of seven big banks accounting for roughly 40 percent of total loans outstanding in the system, as much as VND15.5 trillion was used for provisioning for loan write-offs during 2012.

6 The main reasons for variation in different estimates of NPL have to do with different accounting and classification standards and poor transparency. In a recent statement, Fitch, a credit rating agency, said that they believe system-wide NPLs to be four times higher than the 4.5 percent number reported by the banks.

36

55. Restoration of macroeconomic stability and tight credit policy of SBV have prevented the vulnerabilities from growing bigger. The rapid expansion of deposits and credit in the banking system during the first decade of 2000s—from 44 percent of GDP to 114 percent in the case of deposits and from 39 percent to 115 percent of GDP in the case of credit (left panel, figure 24)—facilitated rapid growth of the economy, but also contributed to its mounting vulnerabilities. One of the key sources of vulnerability was the exposure to inefficient and under-performing SOEs, especially for the SOCBs. Though the share of credit going to SOEs has been declining, in 2009, SOEs still accounted for 29 percent of credit, with two-thirds coming from SOCBs (right panel, figure 24). The growth of credit and the share going to SOEs both fell during 2011 and 2012, arresting any further deterioration in banks’ soundness.7 Similarly loans to real estate and property developers are also reported to have fallen from a peak of more than 40 percent in 2009 to fell to less than 20 percent at the end of 2011; however, part of the this decline is also associated with change in the definition of real estate loans.. SBV also forced the mergers of three weak banks and capped their new lending amount to the volume of debt collected (i.e., zero net lending growth). With continued growth in deposits, limited growth in credit and SBV’s active support, the system’s liquidity has been restored. However, the stock of NPLs are yet to be resolved and the root causes of financial fragility have not been addressed actively.

Figure 24: Banking Sector: It’s Better to Grow Slow Than to Grow More Vulnerable

42%34%

29%

17%

91% 94%

65%60%

0%

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40%

60%

80%

100%

2001

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2007

2008

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2010

2011

2012

Credit to SOEs

SOEs borrowing from SOCBs(% of total credit to SOEs)

Banking Sector exposure to the SOEs

44

59

90 114100

39

59

86

115

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30

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90

120

2001

2002

2003

2004

2005

2006

2007

2008

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e

Deposit and Credit in the Banking Sector (% GDP)

Deposit

Credit

Note: In 2010, SBV changed the way loans are classi�ed by borrowers (SOEs and the rest); therefore data from 2010 are not directly comparable to the previous years.

Source: State Bank of Vietnam

Restructuring Efforts on part of the Government

56. Establishment of the Vietnam Asset Management Company (VAMC) has so far been the most visible step on the part of the Government to resolve the NPL problems. After more than a year of discourse and debate, Decree 53 on the establishment and operation of a national asset management company was issued by the Prime Minister on May 18, 2013. The Decree empowers SBV to establish the Vietnam Asset

7 Some of this decline is purely because of changes to the way loans to SOEs are being classified

37

Management Company (VAMC) as a not for profit, one-member limited liability company that is fully owned by the State with a charter capital of VND 500 billion (equivalent to $24 million). VAMC is expected to buy bad debts from banks at book value through special zero interest, five year maturity bonds or at market price without the bonds. The banks can use the bonds for refinancing loans from SBV and are obliged to make annual provision in their operational expense at a rate of not less than 20 percent of the value of the bond. At the time of maturity of the special bonds, banks will repurchase bad debts from the AMC at book value and return the special bonds to AMC.

57. VAMC, while being part of SBV, is expected to enjoy some authority and responsibility. According to the Decree, it will be able to purchase and sell bad debts and collateral, restructure debt, adjust debt payment conditions, convert debts to capital of the loan customers, invest, repair, upgrade and use and lease the collateral, organize asset auctions and even provide guarantees to other organizations, businesses and individuals to borrow money from credit institutions. If a credit institution with more than 3 percent NPL ratio refuses to sell bad debts to VAMC, SBV can carry out an inspection or hire an independent auditor or valuation company to assess the quality and value of assets of those banks and use the audit results to decide the amount of NPLs, purchase of bad debts, to make provisions and to comply with adequacy ratios prescribed by SBV. At the same time, VAMC will disclose its annual financial statements, which are audited by independent auditors, and the procedures and methods for valuing and selling of debts and assets.

58. Another important part of the restructuring process has been an increase in mergers and acquisition (M&A) activities among banks and increasing the share of foreign investors in the banking sector. These include the merger of three weak banks (Tin Nghia, Ficom Bank and SCB), acquisition of Habu Bank by SH Bank, sale of an 85 percent stake of Trust Bank to a group of investors (led by Thien Thanh Group) and merger of Western Bank and PVFC. Foreign investors increased their presence in the banking sector with the purchase of 20 percent stake of Tien Phong Bank by a group of investors led by DOJI group, 15 percent state bought by Mizuho Bank in Vietcombank and 20 percent stake purchased by Mitsubishi UFJ in Vietin Bank. Because of these M&As the number of domestic commercial banks has been reduced from 43 in November 2011 to 39 by the end of 2012. In 2013, there are other potential M&As among banks, as well as the purchases of bank stakes to non-bank institutions. There is a new bank being created as well (i.e. the Central Credit Fund was recently transformed into a Cooperative Bank). But, the merger of several weak banks has not necessarily created a new healthy bank and therefore their underlying problems remain unaddressed. Second, there is a risk that control of banks by non-bank corporates could lead to conflict of interest, encourage connected lending and more systemic risks down the road.

59. The ongoing efforts to improve loan classification and provisioning have been delayed. In January 2013, SBV issued Circular 02 on loan classification and provisioning, requiring banks to comply with stricter standards closer to international practices in calculating NPLs for all types of bank assets, including those that Decision 493 had missed.8 However, the implementation of the circular, initially planned on June 01, 2013, was delayed by one year because of lack of readiness on part of the banks.9 In this connection, the continuation of Decision 780 on the classification of rescheduled loans will continue to give room to the banks (and related borrowers) to flexibly interpret the loan classification system and to underreport NPLs.

8 As among other things, Circular 2 will cover the following additional aspects: (i) require banks to downgrade loans if it rated a borrower higher than other banks as reported by the Credit Information Center; (ii) tighten rules for deducting collateral from loan values to compute exposures for provisioning purposes; and (iii) introduce provisioning for banks’ holding of corporate bonds.

9 Another reason for the delay, it is alleged, is the concern that reported NPLs would sharply increase after Circular 2 is implemented. This increase will cause new problems for the banks trying to get rid of excess NPLs and for the national asset management company (VAMC) that has a tiny equity capital base relative to the size of NPLs.

38

60. SBV has also been forceful in requiring banks to lower the lending rates, for both new and existing loans, putting additional stress on banking sector profitability. It is believed that more than 60 percent of the loan portfolio is subject to lending rates of below 15 percent, and new loans in priority sectors are provided at 10 percent or lower rates. Despite all these efforts, credit growth has been anemic and with strong growth in deposits, commercial banks have turned to government bonds as a safe investment channel.

Success Will Require a Multi-pronged Approach

61. The Government’s approach to restructuring its banking sector is considerably different from what is generally considered as good practice. First, accurately measuring the size of the NPLs through special audits of banks and using them to estimate the recapitalization needs are important for a successful restructuring process. In Vietnam, there have been some ad-hoc external audits of weak banks, but no systemic efforts to undertake financial and portfolio audits of the larger and systemically important financial institutions. The size of NPLs and the recapitalization costs therefore remain uncertain. Second, most banking sector restructuring involves costs, which are absorbed into the government budget, often stretching over a number of years. The Government of Vietnam has however decided not to put any tax-payers’ money towards the restructuring exercise and instead has asked VAMC to issue special bonds with zero interest rates. In addition, the charter capital of VAMC is minuscule given the size of NPLs outstanding in the economy. Third, the AMC is expected to buy bad debts from banks according to the book value of the outstanding debt minus the unused provisions for such debts.10 Good practice however suggests that bad assets should be bought at market prices or at fair value based on special audit assessment. Finally, there remains a heavy reliance on administrative measures to solve problems—deposit rate caps, lending rate caps, monopolization of certain trade (e.g., gold), and mergers of selected weak banks—that often create distortions and prove costly for the economy in the medium to long-term.

62. Resolution of NPLs will require a proactive multi-pronged approach. The resolution of NPLs through the VAMC will depend on its attractiveness to banks as well as its pro-activeness in addressing NPLs (as opposed to it serving as a temporary warehouse for NPL). The VAMC design requires banks to provision 20 percent per year against the VAMC bonds without giving them an earning asset (VAMC bonds that will be exchanged for the NPLs have a zero coupon rate). The access to liquidity using VAMC bonds may also be of interest to only a handful of banks. Furthermore, if the assets are transferred and warehoused, with no active managed or disposition, they may actually lose value while the VAMC waits to grow out of the problem (do nothing approach, which could lead to higher cost of resolution in the future). In any event, only part of the NPL stock will be addressed through the VAMC. Banks will thus need to actively restructure and resolve NPLs in-house. Inadequate supporting regulation (insolvency, bankruptcy, out of court options, etc.) and a judicial system not trained or experienced in addressing such cases further constrains corporate restructuring and NPL resolution. Given the exposure to SOEs in particular, reforming the SOEs need to be undertaken soon. For successful and sustainable NPL resolution, it needs to be seen as part of the broader financial and economic restructuring program as it stands little chance of being effective in isolation.

10 There is also provision to buy at market prices but not with the special bonds.

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B. STATE-OWNED ENTERPRISE REFORMS

63. More than two years after the government set out to reform the SOE sector, progress has been limited. The general framework for SOE restructuring was laid out by the Government in the Socio-Economic Development Plan 2011-15, which was approved by the National Assembly in November 2011. The Governmental Resolution 01/NQ-CP (dated January 2012) then set out a reform agenda for State Economic groups and Corporations. This was further articulated in Decision 704 in June 2012 and Decision 929 in July 2013, both by the Prime Minister. Decision 704 covers the reform measures to strengthen SOE corporate governance and Decision 929 outlines the restructuring framework for the state economic groups and state general corporations for period 2011-15. The reform efforts, however, have been limited to preparation of new regulations by various line ministries and developing restructuring plan by the SOEs. Most of these regulations have yet to be approved and will take few years to be implemented. Against the target of equitizing 93 SOEs it 2012, it seems only 12 SOEs were equitized.

64. Work is ongoing to build on the existing legislation to create a comprehensive framework for the management of SOEs. Key ongoing efforts include:

• Classification of SOEs. Consolidation of all the SEG and GC restructuring plans to update Decision 14 (2011) on the role of the State in different sectors and to classify them by the level of government ownership. This regulation is expected to promote equitization in SOEs by suggesting that state ownership should concentrate on strategic areas including: military, monopoly industries, provision of primary goods and services, and high technology sectors.

• Law on the management of state capital invested in enterprises. This draft law aims to better define the roles and responsibilities of various ministries, agencies and the Prime Minister with regard to the management of state capital. The current draft does not call for appointment of an autonomous and professional agency to centrally manage state capital because of the prevailing view that no one agency can effectively manage and represent the State in all the 1,300 SOEs. However, according to the people drafting the legislation, Vietnam does intend to move toward such a regime in the long-run as the number of SOEs is reduced.

• Enterprise law, SOE chapter revisions: The plan is to ‘supplement not redraft’ the law with a focus on streamlining the regulatory process for SOEs. Failures like Vinalines and Vinashin have illustrated to government officials that the corporate governance framework needs revision and SOE governance in general must be improved. The need for both internal and external reporting and M&E has been called for including evaluation that that is linked to the remuneration of SOE management.

�• Disclosure of information by SOEs. Several regulations are under preparation that requires SOEs to disclose financial information (see box 5) and to entrust the Ministry of Finance with the responsibility to monitor and report on SOE performance.

65. Successful restructuring of SOEs will be difficult to achieve without strong inter-agency coordination. Currently, different ministries and agencies are drafting their SOE-related regulations independently, without sufficient inputs from and consultation with other relevant ministries and agencies. This is resulting in overlapping mandates and further fragmentation of the legal framework in which SOEs operate. Similarly, several agencies are collecting information and data on SOEs, sometimes duplicating each other’s effort and at other times working with fragmented and incomplete information. Therefore improving the inter-ministerial coordination of the SOE restructuring process by strengthen existing arrangements like national Steering Committee for Enterprise Restructuring and Development (NSCERD) or establishing new arrangements is critical.

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The findings from recent World Bank research support the prevailing view that current information disclosure in Vietnam needs attention. The analytical work suggests that while SOEs report various forms of financial and non-financial information to the Government, the quality of information is unsatisfactory and key information required for proper oversight, monitoring and evaluation are missing.

The standard of public disclosure is below levels in comparable jurisdictions and regional competitors. With no Economic Groups and only eight percent General Corporations reporting ‘summarized financial information’ on their website, public information disclosure by SOEs in Vietnam is at worst non-existent and at best outdated, ambiguous and is often contradictory (see Table below). It is also apparent that being in the spot-light can increase the demand for information as many of the troubled SOEs have been subject to additional requirements.

Sample of Vietnamese SOEs’ current website content

The following steps could improve SOE information disclosure and thus contribute to SOE efficiency. Overlaying this, is a fundamental requirement to ensure that there is a political consensus around the need for reform, and an understanding of the benefits that reform can bring. Without a strong drive for reforms, groups that benefit from existing SOE policy will be able to block progress and ensure reforms that might disempower them take a back seat. The ideas include:

• Enhance public disclosure and do not focus merely on internal disclosure.

• Disclose information on the SOEs at one central place (website), with a national agency being in charge of coordinating the process. The task of collection, compilation and reporting of the information to the central agency should be the responsibility of the SOEs.

• Simplify information requirements and build a more straight forward legislative framework and a standardized information disclosure system.

�• Incentivize compliance by SOEs to the legislative and regulatory framework by rewarding compliant enterprises and penalizing non-complaint ones.

�• Phase in the enhanced disclosure process by piloting it with a select set of SOEs. One such phasing could start with the Economic Groups, then expand to General Corporations and finally to the remaining SOEs with 100 percent state equity.

Source: Unlocking SOE Efficiency in Vietnam: How Information Disclosure Can Help? Policy Note, The World Bank (2013).

Type of Information (%)

Number with

Website

Basic Information on

SOE

News and Strategy

Overview

Annual report or FSs or Auditor

report

Summarized Financial

Information

SOE sample 89 100% 87% 16% 8%

Of which: EGs 11 100% 100% 45% 0%

Of which: GCs 12 100% 50% 8% 8%

Publishing License No: 463-2012/CXB/34-35/LĐ and QĐXB No: 243 QĐLK/LĐ Issued on 01 June 2012.Designed by Golden Sky Co., Ltd. Tel: 84-4-39728458

Box 5: SOE Information Disclosure

Economy & Finance

Vietnam's Recent Economic Development 2013