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Persistence & resistance
Representatives from the IMF and the World Bank see challenges for the new government in stabilising the macro-economy over the next few years
Vietnam recorded a number of achievements over the last five years under the 12th National Assembly, including accession to the WTO, transition from a low- to a middle-income country, effective navigation of the global economic crisis and maintenance of its position as one of the most attractive destinations for long-term investment and growth.
It was also a period of challenge, however, as far as macroeconomic stability was concerned. Inflation rose, the exchange rate came under consistent downward pressure, reserves declined, public debt rose, and the health of the banking and corporate sector deteriorated under the twin burdens of increased leverage and exposure to an over inflated property sector.
Following the 11th Party Congress earlier this year there appeared to be renewed determination to tackle these vulnerabilities and make a decisive break with the macroeconomic instability of the recent past. This new determination was reflected in the strategy laid out in Resolution 11. “Resolution 11 correctly identified that the most immediate challenge was to restore public confidence in the Vietnam dong, which had become eroded by rising inflation expectations and an embedded perception that the dong/dollar exchange rate was on an irretrievable downward trend,” said Mr Benedict Bingham, IMF’s Senior Resident Representative for Vietnam.
The initial impact of Resolution 11 was positive, he continued. “The dong, which had been under pressure, has stabilised and the State Bank of Vietnam (SBV) has been able to start replenishing its reserves. The stability in the dong also helped ease offshore risk premia, which had risen substantially above Vietnam’s regional peers as a result of the macroeconomic turbulence in 2010.”
It was also apparent, though, that significant challenges remained, and not just because inflation lingered at very high levels. Confidence in the success of Resolution 11’s strategy continued to be fragile, with support for the dong continuing to rest on very short term “carry trade” bets.
The key macroeconomic challenge facing the new government when it takes office in early August is to bolster confidence in the government’s commitment to sustaining the Resolution’s strategy. “One important task for the new team will be to take steps to reassure markets that the repo rate cut in the SBV on July 4 does not reflect a weakening of the central bank’s commitment to sustaining a tightening bias in monetary policy until inflation expectations come down and reserves are built up to more comfortable levels,” Mr. Bingham said.
Meanwhile, according to Mr. Deepark Mishra, Lead Economist at the World Bank in Vietnam, there are high expectations of the new administration. “The outgoing National Assembly raised the bar when it comes to the conduct and transparency of policy discussion and providing oversight on government decisions and actions,” he said. “We therefore expect the new National Assembly as well as the new cabinet to continue this tradition. Specifically, we hope to see full and effective implementation of Resolution 11, including further fiscal consolidation, strengthening the governance of SOEs and improving communications with market.”
In the short term, the urgent need is to continue to pursue policies that will contribute to macroeconomic stability, Mr Mishra believes. In the medium-run, the focus should be on translating the vision laid out in the Socio-economic Development Strategy (SEDS) 2011 - 2020 into executable action plans and to ensure their effective implementation.
He added that Vietnam’s macroeconomic problems have two broad origins: Cyclical and structural. Cyclical factors include accommodative fiscal and monetary policies at home and weak global economic recovery and sovereign debt problems abroad. There is not much Vietnam can do to address global problems.
On the domestic front, though, it has taken steps via Resolution 11 to correct its domestic policy stance. It needs to continue to implement all elements of Resolution 11 in letter and in spirit. Any premature relaxation of policies may produce modest short-term benefits, but will result in huge, long-term losses.
The second set of issues is structural in nature, according to Mr. Mishra. The structural distortions are manifested in various forms: relatively inefficient public investment, an over-leveraged and poorly-governed State enterprise sector, and weaknesses in the banking system with inadequate transparency, to name just a few. “Addressing these structural weaknesses, in our view, should be a priority during the next five years,” Mr. Mishra said.
“We hope that the new cabinet will provide the necessary support to implementing agencies such as the SBV, MPI and MoF, to enable them to discharge their mandate effectively. It may also consider explaining its policy decisions to the public at large and bringing a level of a transparency in policymaking that befits Vietnam’s middle-income status.”
Mr. Deepark Mishra, Lead Economist, World Bank in Vietnam
“I have perhaps inevitably focused on the new government’s macro-economic stabilisation priorities. But it is important not to overlook the pressing need to accelerate structural reforms that are essential to raising Vietnam’s growth potential over the longer term.”
Mr. Benedict Bingham, IMF Senior Resident Representative for Vietnam
Linh San
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