On the eve of this week’s Consultative Group (CG) meeting for Vietnam, Sanjay Kalra, Vietnam resident representative of the International Monetary Fund (IMF), talked to VIR’s Thanh Tung about what Vietnam’s government should do to chart a better course through the economic turbulence.
Vietnam’s National Assembly has identified the country’s goals for 2013 to be strengthening macro-economic stability, taming inflation at a rate lower than in 2012 and achieving an economic growth rate higher than in 2012. Do you think that this target will be a wise one and why?
Further strengthening macroeconomic stability, including reining in inflation are indeed appropriate targets for 2013. The macroeconomic stabilisation gains of 2012 achieved under Resolution 11 must be preserved. As part of this effort, headline inflation has declined from over 20 per cent (y/y) in August 2011 to single digits in 2012, and the State Bank seems to be on track to deliver single digit inflation for the year as a whole.
The current account has been in surplus with strong export growth. The exchange rate has been stable this year and the level of international reserves has increased. As inflation has come down, it has been possible to bring down the structure of interest rates - policy rates, deposit rates and lending rates.
But there have been significant challenges as well. Growth has been slower in 2012 and it has been difficult for enterprises, especially small- and medium-sized ones, to survive. While liquidity in the banking system is ample, credit growth has been weak and level of inventories remains high. The real estate market has been frozen. There was some instability in financial markets related to high profile events in the banking sector in recent months.
Lower gross domestic product (GDP) and credit growth while banking system liquidity is high indicates that there are problems in the banking system that need to be resolved. At the same time, problems in the banking system cannot be resolved without solving the problems of corporations, including the state-owned enterprises (SOEs). Attempts to raise growth without solving these structural problems can lead to negative results, including a return to higher inflation and exchange rate instability. In our view, the correct choice would be to accelerate structural reforms. This may lead to lower growth in the short run, but will sow the seeds of higher sustained growth over the long term.
What are the IMF’s policy recommendations to achieve these results?
To retain stability, macroeconomic policies should remain appropriately tight in 2013. The State Bank must maintain the policy rate at current level for some time to come. At the same time, it must continue to monitor closely inflationary pressures, including those arising from global food and fuel prices. The level of international reserves has risen, but is still below what would be considered either comfortable or even adequate to deal with large external shocks.
While confidence in the dong has risen, it is still not enough to withstand financial market turbulence at home and abroad. So there is a need to further increase the level of international reserves through appropriately tight macroeconomic—both monetary and fiscal—policies and make the dong a stronger currency in the eyes of the public. For this, close cooperation between the State Bank and the Ministry of Finance is absolutely essential. Also, stabilisation efforts need to be supported by fiscal policy.
However, structural reforms need to accelerate significantly, and provisions need to be made for the cost of bank recapitalisation and SOE restructuring and reforms, including consequences of possible labor redundancies.
The government has also placed big stress on economic restructuring. In your opinion, how has this issue gone so far and what has been resisting this effort?
As for the banking sector, weaknesses and opacity in the banking sector undermine stability and will continue to constrain growth. Following an extended credit boom and connected lending to SOEs, the banking system is characterised by poor asset quality, under provisioning, and inadequate capital adequacy.
There is significant confusion among market participants about the level of non-performing loans (NPLs). While banks report their NPLs to be around 4.5 per cent, the State Bank’s off-site estimate stands at a much higher 8.75 per cent. NPLs are concentrated in SOEs, particularly those with real estate exposure. Official estimates show the rate of transition into NPLs has declined substantially during the second half of 2012, but this may well be due to some undesirable restructuring of bad loans. Given the weaker growth outlook and the need for banking sector reform and consolidation through 2015, NPLs are likely to increase further.
Despite reform proposals, the merger of weak banks in late 2011 and early 2012, the recent discussions on an asset management company to address the NPL problem, and efforts to strengthen risk management and governance at banks, there is still a need for a clearly articulated and comprehensive bank resolution strategy. In addition, progress in implementing existing plans has been slow.
As for SOEs, a considerable part of the banking sector loans are to the economic groups (EGs) and SOEs. Banking system problems cannot be addressed without dealing with the problems of the banks’ borrowers. Therefore, reform of EGs and SOEs is important. As a first step, the true financial condition of the EGs and SOEs must be disclosed to the public, including their audited income statements and balance sheets, and their borrowings from the banking system. Once the true financial condition of these enterprises has been revealed, steps can be taken to improve their operations and governance structures.
Accelerating the reform process will boost the confidence of international partners in Vietnamese economy and help raise its credit rating by international agencies. This helps Vietnam to attract more FDI and other capital inflows so that the large investment needs of the economy can be fully met.