Taking Stock: An Update on Vietnam’s Recent Economic Developments – December 2014

Key Findings:

•    Early signs show that Vietnam’s economic recovery is on track. GDP growth picked up to a relatively brisk 6.2 %(y-o-y) in the third quarter of 2014, contributing to an overall growth rate of 5.6% for the first nine months of the year.

•    Continued macroeconomic stability has helped underpin growth in Vietnam. It has contributed to the country’s improved sovereign risk ratings which enabled government bonds to be issued on international capital markets, raising US$1 billion on relatively favorable terms.

•    Government revenue increased by 17% in the first nine months of this year, compared to the same period last year. At the same time, total expenditure rose by 11.5%, due largely to recurrent spending. While Vietnam is still considered at low risk of debt distress, overall public debt levels are becoming an increasing concern.

•    Credit growth continues to come in below expectation, hampering the authorities’ efforts to carry out credit expansion to support economic growth.

•    Underlying the broad patterns of recovery, the performances of foreign-invested and domestic firms have been dichotomous. The foreign-invested sector continues to be a significant source of growth, while the performance of the domestic private sector has been more mixed, with rising number of domestic businesses have been closing or suspending operations.

•    The Government has taken some important measures in 2014 to improve business conditions which are expected to bear fruit from next year. This includes a resolution to shorten the time for administrative procedures for filing taxes, reduce administrative costs, and strengthen the transparency and accountability of state administrative agencies. The revised Law on Bankruptcy, the Enterprise Law and the Investment Law, are expected to improve corporate governance in enterprises and State Owned Enterprises (SOEs).

•    Despite a pick-up in momentum, SOE reforms are lagging behind planned targets. The Government has articulated a clear policy vision on SOE reforms, but more consistent implementation will be the key.

•    Medium term projections reflect continued modest GDP growth and further consolidation of macroeconomic stability. The Government’s continued commitment to fiscal consolidation and debt reduction is reassuring. Critical to this will be improved revenue collection, better controls on recurrent expenditures, and improving the efficiency of public investment.

•    The weak performance of the financial sector is due to a complex array of institutional and regulatory factors. These factors have included episodes of interference by central and local authorities on the investment and credit decisions of state owned enterprises (SOEs) and state owned commercial banks; inadequate governance structure and risk management capacity in these institutions; connected lending in several joint-stock banks; weaknesses in financial infrastructure, including poor financial reporting standards; and deficiencies in financial regulation and supervision. The government has announced a comprehensive reform program designed to address these problems and resolve the bad debts in the system. Accelerating the reform program remains a priority.