Key findings:
- The authorities' determined implementation of stabilization measures over the past year has helped to avert a macroeconomic crisis.
- Inflation (y/y) has fallen for the ninth consecutive month — from a peak of 23 percent in August 2011 to 8.3 percent in May 2012.
- The current account deficit is estimated to have declined to 0.5 percent of GDP in 2011, from 4.1 percent in 2010, and a peak of 11.9 percent of GDP in 2008.
- The unofficial exchange rate has traded within the ±1 percent band around the official exchange rate for most of the past year.
- The increased supply of US dollars in the market has enabled the State Bank of Vietnam (SBV) to replenish foreign exchange reserves in the first months of 2012, which are reportedly close to 9 weeks of imports.
- There has been a sharp decline in credit growth, from 32.4 percent at end-2010 to 14.3 percent at end-2011.
- Fiscal deficit is estimated to have declined to 2.7 percent of GDP in 2011 from a peak of 7.2 percent of GDP in 2009.
- Regaining macroeconomic stability has been costly, but not stabilizing the economy would have led to even bigger losses.
- Real GDP growth has decelerated from 6.8 percent in 2010 to 5.9 percent in 2011, and further to 4 percent in the first quarter of 2012.
- While the stabilization efforts may have contributed to a cyclical slowdown, Vietnam’s trend growth rate has been on a downward path for the last 5-6 years, largely on account of the slow pace of structural reforms.
- Inefficiencies in state-owned enterprises, banks and public investments have been a drag on the country’s long-term growth potential.
- With gains from macroeconomic stabilization still recent and fragile, the government needs to be careful not to shift to an expansionary stance prematurely.
- State Bank of Vietnam has reduced policy rates by 300 basis points in a period of eight weeks and the Government tries to support affected enterprises by deferring tax payments and lowering land lease fees. But given Vietnam’s history of premature loosening of policy, there are reasons to exercise caution.
- With a 3-4 months lag between policy change and outcome, the effect of recent expansionary policy will be felt by the end of the third quarter of 2011 not only through higher growth, but also higher inflation. With public debt at a more elevated level, there is less room for fiscal stimulus in 2012 than was the case in 2009.
- With lingering inefficiencies in state-owned enterprises and weaknesses in the banking system, stimulus measures will contribute to preserving an inefficient growth model, going against the Government’s own desire to move towards a more productive and competitive economy.
- Despite the Government announced its intention to restructure state-owned enterprises, the public investment regime and the financial sector last October, what is perhaps missing is a ‘restructuring roadmap’ with a clear timetable and an effective oversight mechanism for implementing it.
