Vietnam Economy - IMF Article IV Consultation Report Summary (Summer 2017) Inwa Advisers Pte Ltd. Incorporated in the Republic of Singapore. Co Reg No. 198601745D.
Summary of Main Points (I)* POSITIVES The economy continues on a solid path growth is robust, underpinned by domestic demand, export-oriented manufacturing and FDI 2016 real GDP +6.2%, current A/C +4.1% of GDP, FDI 6.3% of GDP, FX reserves +$10bn (5% GDP) Excellent progress has been made in reducing poverty poverty headcount ratio has fallen from c.80% to below 20% since 1990 rapid income growth has been widely shared across the wealth spectrum of the population Reforms continue on a broad front the govt. is keenly aware of limited fiscal space & the need to upgrade the growth model Stated plans for fiscal consolidation are appropriate 4.7% deficit target for 2017, falling to below 3.5% of GDP by 2020 2016 has seen progress in tax administration, 0.7% GDP in equitization, lengthening of govt. debt maturities Core inflation is low (at below 2%) this is an excellent time to begin modernizing Vietnam s monetary framework * For full details, please refer to the Vietnam pages on the IMF s website and, specifically, to the items dated 5 th July 2017 - Country Report No. 17/190, including Staff Report for 2017 Article IV Consultation - Country Report No. 17/191 Vietnam: Selected Issues 1
Summary of Main Points (2) CHALLENGES / NEXT STEPS Fiscal consolidation: more specific measures are needed to broaden revenue (eg. fewer incentives, a property tax, unified VAT rates, higher excise & environmental taxes) to raise spending effectiveness, protect infrastructure / social spending, reform the civil service pending clarification of these, the IMF staff s projections do not fully reflect the government s fiscal targets External position: substantially stronger than warranted by fundamentals reforms needed (in banking, SOEs, services, competition) to reduce barriers to investment coverage of pensions & social safety net need strengthening to lower precautionary saving Banking system: provisioning is piecemeal and bank recapitalization needs to be faster strong deposit insurance & effective lender of last resort needed to maintain confidence in system phasing out of credit targets, reforms to facilitate debt enforcement / collection introduction of international accounting standards, reduction in foreign ownership limits Credit misallocation / narrowing the perimeter of the state a disproportionate share of credit is channeled to SOEs, which enjoy unfair advantages vs SMEs privatization of stronger SOEs is welcome; attention now needed to sell/restructure/resolve weakest plans to separate govt. ownership from SOE management and state s regulatory function are critical Raising the productivity of the non-fdi sector, including in agriculture regulatory barriers to entry in certain sectors (eg. electricity), corruption, preferential access to resources sustainability risks elevated in agriculture & fisheries (salinization, water/air/ground pollution, climate change) 2
Selected Economic & Financial Indicators 2012 2013 2014 2015E 2016P 2017P 2018P Real0GDP0Growth0(YoY,0%) 5.2 5.4 6.0 6.7 6.2 6.3 6.3 000Per0Capita0GDP0(USD) +++++++ 1,753 +++++++ 1,902 +++++++ 2,049 +++++++ 2,088 +++++++ 2,173 +++++++ 2,301 +++++++ 2,460 000Growth0in0Per0Capita0GDP0(%) 8.5 7.7 1.9 4.1 5.9 6.9 CPI0(Period0Average,0%) 9.1 6.6 4.1 0.6 2.7 4.9 4.8 CPI0(End0of0Period,0%) 6.8 6.0 1.8 0.6 4.7 5.0 4.5 Core0Inflation0(End0of0Period,0%) 5.8 4.6 2.7 1.7 1.9 Govt.0Revenue0&0Grants0(%0GDP) 22.6 23.1 22.2 23.7 23.2 23.2 23.1 Govt.0Expenditure0(%0GDP) 29.5 30.5 28.5 30.0 29.8 29.0 28.9 Govt.0Balance0(%0GDP).6.9.7.4.6.3.6.2.6.6.5.8.5.8 Public0Debt0(Period0End,0%0GDP) 47.9 51.8 55.1 58.3 62.4 63.3 64.3 Broad0Money0Growth0(YoY,0%) 18.5 18.8 17.7 16.2 18.4 18.1 17.4 Credit0Growth0(YoY,0%) 8.7 12.7 13.8 18.8 18.8 17.1 16.9 000Nominal03m0Deposit0Rate0(%) 8.3 6.9 5.0 4.8 4.9 000Nominal0ST0Lending0Rate0(%) 12.4 9.7 8.5 7.2 7.2 Current0Account0Balance0(%0GDP) 6.0 4.5 4.9.0.1 4.1 2.7 2.0 000Exports0(FOB,0%0GDP) 73.6 77.4 80.8 84.6 87.7 90.0 91.8 000Imports0(FOB,0%0GDP) 68.0 72.3 74.3 80.8 80.8 83.5 85.6 Capital/Financial0Account0(%0GDP) 5.6 0.2 2.9 0.5 5.0.0.2 0.8 Gross0Int'l0Reserves0(USD0bn) 25.4 26.0 34.3 28.4 36.7 42.2 48.6 000In0Months0of0Prospective0Imports 2.2 2.0 2.4 1.9 2.2 2.3 2.4 Total0External0Debt0(%0GDP) 37.4 37.3 38.3 43.1 47.8 49.5 51.0 Nominal0Exchange0Rate0(USD,0EoP) +++++ 20,825 +++++ 21,105 +++++ 21,385 +++++ 22,485 +++++ 22,770 00Nom.0Effective0Exchange0Rate 86.4 88.3 94.0 97.6 98.2 00Real0Effective0Exchange0Rate 108.9 116.1 123.6 128.7 132.8 3
Growth and Inflation Vietnam s growth continues to be solid although oil output has dragged recently. Domestic demand & investment remain robust. 9" GDP$Growth$(%)$ Contribu)on*to*GDP*Growth*by*Ac)vity*(2010*Prices,*%)* 20$ Contribu)on*to*GDP*Growth*by*Expenditure*(2010*prices,*%*pts)* 8" 7# 7" 6" 5# 10$ 5" 4" 3" 2" 3# 1# 0$ 1" 0" Q1"2011" Q1"2012" Q1"2013" Q1"2014" Q1"2015" Q1"2016" Q1"2017"!1# Q1#2011# Q1#2012# Q1#2013# Q1#2014# Q1#2015# Q1#2016# Q1#2017# Services# Construc8on# Industry#(excl#Mining)# Agriculture,#Forestry,#Fisheries# Mining#!10$ Q1$2011$ Q1$2012$ Q1$2013$ Q1$2014$ Q1$2015$ Q1$2016$ Q1$2017$ Gross$Capital$Forma8on$ Errors$and$Omissions$ Trade$ Consump8on$ Administered price increases are the main driver of higher headline inflation 9# 7# 5# 3# 1#!1# Contribu)on*to*Headline*Infla)on*(%*pts)*!3# Jan!13# Jul!13# Jan!14# Jul!14# Jan!15# Jul!15# Jan!16# Jul!16# Jan!17# Food# Transport# Educa9on/#&#Healthcare# Other#Goods# and, although the output gap has closed, core inflation has remained low. 9# 7# 5# 3# 1# Vietnam()(Headline(and(Core(Infla2on,(%(YoY(!1# Jan!13# Jun!13# Nov!13# Apr!14# Sep!14# Feb!15# Jul!15# Dec!15# May!16# Oct!16# Mar!17# Source for all charts / data: IMF Staff Report for 2017 Article IV Consultation, 5 th July 2017. IMF s website for full details Headline# Core#(excl.#raw#food,#energy,#administered#prices)# Please refer to the - Monetary conditions are accommodative, with real IB rates close to zero and the Dong having depreciated by 1.9% since Nov. 2016. - IMF advises keeping IB rates above the repo. rate, reducing credit growth targets to below 15% and being alert to higher inflation risks - Monetary policy, if anchored to inflation, would increase FX flexibility & resilience, whilst allowing credit targets / deposit ceilings etc. to be phased out in stages - Further strengthening in human capital / capacity at the Central Bank is advised as a first step in policy modernization - Reserves stand at 70% of the IMF s metric and should be accumulated opportunistically over the medium term. 4
Balance of Payments Exports (IT) & imports stronger in H2 2016... and the BOP strengthened in 2016. FDI strong, especially in manufacturing. 40.0% 35.0% Exports(&(Imports((3mma,(%(change(YoY)( 30.0% 25.0% Balance'of'Payments'(%'GDP)' 3 FDI$Commitments$($bn)$ 30.0% 20.0% 25.0# 25.0% 20.0% 15.0% 10.0% 2 15.0% 5.0% 15.0# 10.0% 5.0% 0.0%!5.0% 1 0.0%!5.0%!10.0% Jan!12% Jul!12% Jan!13% Jul!13% Jan!14% Jul!14% Jan!15% Jul!15% Jan!16% Jul!16% Exports% Imports%!10.0%!15.0%!20.0% Q1%2010% Q4%2010% Q3%2011% Q2%2012% Q1%2013% Q4%2013% Q3%2014% Q2%2015% Q1%2016% Q4%2016% Errors%&%Omissions% Current%A/C% Capital%&%Financial%A/C% 5.0# 2009# 2010# 2011# 2012# 2013# 2014# 2015# 2016# Others# Real#Estate# Wholesale/Retail# M:g/Processing# Investments goods & intermediate inputs are more than 50% of imports combined 20 18 16 14 12 10 8 6 4 2 Imports(by(Category(($bn)( 2009# 2010# 2011# 2012# 2013# 2014# 2015# 2016# Others# Commodi7es# Intermediate#Inputs# Machinery/Eqpt# Steel# but investment has declined in the past decade and savings are stubbornly high. 40# 35# 30# 25# 20# 15# Savings(and(Investment((%(GDP)( 2005# 2006# 2007# 2008# 2009# 2010# 2011# 2012# 2013# 2014# 2015# 2016# Gross#Na2onal#Saving# GCF#(ex#FDI)# GCF# Source for all charts / data: IMF Staff Report for 2017 Article IV Consultation, 5 th July 2017. IMF s website for full details Please refer to the - The external position is substantially stronger than warranted by fundamentals and desirable policies - IMF estimates the Current A/C is c.6% higher than it could be and that, taking this into account, the Dong is undervalued by c. 10% - Distortions in the economy discourage investment in the domestic private sector and underdeveloped social security encourages precautionary saving - Current A/C of domestic non-fdi sector is -8% of GDP and productivity is 20% of FDI sector - Slow SOE reform, barriers to SMEs reaching economies of scale and credit misallocation all impede the development of a vibrant non- FDI sector. 5
Fiscal Balance and Credit Fiscal deficit >6% of GDP since 2012 public debt up by 10% GDP since 2013. Fiscal revenue has been in long-term decline Fiscal'Balance'(%'GDP)' Public'and'Publicly'Guaranteed'Debt'(%'GDP)' 2.0% 7 1.0% 6 0.0%!1.0% 5!2.0% 4!3.0%!4.0% 3!5.0% 2!6.0%!7.0% 1!8.0% 2006% 2007% 2008% 2009% 2010% 2011% 2012% 2013% 2014% 2015E% 2016P% 2006# 2007# 2008# 2009# 2010# 2011# 2012# 2013# 2014# 2015E# 2016P# Fiscal%Balance% Primary%Balance% Domes4c#Debt# Foreign#Debt# 30# 27# 24# 21# 18# Revenue&(%&GDP)& 2006# 2007# 2008# 2009# 2010# 2011# 2012# 2013# 2014# 2015E# 2016P# Lending to real estate in the vanguard even as credit growth remains high. Contribu)on*to*Credit*Growth*(%*change*YoY)* 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%!5.0% Q4%2012% Q2%2013% Q4%2013% Q2%2014% Q4%2014% Q2%2015% Q4%2015% Q2%2016% Q4%2016% Trade,%Transport,%Comms% Real%Estate,%Fin%Servs,%Other%Servs% ConstrucDon% Industry% Agriculture,%Forestry,%Fisheries% Credit'Growth'(%'change'YoY)' 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%!5.00% Q4%2011% Q4%2012% Q4%2013% Q4%2014% Q4%2015% Q4%2016% To%SOEs% To%non!SOEs% From%Four%Main%State%Banks% From%non!State%Banks% Source for all charts / data: IMF Staff Report for 2017 Article IV Consultation, 5 th July 2017. Please refer to the IMF s website for full details - Target is to reduce deficit to 4.7% GDP in 2017 and to below 3.5% GDP by 2020 - Plans for better tax administration, and 2% of cuts in social and capital expenditure - Administered prices are being liberalized - IMF argues more is needed to broaden and diversify revenues and reduce tax incentives - It sees scope for a reduction in public sector headcount, improved capital spending efficiency and greater private sector participation in infrastructure projects - Public funds (1% GDP) should be authorized for bank recapitalization - Faster bank and SOE reform could boost GDP growth to 7% in the long run. 6
Banking System and Credit Progress on NPLs, but more to be done Total Impaired IL.Ratio IL.Ratio Loans Loans.(IL) (Dec.2016) (Jun.2015) Total.banking.sector 5575 470 8.4% 12.7% StateFowned.banks 2638 150 5.7% 13.7% Private.sector.banks 2937 321 10.9% 11.7% IMF Staff Note: The reported CAR is 9.9% for SOCBs and 11.8% for private domestic banks. However, these reflect the reported NPL ratio of 2.5%, not the IMF Staff s more broadly-defined impaired assets ratio of 8.4%. Full adoption of Basel II, scheduled for 2020, will reduce CARs by 200 to 400 bps. Credit /GDP now high vs. ASEAN-5 & peers Credit'to'Private'Sector'(%'GDP)' 120.0$ 100.0$ 80.0$ 60.0$ 40.0$ 20.0$ 2000$ 2001$ 2002$ 2003$ 2004$ 2005$ 2006$ 2007$ 2008$ 2009$ 2010$ 2011$ 2012$ 2013$ 2014$ 2015$ Vietnam$ ASEAN85$ Middle$Income$ and higher than regression analysis estimate 14 12 10 8 6 4 2 Credit'to'Private'Sector'' Predic.ons'on'Fundamentals'(%'GDP)' 2000#2001#2002#2003#2004#2005#2006#2007#2008#2009#2010#2011#2012#2013#2014#2015#2016# Actual# Predic8on# Credit intensity of growth is high, raising questions over the productivity of new credit 7.5% 6.0% 4.5% 3.0% 1.5% 0.0%!1.5% Credit'Intensity'of'Growth'(%)' 2000% 2001% 2002% 2003% 2004% 2005% 2006% 2007% 2008% 2009% 2010% 2011% 2012% 2013% 2014% 2015% 2016% 2017% Credit/GDP is now close to levels reached during previous periods of economic instability Source for charts / data: IMF Staff Report for 2017 Article IV Consultation and IMF report on Vietnam, Selected Issues, both dated 5 th July 2017. Please refer to the IMF s website for full details. 30.0& 25.0& 20.0& 15.0& 10.0& 5.0& 0.0&!5.0&!10.0& Credit'to'GDP,Cycles,(Q1,2001'Q4,2016),!15.0& Q1&2001&Q3&2002&Q1&2004&Q3&2005&Q1&2007&Q3&2008&Q1&2010&Q3&2011&Q1&2013&Q3&2014&Q1&2016& Credit&Cycle&(HP&Filter)& Infla@on&(EOP)& - Progress on NPLs, but performance uneven between banks. Some (incl. 3 taken over by SBV) in need of restructuring - Piecemeal provisioning and gradual bank recapitalization are sub-optimal - Low returns (system RoA 0.6%, RoE 7.5%) complicate efforts to strengthen bank capital - Foreign ownership limits and weak accounting deter foreign strategic investors - Tightening of risk weights for real estate loans welcomed. SOE leverage should be watched (they absorb a disproportionate amount of credit) - Administrative credit growth targets should be phased out - Steps to strengthen VAMC and to enable it to seize collateral are welcomed 7
Wealth Distribution, Environmental Costs, Preparing for Ageing Extreme poverty has fallen dramatically and rapid income growth is widely shared. Growth has come with environmental damage. 90" 80" 70" 60" 50" 40" 30" 20" 10" Poverty(Headcount(Ra0o(at($3.10/day(( (2011(PPP,(%(of(Popula0on)( 0" Bangladesh" Lao"PDR" Philippines" Indonesia" Cambodia" Vietnam" China" Malaysia" Thailand" 1990" 2014"(or"latest)" 8.0# 7.0# 6.0# 5.0# 4.0# 3.0# 2.0# 1.0# Annualised(Per(Capita(Income(Growth( by(percen&le(of(income(distribu&on((%)( 5# 15# 25# 35# 45# 55# 65# 75# 85# 95# Percen&le(of(Income(Distribu&on( 1993-2014# 2010-2014# 2.0# 1.6# 1.2# 0.8# 0.4# CO2$and$Par*culate$Emission$Damage$ %$GNI,$2010>2014$Average$ BRN# KHM# IDN# LAO# MYS# PHL# SGP# THA# VNM# World# CO2#Damage# ParDculate#Damage# Like other Asian economies, ageing is projected to occur more rapidly than in the West Singapore# Thailand# China# Vietnam# Japan# Korea# Indonesia# India# Malaysia# Philippines# HK# Australia# NZ# US# Europe# Years&for&Age&Dependency&Ra2o&to&Increase& from&15%&to&20%&(adr&=&pop&>65yrs&/&pop&15a64yrs)& 1 2 3 4 5 6 but at a lower per capita income level, meaning the costs may be harder to absorb. Source for charts / data: IMF Staff Report for 2017 Article IV Consultation and IMF report on Vietnam, Selected Issues, both dated 5 th July 2017. Please refer to the IMF s website for full details. 12 10 8 6 4 2 US# Per$Capita$Income$at$Working$Age$Pop.$Peak$Share$ (PPP7based,$as$%$of$US$PCI)$ Germany# Italy# Canada# France# UK# Australia# Japan# Korea# NZ# Philippines# Malaysia# India# Indonesia# Thailand# China# Vietnam# - Vietnam s overall wealth inequality, as measured by the net GINI Index, remains below the East Asian average - Agriculture and industrial development has relied on intensive, unsustainable exploitation of resources. The stock of natural capital has declined as these are depleted, and air land and water pollution have increased - In large cities and industrial zones, air pollution is comparable to China s. Under current plans, 53% of energy production will be coal-fired by 2030 - The working-age share of the population peaked in 2013 and will drop relatively quickly and at a low per capita income level - There is a risk of Vietnam becoming old before it becomes rich ie. it needs to sustain high growth in the coming decades 8
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