Like many Asian economies, Vietnam escaped the worst of the economic downturn, thanks in part to stimulative monetary and fiscal policies adopted in late 2008 and 2009. The Vietnamese economy posted growth rates in inflationadjusted GDP of 5.32% in 2009 and 6.78% in 2010. The brisk pace of growth was spurred largely by a 25.5% surge in merchandise exports to $71.6bn and a surge of gross capital investment to 41.9% of nominal GDP.

However, this apparent success sowed the seeds for the country’s present difficulties, with Vietnam now grappling with a hefty deficit of $12.4bn and, despite continued strong inflows of foreign equity and portfolio investment, a balance of payments deficit of $4.6bn, according to the State Bank of Vietnam. Moreover, the government’s budget deficit stood at 5.6% of nominal GDP, a substantial shortfall even though it was officially lower than the 6.9% figure of the previous year, according to the General Statistics Office of Vietnam.


Downwards for the dong

The limited effect of efforts to curb the structural trade, payments and fiscal deficits, and the 23% rise in the money supply last year, put downward pressure on the Vietnamese dong and helped trigger a surge of price inflation in the second half. This resulted in an average jump in the consumer price index of 9.79% in 2010, including a year-on-year rise of 11.75% in December 2010 and a continued surge to 12.24% year on year during the first two months of 2011.

During this period, the Vietnamese dong fell against both the dollar and gold, resulting in a 9.3% official devaluation on February 11 from VND18,932 to the US dollar to VND20,693, a position close to the unofficial rate. This intensified the pressure on citizens on a fixed salary and undermined the country’s economic stability. Combined with the year-end downgrades in Vietnam’s sovereign debt ratings following a major default by a state-owned shipbuilding firm, the government seemed to wake up. On February 24, prime minister Nguyen Tan Dung issued a major policy resolution from the ruling Communist Party, which mandated measures to control excessive inflation, stabilise the macroeconomy and ensure social livelihood.

Resolution 11

Resolution 11 was adopted shortly after a Communist Party of Vietnam congress confirmed Mr Dung for another five-year term as prime minister and tabbed Nguyen Phu Trong as secretary-general to replace Truong Tan Sang, who shifted to the role of national president.

Besides the complex global economic sit- uation and rising global commodity prices, Resolution 11 acknowledged that measures adopted by the Vietnamese government to maintain economic growth, including expansionary monetary and fiscal policies, had became factors spurring fierce inflation and macroeconomic imbalance.

Resolution 11 mandated seven major categories of measures, including: the adoption of a tight and prudent monetary policy; tightening fiscal policy and public investment; moves to boost exports, control the trade deficit and consume energy economically; moves to adjust electricity and oil prices with priority on protecting poorer households; and other measures to improve social protection.


Targets downgraded

The State Bank of Vietnam also set new targets to hold total credit growth in 2011 to below 20% compared with 27.6% last year and an initial 2011 target of 23%. M2 money supply growth will be limited to below 16% compared with 23% in 2010. Meanwhile, interest and exchange rates will be held at reasonable levels in accordance with macroeconomic conditions and objectives. The government also announced its intention to reduce total investment to between 38% and 39% of GDP in 2011, compared with 41% in 2010. This will reduce the trade deficit to below 16% of total exports, from 18%, slashing the budget deficit to under 5% from an initial target of 5.3%, and cutting government spending by 10%.

The State Bank of Vietnam also announced that commercial banks should revise their operational plans in terms of credit and asset growth in line with the new targets and minimise loans to what the government called “non-productive sectors”, such as real estate and securities. It also ordered state-owned companies to sell their foreign-currency holdings to banks to ease downward pressure on the dong.

The order to state enterprises to sell their overseas currency to the State Bank of Vietnam was expected to bolster the central bank’s foreign exchange reserves, which have been depleted from a peak of $23.9bn to just $13.6bn, according to an estimate by Citibank.

The State Bank of Vietnam has also issued a flurry of circulars on base interest rates, loan fees, time deposit withdrawals and other matters, tighter controls on gold, and foreign exchange trading designed to reduce dollarisation. It seems the Vietnamese government has realised that the fight against inflation will slow the economy. On March 7, deputy planning and investment minister Cao Viet Shih announced that growth targets for the Vietnamese economy had been downgraded. They were initially 7% to 7.5%, but are now 6.5% to 7%.

According to local economists, an unusual and important feature of Resolution 11 was its declared intention to “ensure harmonisation and consistency between monetary and fiscal policies to control inflation and stabilise the macroeconomy” and to launch a comprehensive review of central and local government infrastructure projects and state-enterprise investments.

Anti-inflationary measures

Most bankers surveyed expressed support for the anti-inflation drive. ANZ’s Greater Mekong region CEO Thuy Dam believes it is a wellcoordinated effort in both monetary and fiscal policy. She believes that restoring confidence is the most important task – and will take the most time. “The government can devalue the currency or cut spending and these measures may show results in six months to a year, but two or three successful years will be necessary for people to regain confidence in the dong,” says Ms Dam.

HSBC Vietnam CEO Tom Tobin thinks strong action by the State Bank of Vietnam was necessary because the repeated devaluations of the dong were eroding confidence in the currency. “What people are concerned about are devaluations fuelled by anticipation, rather than caused by economic fundamentals,” says Mr Tobin. “People now feel that holding onto dollars is better as they will be worth more in the future. To restore confidence, people need to see the government seriously tackling the macroeconomic problems and inflation.”

Brett Krause, managing director at Citibank Vietnam, says the government’s action is understandable. “There is a trade-off between growth and inflation. During the past two months, the government has squarely recognised that tackling inflation is a priority and it is willing to take tough decisions, including giving up growth in the short-run to promote a more balanced macroeconomic environment,” he says.

“The Vietnamese government has also made the tough but correct decisions on increasing prices on petroleum products and electricity, and reducing various state subsidies, all of which will also have an anti-inflationary impact,” adds Mr Krause.

Wait-and-see approach

However, other observers have adopted a waitand-see stance on whether the Vietnamese leadership has the resolve to keep the brakes on – despite a possible moderate slowdown and likely resistance from organisations with special interests, which have stakes in the high-leverage and high-investment model – and deal with chronic structural imbalances.

Asia Commercial Bank executive vice president Dam Van Tuan says the State Bank of Vietnam’s actions “showed that the government has a strong resolve to fight inflation, reduce imbalances in banks and improve the soundness of the banking industry”. However, he stresses that the key issue is whether the State Bank would “walk the talk and stay the course” in the face of pressure from numerous powerful interests, including state enterprises, provincial governments and quasi-private conglomerates.

“The more projects such agencies have, the more moral hazard there is, so cutting public spending will be seen as a pain by some people,” says Mr Tuan, who adds that the government at central and local levels must have a proper allocation of investment for infrastructure, social welfare and other purposes.

Pham Chi Lan, a former general secretary of the Vietnam Chamber of Commerce and Industry, thinks the decision to adopt a tighter fiscal policy is even more important than a tighter monetary policy, because the new monetary policy cannot succeed without reducing the fiscal deficit. Ms Lan points out that discussions by Communist Party leaders, economists and business advisors in the past year have emphasised the need to restructure the economy and follow a new model of growth.

For example, senior economist Le Dang Doanh has said: “Although the economy has grown rapidly and poverty has been considerably reduced, Vietnam has not succeeded in modernising its economy, and our export structure remains dominated by commodities exports and

labour-intensive manufactured products with

limited value-add.”

Development blueprint

Some of the calls for a new development model have been incorporated in a 10-year socio-economic development blueprint, which was ratified in the January congress. It referred to sustainable development and called for the promotion of knowledge-based industries with the potential to add value, and greater attention to environmental protection and human resources. But the new blueprint’s commitment to sustainability seemed compromised by its attachment to a 7%-plus rate of growth.

Ms Lan believes there is a critical need for greater transparency and accountability in the public investment decision-making process, so that people can decide whether there is a need for a particular project and whether they are willing to pay taxes to finance it. Ms Lan says one sign that the Vietnamese government is capable of adjusting its priorities was the National Assembly’s surprising June 2010 rejection of government plans to build a 1700-kilometre, $60bn high-speed railway to link Hanoi and Ho Chi Minh City.

“This decision by the National Assembly is an example of the slowly developing democracy in Vietnam,” says Mr Doanh. “If the government would exercise more control over state investment and effectively curb money supply and credit growth, the confidence of the population could be rebuilt and the economy would still have high growth potential.”

Nevertheless, according to one economist, the greatest obstacle to necessary structural reform lies in the facts that the “state enterprises are broken, public investment is inefficient, the quasi-private conglomerates are speculating and the government is bought out”.

“The government has used strong language to condemn corruption, which is a dangerous internal disease of the political system, but has not yet succeeded in reducing graft,” says another economist, who warns that “we need an independent and responsible free press that can ensure transparency and provide a counterbalance to power”.

Two bills to contend with


Several executives at foreign banks also expressed overall approval for the direction of two major pieces of legislation that took effect on January 1, including new revisions to the organic law for the State Bank of Vietnam and a new law on credit institutions. The former bill formalised the roles and responsibility of the State Bank of Vietnam and granted it greater autonomy. But it still fell short of establishing the State Bank as a “really autonomous central bank”, according to one foreign banker.

The new law on credit institutions was also seen as a more robust, comprehensive and modern bill that sets out clear corporate governance and risk management frameworks, definitions of what types of banks can operate and requirements of maintaining capital liquidity and adequacy.

“This bill is positive for the banking industry and helps establish a level playing field,” says Louis Taylor, CEO at Standard Chartered Bank Vietnam, Laos and Cambodia.

Nevertheless, foreign banks have had problems with two articles in the bill in particular. Article 128 requires that any bank incorporated in Vietnam needs to have a minimum charter capital of VND3000bn (approximately $144m) as of December 31, 2010.

Mr Taylor predicts that the new requirement will “make it more difficult to establish a bank, may still lead to some consolidations and will also promote more privatisation or equitisation in the state-owned banks and encourage them to bring in foreign expertise to reform and grow faster.” Mr Taylor adds that reported plans to push up the minimum capitalisation limit to VND5000bn in 2013 and to VND10,000bn by 2015 were not necessarily the right thing to do, as the ramping up of capital could lead to a lowering of underwriting standards.

Bankers are also expressing concern over the impact of Article 138 of the new law on credit institutions, which imposes a single-borrower ceiling of 15% of chartered capital. Some analysts believe this will create a level playing field among domestic and foreign banks in the home market.

“I have questions about whether this requirement is good for a country that needs so much capital for infrastructure and thus needs large syndications involving billions of US dollars,” says ANZ’s Ms Dam. “If foreign banks are not allowed to rely on their parent’s balance sheets, it may cut off a major source of capital,” she adds

Citibank’s Mr Krause cautions that its downside might not be immediately visible, but itcould pose an economic hurdle to new foreign investment projects that would have to hike equity inputs if financing by bank branches from their parent country was not available.