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COUNTRY REPORT

VIETNAM

AN EXPORT DESTINATION ?

BACKGROUND

Vietnam is the easternmost country on the Indochina Peninsula and has a population of an estimated 93 million; this translates to the 13th most populous country in the world and the eight most populous in Asia. Traditionally the economy revolved around the agricultural sector (wet rice cultivation). Manufacturing, information technology and high tech-industries now form a large and dynamic part of the national economy. It is also the third largest oil producer in South East Asia with a total output of 318,000 barrels per day as per 2011 statistics.

Australian exports into Vietnam include wheat, ferrous waste, copper and crustaceans.

THE ECONOMY

A recent IMF report (released August 9, 2013) indicated that Vietnam had finally regained macroeconomic stability over the past year; however progress remains in a two speed mode with the export sector performing well but the domestic not so well. Factors impacting on the domestic economy include:

             low productivity

             poor structuring of resource allocation

             Impaired bank balances

             Inefficiency in several state owned enterprises

Selected economic indicators, 2009-14 (Percentages)

 

 

 

 

EST

PROJECTIONS

 

2009

2010

2011

2012

2013

2014

 

 

 

 

 

 

 

Real GDP (% change)

5.4

6.4

6.2

5.2

5.3

5.4

Credit to the economy ( Change end of period)

39.6

32.4

14.3

8.7

12.4

13.1

Nominal short term lending rate (less than one year) (in % end of period)

12.7

14.0

16.4

12.3

_

_

Current account balance (includes official transfers) (in % of GDP)

-6.0

-3.8

0.2

5.9

5.6

3.3

Exports fob (in % of GDP)

56.2

64.0

72.0

75.0

77.9

77.7

Imports fob (in %G of DP)

64.3

4.1

4.1

4.5

2.5

0.7

Gross international reserves (in billions of USD)

14.1

12.4

13.5

25.4

38.7

46.1

Credit growth: has picked up with a strong focus on the export-oriented and agricultural sectors.

Inflation: headline inflation has declined significantly however underlying pressures persist

Fiscal revenue: both domestic and imported related fiscal revenue has been weaker during recent months

Current account: This is in surplus and there has been a surge to USD9.1 billion in 2012, up from USD0.2 billion in 2011 resulting from strong exports and a slowing of imports.

The exchange rate: this has been stable, gross international reserves have more than doubled in February 2013 from end 2011, although still INADEQUATE at about 2.5months imports.

RISKS AND VULNERABILITIES

The banking system : there has been significant progress by the authorities in macroeconomic stabilization and the containment of vulnerabilities in the banking sector. Calm has now returned to financial markets following moves by the State Bank of Vietnam (SBV) to provide liquidity and facilitation of the merging of several smaller (and weak) banks over the past two years. Another step by the SBV has been to reduce bank balance sheets risks from speculation in gold through measures to stop gold deposit taking and lending activities.

At this stage some banks are dependent on access to the SBV’s refinancing facility as they cannot meet the required conditions to access the interbank’s market. Overall the interbank’s function has been restored. There is now strong evidence that banking system liquidity has eased as evidenced by the growth of higher deposit levels and lower funding costs

State owned enterprises (SOE’s) : a restructuring plan has been drawn up to force SOE’s to remove   non-core assets, improve reporting and implement better internal controls and financial reporting. SOE’s are a key source of vulnerability as many are loss making or just breaking even. As part of the reform strategy it is envisaged that around 43 percent of SOE’s will be equitised and the rest sold, restructured, sold or liquidated.

In summary

Both the banking system and SOE’s will continue to be key sources of vulnerability due to past policies. The banking system is undercapitalized and under provisioned and profitability is low. Another area of concern is the cross ownership among banks and between banks and enterprises which means the authorities will need to ensure that there is no contagion risk. Data limitations and challenges in the regulatory and supervisory framework will continue to hamper an understanding of the true state of the financial system. SOE’s dominate key industries and account for one third of all business asserts and one sixth of employment. SOE’s also provide one half of corporate income and one third of domestic value added taxes.

THE FUTURE

Expectations are that the current account surplus over the next two years will remain sizable with continued strong foreign direct investment (FDI) inflows which will support foreign reserves. Growth expectations in 2013 are projected to reach just over 5 percent in 2013 strongly supported by exports. This will depend on an improving global economy accompanied by broadly unchanged monetary and exchange rate policies and a calculated and steady withdrawal of fiscal stimulus.

Source : Vietnamese authorities and IMF estimates and projections

 

John Brooks

Trade Economist

The Auspacific Institute

30 September 2013