Vietnam needs new wave of reforms: IMF

Vietnam needs a new wave of reforms to sustain high economic growth over the medium term amidst demographic and climate headwinds, said the International Monetary Fund (IMF).

Increasing productivity, further investing in human and physical capital, and incentivizing private investment in renewable energy are key, said Paulo Medas, who led an IMF team for the 2024 Article IV consultation with Vietnam from June 12-26.

Improving the functioning of the capital markets would also help boost productivity. In this regard, developing a market-based sovereign bond market is vital to facilitate broader capital market development and to make monetary policy transmission more effective.

Looking back at a challenging year in 2023, Medas said the Vietnamese economy grew 5% thanks to determined action by the government. The economy was hit by turbulence in the real estate sector, financial distress, and a significant drop in exports. A recovery began in late 2023, fueled by a rebound in exports, tourism, and appropriately expansionary fiscal and monetary policy support.

Inflation picked up in the first quarter of 2024, driven partly by rising food prices, though core inflation remained relatively low and stable. The external current account posted a large surplus in 2023, 5.8% of GDP, mainly reflecting a significant contraction in imports.

Economic growth is projected to recover to close to 6% in 2024, supported by continued strong external demand, resilient foreign direct investment, and accommodative policies.

Domestic demand growth is expected to remain subdued as corporates navigate through high debt levels, while the real estate sector will only fully recover over the medium term. Inflation is expected to hover around the government’s target of 4-4.5% this year.

Medas pointed out that downside risks are high. Exports, a key driver for Vietnam’s economy, could weaken if global growth disappoints, global geopolitical tensions persist, or trade disputes intensify.

Domestically, persistent weakness in the real estate sector and corporate bond market could weigh more than expected on banks’ ability to expand credit, hurting economic growth and undermining financial stability. Given easy monetary conditions, if exchange rate pressures were to persist for long it could lead to a larger pass-through to domestic inflation.

“Given the uneven economic recovery, policies remain highly supportive in 2024, but may need to adjust in response to significant risks to the outlook,” he suggested.

Inflation remains contained, but the State Bank of Vietnam (SBV) should stand ready to tighten monetary policy if upward price pressures were to intensify. Policies should continue to focus on improving financial stability, which would require strengthening asset quality and avoid excessive, low quality, credit growth.

“Fiscal policy is also supporting economic growth in 2024 given the expected large public wage increase and ongoing efforts to accelerate public investment,” he added.

Medas commented that Vietnam's anti-corruption efforts are important for high-quality development and would benefit from stronger preventative anti-corruption institutions, economic governance, and transparency.

“Efforts to reduce legal uncertainty and allow for swifter decision-making by public officials would also foster a more business-friendly environment.

“In addition, the Anti-Money Laundering/Countering the Financing of Terrorism framework warrants urgent strengthening. Efforts to improve economic data are welcome and combined with greater transparency will help enhance policy decision making and support economic and capital market development,” Medas concluded.

End-of-Mission press releases include statements from IMF staff teams that convey preliminary findings after a visit to a country. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's executive board for discussion and decision.

During its stay, the IMF team exchanged views with Prime Minister Pham Minh Chinh, senior officials of the SBV, the Ministry of Finance, the Ministry of Planning and Investment, the Central Economic Commission, the National Assembly, and other government agencies. It also met with representatives from the private sector, think tanks, academia, and other stakeholders.

S&P Global has affirmed a 'BB+' long-term sovereign credit rating and a 'B' short-term rating for Vietnam, adding that its long-term rating outlook is stable.

In a release on June 20, the US-based credit rating agency said Vietnam's economy will accelerate over the next 12 months as global demand picks up and the country gradually resolves its domestic challenges. The sovereign ratings on Vietnam reflect the country's strong economic growth outlook, moderate government debt levels, and generally sound external position.