Việt Nam’s outlook clouded by slow reform

Slow restructuring of Việt Nam’s banks and state companies contributed to the International Monetary Fund’s (IMF) decision last week to cut the nation’s growth forecasts.

The IMF lowered its projection for Vietnam’s growth to 5.2 per cent this year from 5.8 per cent previously, and to 5.2 per cent next year from 6.4 per cent, in its report on April 29.

Việt-Nam

A man sleeping on a motorcycle in front of a closed supermarket in Hà Nội 

The reduction of this year’s forecast is the biggest cut among South-east Asian countries after Singapore, while next year’s cut is the biggest downward move for any Asian country.

The cuts signal “that it will be important to carry through with the reforms the government has said it intends to”, said Mr Sanjay Kalra, the IMF’s Hà Nội-based resident representative.

“Structural reforms have moved a bit slower than one might have expected or desired.”

Việt Nam’s economy expanded 5.03 per cent last year, the slowest pace since 1999.

The central bank cut interest rates in March, the seventh such reduction since the start of last year, in a bid to spur lending, even as the World Bank said the country’s issues cannot be resolved with monetary easing.

The government’s plan to restructure state firms and overhaul the financial system lacks clear action steps, with a slow pace of share sales and the banking reform lacking timelines, said Mr Trương Đình Tuyển, a member of the National Financial Monetary Policy Advisory Council.

Restoring the nation to a higher and sustainable growth path will require the acceleration of banking and state-owned enterprise reforms, with planned structural changes “implemented decisively and additional steps considered”, the IMF said.

“There is a need not just to merge banks but also to really improve governance and to recapitalise them,” the IMF’s Mr Kalra said.

“Their balance sheets need to be improved, their depositor base needs to strengthen, and their loan portfolios need to be diversified.”

The planned asset-management firm missed a March deadline for beginning operations.

Setting it up “would be a good start, and an indication from the authorities that they understand this is a big enough problem to require a system-wide approach”, Mr Kalra said.

The entity “would help address the liquidity problems at some banks but, for now, we don’t know how the recapitalisation issue would be addressed”.

The IMF forecasts for this year put Việt Nam behind regional peers, including Indonesia, Myanmar and Thailand.

The Philippines last week received an investment-grade rating from Standard & Poor’s, while Indonesia’s economy grew 6.02 per cent in the first quarter, a 10th straight quarter of above 6 per cent growth.

The Hồ Chí Minh City Stock Exchange’s VN Index has advanced 18 per cent this year, compared with gains of almost 16 per cent for the Jakarta benchmark and more than 23 per cent for the Philippine index.

Việt Nam reported a wider- than-estimated trade deficit of US$1 billion (S$1.2 billion) last month, while inflation slowed to 6.61 per cent, the lowest since September, even as core inflation, which excludes raw food and energy, remains high and limits the room for further rate cuts.

“The issue is less the level of the rates and more a question of whether further cuts in policy rates can increase credit growth,” Mr Kalra said.

“Banks are reluctant to lend even if they have resources, in part because they are concerned about the economy’s prospects and their own balance sheets.”

Source: Bloomberg

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