Vietnam’s economy remained resilient and growth reached a 10-year high of 7.1 percent in 2018, with the momentum continuing in the first quarter of 2019. The expansion was broad-based, fueled by healthy growth in incomes and consumption of the growing and urbanizing middle class, and by a strong harvest, a surging manufacturing sector, and inflows from growing tourism, remittances and direct investment, the fund said following discussions last week for the 2019 Article IV consultation with Vietnam.
The IMF, however, expects a soft landing of growth to 6.5% in 2019 and over the medium term, reflecting weak external conditions. Inflation is expected to pick up slightly in 2019 on the back of administered price increases but should remain below the authorities’ 4% target.
“The budget deficit of the general government has been lowered significantly during 2016-18 relative to the pre-2016 period. The lower deficit together with strict limits on new government guarantees and robust economic growth are helping to place Vietnam’s public finances on a sounder footing. Public and publicly guaranteed debt fell to 55.5% of GDP at end-2018, from 60% of GDP at end-2016,” the IMF said.Recognizing that the Vietnamese authorities are continuing fiscal consolidation, the IMF experts recommend the quality of fiscal adjustment should improve to create more fiscal space, narrow infrastructure and social spending gaps and meet the coming challenge of rapid population aging.“The emergence of a corporate bond market and other capital markets in Vietnam is welcome, as are the authorities’ plans to strengthen their infrastructure. Capital markets will help to reduce the cost of capital in Vietnam and accelerate the shift to retail banking,” they added.

The State Bank of Vietnam intends to gradually move from administrative allocation of credit to market-based means and banks will adopt Basel II capital standards by January 2020. This will require strengthening the state-owned commercial banks, including arm’s length governance and higher capital buffers.

“Plans to modernize the monetary policy framework, including greater exchange rate flexibility to make the currency a better absorber of external shocks, are welcome. Gradual reserve accumulation should continue. To safeguard monetary and financial stability, the system of macroprudential regulations should be strengthened,” the IMF experts suggested.

The IMF also commented that the Vietnamese government conduct more ambitious structural reforms to level the playing field for the domestic private sector, tackle economic policy distortions and capacity constraints and increase investment.

Administrative and licensing procedures should be reduced and the domestic private sector’s access to land and credit should be further facilitated. Greater information sharing and transparency throughout the government and vis-à-vis the public and foreign investors will help Vietnam reach full emerging market status.

Ongoing efforts to address corruption are welcome, said the mission, urging improvements in public procurement; further strengthening of the system of income and asset declarations for public officials.

IMF staff affirmed continued engagement in a wide-ranging capacity development program with Vietnam, including in fiscal, monetary, financial, legal and statistical issues, and stands ready to assist the authorities.