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p. 23 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia Cambodia Indonesia Lao People's Democratic Republic Malaysia Myanmar Philippines Singapore Thailand Viet Nam South Asia Central Asian Republics The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

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Viet Nam

GDP growth slowed moderately to around 6% in 2001, due to weakening exports and agricultural output. In spite of this, the economy remained fast growing, with stable prices and solid indicators of public finance and external debt. Steadier progress in state enterprise and banking sector reform is needed for the economy to maintain its international competitiveness, while policymakers should pay more attention to balanced regional development to consolidate past achievements in poverty reduction.

Macronomic Assessment

Despite the slowdown in the global economy, preliminary staff estimates for 2001 suggest that GDP in Viet Nam grew by 5.8% (6.8% according to preliminary official estimates), representing one of the highest rates of expansion in the region. As external demand weakened throughout the year, particularly in the aftermath of the events of September 11th, domestic demand—mainly investment—became the main source of growth.

On the supply side, the agriculture sector recorded weaker growth than the government target. The moderate 2.3% increase was due to a 1.7% decrease in rice output, a fall in the price of agricultural goods, and estimated growth of 5% in fisheries, the best-performing subsector.

However, the deceleration in agriculture was more than offset by a strong performance in industry and construction. Growth in industry was estimated at 9.7% in 2001, on the back of manufacturing and construction strength. Manufacturing is estimated to have increased by 9.2% while construction recorded a robust performance of 13%, due to the implementation of infrastructure projects, urban development projects in major cities, particularly Hanoi and Ho Chi Minh City, and a real estate boom. Within industry generally, the foreign-invested subsector grew at its lowest rate in recent years, namely 12.1%. Nonstate activities grew by 20.3% in 2001, partly due to the vigorous impact of the Enterprise Law, which streamlined administrative procedures for doing business. The Law abolished 145 out of 400 licenses in 2000, and government decree no. 30 issued that year required 60 licenses to be abolished in 2001. Registration requirements were also simplified. As a result, the number of private enterprises surged in both 2000 and 2001. In the improved business environment, capital investment also increased.

In 2001, services sector growth was estimated at 4.4%. Wholesale and retail trade maintained its modest improvement of 3.3%. Real estate services were the leading area, strengthening by an estimated 8% due to the buoyant real estate market. The easing of procedures for issuing land-use certificates, the granting of permission to buy land to overseas Vietnamese, and the recognition of Viet Nam as one of the safer countries in the region all promoted land transactions. As a result, land prices in major urban centers such as Hanoi and Ho Chi Minh City increased by three or four times during the year.

On the demand side, domestic demand was the main source of economic expansion in 2001, led by strong growth in investment stemming from low interest rates, the continuing creation of a large number of SMEs, an increase in government capital spending, and a rise in FDI inflows. Investment’s strong growth offset the deceleration in consumption, which rose by only 4.9% in 2001, due to declining rural incomes resulting from the weakening performance of the agriculture sector.

Official data based on the new national poverty line introduced in 2001 by the Ministry of Labor, Invalids, and Social Affairs show a further decline in poverty to 16% by end-2001, from 17.2% at end-2000. While these data are not internationally comparable, the draft Comprehensive Poverty Reduction and Growth Strategy released in January 2002 suggests that poverty—as measured by an international poverty line developed by the General Statistical Office and the World Bank—has also continued to decline since the last household survey, from 37% in 1998 to about 32% in 2000. Given the emerging disparities between urban and rural areas and among regions, the Government will need to ensure equitable distribution of the benefits of growth. The urban unemployment rate fell somewhat from 6.4% in 2000 to 6.3% in the first 7 months of 2001. The gradual shift in labor from agriculture continued, and was directed mainly toward the services sector.

The fiscal deficit in 2001, including onlending, was estimated at 4.9% of GDP, lower than budgeted because revenues strengthened more than expected, to 21.2% of GDP. On the expenditure side, the fiscal stimulus stance translated into higher capital spending, primarily on infrastructure projects. Overall expenditure was estimated at 25.6% of GDP in 2001.

The consumer price index remained fairly stable over the year with a slight increase of 0.8% by end-December 2001 on a year-on-year basis. Food prices fell through the first half of the year due both to the fall in world prices of agricultural commodities, particularly rice, and to 2 years of bumper rice harvests at home. Food prices recovered in the second half of 2001, and the food price index rose by 6% by the end of the year, reversing the downtrend of the previous 2 years. The transport and communications price index declined by 4.7%, reflecting, among other elements, lower Internet and telephone prices, as the market became more competitive and tariffs were reduced. So that trends in the prices of nonfood goods and services could be more fully captured, the weighting of food items in the consumer price index basket was reduced from 60% to 47% in July 2001.

Though interest rates fell during 2001, it is estimated that credit growth to the economy decelerated from a high 38.1% in 2000 to 21% in 2001. Credit growth to SOEs slowed significantly, while accelerating by 27.5% to other sectors. This partly reflects the impact of the ongoing restructuring of the SOE sector on lending decisions by commercial banks. Broad money (M2) expanded by 23.2%. Within M2, the increase in foreign currency deposits fell by more than half to 27.7% from 60.5% in 2000. This reflects the disincentive to holding foreign currencies as opposed to local currency, as the interest rate spread between foreign currencies and dong deposits widened significantly in favor of the dong due to the fall in global interest rates.

The number of companies listed on the stock exchange increased from five in 2000 to 11 by the end of 2001. The market is still at a very early stage of development. Share trading constituted almost all transactions in the market; bond trading accounted for only 6.4% of the total. The stock exchange market was volatile as the index soared to 500 by mid-2001 and then fell sharply to 235 by the end of the year.

Since, during the early months of 2001, currencies of other countries in the region depreciated against the dollar even faster than did the dong, in real terms the dong appreciated against them. In view of this, attempting to accelerate export growth, the Government allowed foreign exchange management to become progressively more flexible, and the dong depreciated more rapidly in the second half of the year. Just before the events of September 11th, the dong was trading at 15,150 to the dollar. It then appreciated slightly, and remained at the 15,130 level until the end of 2001. This represented a depreciation of about 4% during the year.

In 2001, export growth was estimated at 6.5% compared with 25.2% in the previous year (Figure 2.13). The fall in international crude oil prices accounted for a large part of this deceleration. However, non-oil export growth was also slower than in 2000. Agricultural exports remained depressed, particularly rice and coffee, whose higher volumes were insufficient to offset declining world prices. Manufactured exports fared relatively poorly, with slowing export growth of footwear and garments due to subdued demand from within the region and from the EU. Against a broad-based weakening in export performance, marine products were among the few strong performers. Import expansion too was sluggish at 6%. Petroleum import growth was slower, due in part to the decline in world oil prices but also to the slowing domestic economy, which also accounted for the decline in imports of machinery and equipment.

On the current account, foreign exchange remittances surged in 2001, reflecting the impact of liberalization of regulations on foreign currency accounts and the permission granted to overseas Vietnamese to buy land. Current official transfers have remained broadly constant over the last few years. The current account surplus, excluding official transfers, was estimated at 1.5% of GDP in 2001.

On the capital account, FDI commitments rose. During 2001, 458 foreign-invested projects were licensed with a total registered capital of $2.2 billion, representing an increase of 12% over the 2000 level. The pickup in FDI commitments reflects the improved climate for foreign enterprises following amendments to the Foreign Investment Law and the successful conclusion of prolonged negotiations on a number of large energy projects. Another positive trend was the increasing share of FDI in light industries and agriculture, as these are more labor intensive and have export potential. For 2001, the surplus on both the current and capital accounts contributed to a rise in official reserves from $3.3 billion in 2000 to $3.5 billion in 2001, representing 11 weeks of imports.

Policy Developments

The lower fiscal deficit than earlier projected in 2001 gives room for phasing in some of the costs of implementing SOE and banking reforms in 2002. By some estimates, the capital cost of such reforms could come close to 3-4% of GDP this year. The Government also took steps to strengthen expenditure management, by endorsing, in September 2001, the Master Plan of Public Administration Reform for 2001-2010, which includes suggestions for public finance reform. In this regard, in an initial trial, the Government plans to replicate the success of a pilot scheme of lump-sum allocations for operational costs of administrative agencies to major cities such as Hanoi and Ho Chi Minh City. In addition, to enhance predictability and strengthen budget allocation for operation and maintenance, multiyear expenditure programming for education and transport was piloted in 2001, as opposed to the usual annual expenditure budgeting.

The Government has been gradually moving toward market-determined interest rates. The base rate, which replaced the ceiling on dong borrowings, is based on information on lending rates collected from nine commercial banks. Since June 2001, banks have been able to set dollar lending rates in line with the international market. Further, on 1 August 2001, the State Bank of Viet Nam liberalized its policy on the rates at which locally based companies may borrow from overseas lenders. This practice will require close monitoring, however; the experience of several countries during the Asian financial crisis demonstrated its potential dangers.

The State Bank of Viet Nam responded to the fall in global interest rates by lowering its base rate on dong loans on four occasions, from 0.75% to 0.6% per month. To increase banks’ liquidity of dong holdings, currency swap operations between dollars and dong were reintroduced in August 2001. Reserve requirements on foreign currency holdings were raised from 12% to 15% in May 2001, but were lowered to 10% in November.

The Government adopted an overall reform framework for SOCBs in March 2001 and developed restructuring plans for individual SOCBs. The main challenges in this area are twofold: implementation of financial restructuring plans through resolution of nonperforming loans and recapitalization, and operational restructuring to strengthen corporate governance and risk management. Resolving the nonperforming loan problem is related to SOE reform in that much of the bad debt is owed by loss-incurring SOEs. With regard to developing the nonbank financial sector, the Government has broadened the scope of financial leasing and strengthened regulations to improve the business environment for domestic and foreign leasing companies.

The Government initiated, also in March 2001, a 3-year SOE reform framework that provides for the equitization, liquidation, and merger of around 1,800 small and medium SOEs, but progress in implementing plans and achieving targets has been slow. Against the 2001 target of 450–500, only 113 enterprises were equitized in the first 8 months of the year. Factors accounting for the slow pace include problems in resolving inter-enterprise debt; valuation of land, buildings, and equipment; decisions over the management structure of equitized enterprises; and difficulties in handling redundancies. There is a risk that the larger and more capital-intensive SOEs, which account for 90% of the SOE debt, will remain largely untouched by the reforms.

Significant progress was made in trade reform in 2001. Among the various measures introduced were lifting quantitative restrictions on all but a few items, abolishing quota allocations for rice exports and fertilizer imports, further liberalizing trading rights, and lowering the foreign exchange surrender requirement from 50% to 40%. The bilateral trade agreement with the US was ratified, and active preparations started toward the goal of WTO accession by 2004.

Outlook for 2002–2003

Viet Nam’s medium-term growth is expected to remain robust and sustained, as domestic demand continues to expand. GDP is projected to rise by 6.2% in 2002 and by 6.8% in 2003. The lagged impact of the fall in interest rates in 2001 and possibly in the first half of 2002, as well as the improvement in the business environment, should provide impetus for further development of the private sector.

As public sector debt is manageable, it is expected that, to ease the impact of the global slowdown on export demand and to accelerate SOE and banking reforms, the Government will continue its cautiously expansionary fiscal stance. Consequently, investment is likely to increase in all subsectors—namely private, foreign-invested, and public. Gross domestic investment is projected to reach nearly 27% of GDP in 2002 and 28% in 2003. Consumption is forecast to continue growing moderately at about 4.5%, as incomes in rural areas remain depressed due to the weak prices of agricultural commodities projected for 2002.

On the supply side, industry and construction together are projected to grow at about 10% annually in 2002–2003, acting as the main drivers of growth. Construction is expected to continue performing strongly in the medium term due to ongoing infrastructure projects, such as the Truong Son highway and urban development projects in major cities. The services sector, which is still dominated by the more traditional wholesale and retail trade and by transport services, is expected to post moderate growth of 5–6%—a rate somewhat higher than in recent years—in spite of a more steady increase in tourism.

It is expected that the Government will continue its cautious fiscal stimulus. Revenues are projected to grow, reflecting broadly stable but slightly rising oil prices in 2002. Given the higher rates of expenditure, and the implementation costs of some of the proposed reforms in the areas of public administration, SOCBs, and SOEs, the overall government deficit may increase to 5–6% of GDP in 2002–2003. Inflation rates are expected to increase, but to remain below 4%. Given the attempt to reduce nonperforming loans and to strengthen risk management by banks, credit restraint is expected to continue over the period.

Viet Nam’s already rather high level of trade as a proportion of GDP is expected to rise further as a result of the bilateral trade agreement with the US and diversification toward manufactured exports. This should bring higher growth but also greater exposure to the risks and fluctuations of the external environment. External demand is anticipated to strengthen modestly in 2002, when the global economy is expected to gather momentum for a more robust expansion in 2003. The expectation of stable oil prices with an upward bias projected throughout 2002 and a projected increase of exports to the US and EU, particularly of footwear and garments, will support export growth in 2002–2003. Exports are forecast to increase to $16.7 billion in 2002 and to $18.7 billion in 2003, representing growth of 8.5% and 12%, respectively.

The recent trade liberalization measures and the expected rise in goods and machinery imports for the implementation of FDI projects approved in the oil, gas, and power sectors will result in medium-term import growth, projected at 10% in 2002 and 13% in 2003. The current account surplus, excluding official transfers, is projected to narrow to 0.3% of GDP in 2002 and move to a deficit of 0.2% in 2003, as imports pick up along with the expected economic recovery.

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