Vietnam's Recent Economic Development 2013

Hanoi, July10, 2013
TAKING STOCK
AN UPDATE ONVIETNAM’S
RECENT ECONOMIC
DEVELOPMENTS

AN UPDATE ONVIETNAM’S
RECENT ECONOMIC
DEVELOPMENTS
TAKING STOCK
This report has been prepared by Deepak Mishra and Viet Tuan Dinh with contributions from
James Anderson, Reena Badiani, Quang Hong Doan, Sameer Goyal, Duc Minh Pham, Habib Rab,
Gregory Smith and Viet Quoc Trieu, under the general guidance of Victoria Kwakwa and Sudhir Shetty.
Administrate assistance was provided by Linh Anh Thi Vu.
TheWorld Bank
Hanoi, July 10, 2013

CDS Credit Default Swap
CIT Corporate Income Tax
CPI Consumer Price Index
EAP East Asia and Pacific
ECB European Central Bank
EU European Union
FDI Foreign Direct Investment
GDP Gross Domestic Product
GI Government Inspector
GSO General Statistics Office
IIP Index of Industrial Production
IMF International Monetary Fund
IPO Initial Public Offering
M&A Mergers and Acquisition
MDG Millennium Development Goals
M&E Monitoring and Evaluation
MOF Ministry of Finance
MPI Ministry of Planning
NCERD National Steering Committee for Enterprise
Retructuring and Development
NPL Non-performing Loans
ODA Official Development Assistance
PMI Purchasing Manager Index
QE Quantitative Easing
ROW Rest of the World
SBV State Bank of Vietnam
SEDP Socio-Economic Development Plan
SME Small Medium Enterprise
SOCB State-owned Commercial Bank
SOEs State-owned Enterprises
USA United State of America
VAT Value Added Tax
VAMC Vietnam Asset Management Company
VHLSS Vietnam Household Living Standards Survey
WTO World Trade Organization
ACRONYMS AND
ABBREVIATIONS
CURRENCY EXCHANGE RATE: US$ = VND 21,036
Government Fiscal Year: January 1 to December 31

PART I: GLOBAL AND REGIONAL ECONOMIC ENVIRONMENT 5
A. Global Growth is Consolidating 5
B. Financial Market Conditions have Seen Significant Improvements 6
C. Inflationary Pressures Remain Benign, Promoting Monetary Policy Easing 7
D. Trade Remains Volatile, Though Commodity Prices are Easing 9
E. Medium-Term Growth Outlook 10
F. Risks to Outlook 11
PART II: VIETNAM RECENT ECONOMIC ENVIRONMENT 15
A. Macroeconomic Conditions Continue to Improve, but Growth Remains Sluggish 15
B. The Real Sector: Is Slow Growth Here to Stay? 17
C. Performance of The External Sector Continues to be Impressive 21
D. Inflation Has Stabilized, But Inflationary Expectation are Not 27
E. Monetary Policy Effectiveness Has been Hindered by Banking Sector Problems 28
F. Fiscal Development and Policies 29
G. Near-term Outlook 33

PART III: AN UPDATE ON THE RESTRUCTURING AGENDA 35
A. Banking Sector Update 35
B. State-Owned Enterprise Reforms 39
TABLE OF CONTENTS

5
A. GLOBAL GROWTH IS CONSOLIDATING
1. The global economy appears to be transitioning toward a period of more stable albeit moderate
pace of growth. Global GDP, which slowed in mid-2012, is recovering and a modest acceleration in quarterly
GDP is expected during the course of 2013 (left panel, figure 1). In the United States, GDP rose 2.4 percent in
the first quarter of 2013, supported by a recovering housing market, an increase in payroll jobs, and robust
investment demand, especially in durable goods orders. In Japan, a dramatic relaxation of macroeconomic
policy has prompted a sharp acceleration in GDP in the short-term, which grew at a 4.1 percent annualized
pace in the first quarter of 2013. However in the Euro Area, growth is being held back by weak confidence and
continued banking sector and fiscal restructuring, with GDP contracting at a 0.8 percent in the first quarter.
2. In the developing world growth remains solid, but there are some signs of easing. Most
developing countries have more or less fully recovered from the 2008 global financial crisis and are growing in
line with underlying potential growth. During the first several months of 2013, however, the pace of growth
in developing countries appears to have slowed, particularly in East Asia, where quarterly growth in China
and Indonesia has eased and turned negative in Malaysia and Thailand. Elsewhere signs are more mixed.
Growth has slowed down in Chile, India, Mexico, and South Africa, but strengthened in Philippines,Turkey, and
Ukraine.
3. More than four years after the financial crisis started, global industrial output is only 5.3 percent
higher than its pre-crisis peak. Industrial output in high-income countries is still 6.5 percent below pre-crisis
levels, with output in the Euro area and Japan sharply lower and output in the United States having almost
regained pre-crisis levels. Industrial growth in developing countries has been most dynamic in East Asia and
Pacific mainly reflecting double-digit growth in China, where output is 67.9 percent higher than the pre-crisis
high, versus 12 percent for the other countries in the region. Industrial output in South Asia and Europe and
Central Asia are 19.6 and 2 percent higher respectively than their pre-crisis peaks.
PART I: GLOBAL AND REGIONAL ECONOMIC ENVIRONMENT
01

6
B. FINANCIAL MARKET CONDITIONS HAVE SEEN SIGNIFICANT
IMPROVEMENTS
4. While the global financial market conditions continue to improve, eventual phasing out of
quantitative easing in advanced economies is beginning to worry investors. The improvement in financial
conditions can be seen in lower yields on long-term debt, higher stock market returns and near-record flow
of gross capital to developing countries. This reflects the extraordinary monetary policy easing undertaken
by the Federal Reserve Bank in the United States, the Bank of England, the ECB, and most recently the Bank
of Japan, as they have flooded global capital markets with liquidity. At the same time, the slightest hint of
a scaling back of the U.S. stimulus program did send panic through many emerging markets in June 2013,
underscoring the volatile nature of global capital markets.
5. Gross capital flows to developing countries have been robust. During the first five months of 2013,
gross capital flows (international bond issuance, cross-border syndicated bank loans and equity placements)
to developing countries rose by 63 percent year-on-year and reached a historic high at $306 billion (left panel,
figure2). Internationalbondflowstodevelopingcountrieshavebeenparticularlyrobust,reachingahistorically
high level at $158 billion for the first five months of the year with the record monthly issuance of $45 billion
in April. Syndicated bank lending to developing countries totaled $91 billion during the first five months of
2013, 69 percent higher compared to a year ago. There has also been a steady increase in equity flows—initial
public offerings (IPOs) and follow-on issuance—due to the strong follow-on issuance from East Asia, Europe
and Central Asia, and Latin America and the recovery of IPO activity from last year’s lows.
6. Despite increased flows, capital costs are rising, reflecting reduced high-income country risks.
Developing countries’ sovereign credit default swap (CDS) rates and yields (right panel, figure 2) have been
rising, despite their improved ratings and stronger investor appetite for developing-country bonds. Part of
the decline in developing-country risk premiums over the past five years was due to the increased riskiness
of high-income country debt. Now that those risks are receding, investors are shifting their portfolios back
into high-income country assets, resulting in an increase in developing-country yields and spreads and better
stock-market performance in high-income countries. These developments may also reflect concern on the part
of investors about inflation of asset prices in some developing countries (such as Brazil, Indonesia, Philippines,
Thailand, and Turkey) and the recent easing of commodity prices.
Figure 1: While global growth is stabilizing, recovery in industrial production has been uneven
-1
0
1
2
3
4
5
6
7
8
9
2010Q1 2011Q1 2012Q1 2013Q1
Quarterly GDP growth, annualized (in %)
Developing Countries
World
High-income countries
100
167.9
119.6
112.0
105.3
102.0
93.5
90
110
130
150
170
Pre-crisis peak 2013 (latest)
China
South Asia
East Asia (ex
China)
Global
Europe and
Central Asia
High-income
countries
Industrial production since global crisis (Index=100)
Source: Global Economic Prospects: June 2013; Developing Trends: June 2013.

7
Figure 2: More capital is flowing to developing countries, but cost of capital is starting to rise
0
10
20
30
40
50
60
70
M-09 S-09 M-10 S-10 M-11 S-11 M-12 S-12 M-13
New equity issuance Bond issuance
Bank Loans
Gross capital flows to developing countries, billions USD
0
1
2
3
4
5
6
7
8
J-11 D-11 J-12 D-12 J-13
Implied developing country yield
US 10 year treasury yield
Spread
Soverign 10 year bond yields and spreads, in basis points
C. INFLATIONARY PRESSURES REMAIN BENIGN, PROMPTING
MONETARY POLICY EASING
7. Global inflationary pressures remain relatively subdued in most countries. Inflation in high-
income countries has remained low and within the comfort zone of their central banks except perhaps in UK.
Inflationary pressures in China appear to have eased somewhat but may be intensifying in Indonesia and Lao
PDR following years of rapid growth and relatively accommodative macroeconomic policy, and core inflation
remains high in Vietnam. In the Middle East North Africa, high prices reflect both efforts to reduce the fiscal
burden of price subsidization by raising some regulated prices, as well as supply disruptions caused by civil and
armed strife. In South Asia, as well as in Vietnam, increases in administrative prices have also played a role, as
have tight market conditions despite the relatively slow pace of growth.
8. Monetary policy in developing countries continues to ease including in Albania, Azerbaijan,
Belarus, Colombia, Georgia, India, Kenya, Mongolia, Mexico, Sri Lanka, Thailand, Turkey, Uganda, and Vietnam.
Only five developing countries (Brazil, the Arab Republic of Egypt, Gambia, Ghana, and Tunisia) have raised
interest rates in 2013; Serbia raised and then cut rates. Although global inflationary pressures remain benign,
given the lags in monetary policy transmission, this additional easing may add to a strengthening activity
already under way, resulting in additional inflationary pressures in countries operating close to full capacity,
without commensurate payoff in additional output.

8
Box 1: Japan’s monetary easing and implications for developing countries
InNovember2012,theBankofJapan(BoJ)signaledthatitwouldundertakemonetaryeasingmeasures
to fight against deflation. The BoJ announced the actual quantitative and qualitative easing measures
on April 4th this year. These measures include the monthly purchase of ¥7.5 trillion ($75 billion) of
the Japanese government bonds aiming to double its monetary base in two years. It will also expand
the average maturity of bonds that it purchases from three to seven years. More importantly, the BoJ
announced that it would continue these “as long as necessary”. The BoJ’s quantitative easing (QE)
program is broadly similar to the QE3 program in the US.
While the immediate beneficiary of the program is domestic assets, its spillover into international
capital markets is inevitable, especially because the Japanese bond market is relatively small—only
22 percent and 8 percent of US bond and equity market respectively. The bulk of these flows are likely
to go to other high-income countries, though Japanese investors have been actively investing in
local currency bond and equity markets in some developing countries (see table). According to the
InvestmentTrustsAssociationofJapan,Japaneseportfolioinvestmentinlocaldebtsecuritiesincreased
in Mexico (by 34 percent),Turkey (28 percent) andThailand (17 percent) during the first two months of
2013, and at a less pronounced rate in Philippines (5.9 percent) and South Africa (4.4 percent).
The Japanese QE program might also increase direct investment by lowering the cost of capital for
Japanese multinationals. Rising outward FDI flows from Japan in recent years have been particularly
important for Thailand and Vietnam, accounting for 40 percent and 55 percent of those countries
in 2012.
FDI Portfolio Investment Total capital
flows from Japan
Total Total PI: Equity PI: Debt
3,279 647 2632 4,214
Developed Countries 742 3203 619 2,585 3,945
Developing Countries 193 76 28 47 269
P.R. China 73.5 10.3 9.8 0.5 84
Brazil 30 28.1 5.6 22.4 58
Thailand 31 2.3 1.5 0.9 33
Indonesia 13.9 5.8 3.3 2.6 20
India 13.6 5 3.4 1.6 19
Malaysia 9.9 4.3 1.6 2.7 14
Mexico 2.6 11.6 0.5 11.1 14
Philippines 9 2.7 0.3 2.5 12
Vietnam 5.6 0.1 0.1 0 6
Box 1: Japan’s monetary easing and implications for developing countries
Japanese outward investment position by destination, 2011 ($ billion)
935

9
D. TRADE REMAINSVOLATILE,THOUGH COMMODITY PRICES ARE EASING
9. After a cyclical rebound in global trade, the pace of trade expansion has started to decelerate
again. Following the slump in Q2 2012, global trade began a cyclical rebound in Q3, led by acceleration
in developing country imports, which sparked increase in exports from both high-income and developing
countries (left panel, figure 3). South-South trade continued its rapid growth during this period (see box 2).
However, reflecting ongoing fragility in the global economic recovery, the pace of trade expansion has slowed
in recent months. Indeed, in the three months of 2013, global trade expansion had decelerated to a below
trend pace of 0.8 percent compared with 10.9 percent in March.
10. Commodity prices have weakened in response to new capacity and changing consumption
patterns. Despite the strengthening of the global economy, the prices of most industrial and agricultural
commodities have been declining (right panel, figure 3). While it is still too early to be certain, the declines
appear to result from both increased supply and increased substitution on the demand side induced by the
high prices of the past several years. Expectations are that prices will continue to ease over the medium term.
The World Bank forecast, which calls for the price of a barrel of oil to ease to $102 in 2013, and to $101 in 2015,
reflects a technical assumption that oil prices will slowly decline between now and 2025 to a level consistent
with the real cost of producing a barrel of oil from the Canadian tar sands using existing technology. Metals
prices are expected to decline in real terms by 3.7 and 1.4 percent in 2013 and 2014, respectively, reflecting
increased supply and a gradual reduction in the metals intensity of developing-country (especially Chinese)
growth. Food prices are also projected to decline (7.7, 6.0, and 5.5 percent over 2013–15), reflecting a gradual
improvement in supply conditions and reduced production costs due to lower energy and fertilizer prices.
Figure 3: Trade has seen cyclical recovery and deceleration,
while commodity prices are steadily declining
-15
-10
-5
0
5
10
15
20
25
30
35
Jan '11 Jul '11 Jan '12 Jul '12 Jan '13
Export and import volumes, percent growth, 3m/3m sa
150
160
170
180
190
200
210
220
230
240
Jan '11 Jul '11 Jan '12 Jul '12 Jan '13
Agricultural goods
Energy
Metals Minerals
USD price indexes, January 2005=10
Developing-country Imports
Euro Area Exports
Other High-income
Exports

10
Box 2: South-South Trade Grows Faster than South-North Trade By A Wide Margin
More than half of developing
country trade is now with other
developing countries, up from 37
percent in 2001. China has played
a big role in this transformation,
with 26 percent of total exports
from all developing countries
now going to China, up from
14 percent in 2001. But even
excluding China’s trade with other
developing countries, growth
of trade between developing
countries has also outpaced their
trade with high-income countries
by a wide margin in the last decade
(see adjacent figure). The U.S.
dollar value of trade between developing countries has grown annually by an average of 19.3 percent
over the past decade (17.5 percent if trade with China is excluded); whereas growth is about 11 percent
for developing-country exports to high income countries. Interestingly, the rapid expansion of intra-
developing-country trade reflects more than just commodity trade, with the value of developing-country
exports of manufactures rising at about the same rate as the value of commodities.
Source: Global Economic Prospects: June 2013
Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13
East Asala
Pacific
0
5
10
15
20
25
Europe
Central Asla
Average annual growth 2000-2011, percent
Average all developing countries
All developing Developing (exd. China)
Average (exd. China) Average exports to
High Income countries
High-Income Imports
Latin
American
Caribbean
Middle-east
north
Africa
Sub-saharan
Africa
South Asla
E. MEDIUM-TERM GROWTH OUTLOOK
11. The global economy is slowly getting back on its feet, though the recovery remains hesitant and
uneven. Global GDP is projected to grow at 2.2 percent during 2013, marginally slower than in 2012. The
recovery is expected to strengthen, with the global economy growing at 3.0 percent in 2014 and 3.3 percent
in 2015 (left panel, figure 4). However, the prospects for individual countries and regions will vary widely (right
panel, figure 4). Here is a brief discussion of the economic outlook for a select set of advanced and developing
countries.
Figure 4: Global Growth will be Less Volatile, But Outlook Differs Across Regions
4.0
2.8
2.2 2.2
3.0
3.3
7.6
6.2
4.8
5.1
5.6 5.7
2.9
1.7
1.3 1.2
2.0
2.3
0
1
2
3
4
5
6
7
8
2010 2011 2012 2013 2014 2015
2.2
3.0
3.3
5.1
5.6 5.7
1.2
2.0
2.3
2013 2014 2015
World
Developing Countries
High-income countries
Annual GDP growth, %
0
1
2
3
4
5
6
7
8
EastAsia
Pacific
Europe
CentralAsia
LatinAmerica
Caribbean
MiddleEastN.
Africa
SouthAsia
Sub-Saharan
Africa
2012 2013 2014 2015
Annual GDP growth, %
Box 2: South-South Trade Grows Faster than South-North Trade By A Wide Margin

11
12. In the United States, the private sector recovery appears to be relatively robust as reflected in
an improving labor market (unemployment has fallen to 7.6 percent) and recovery in the housing market.
Policymakers have extended both the debt ceiling and spending authorizations well into the future, thereby
reducing the likelihood of a debt-ceiling confrontation and the threat of default. On the downside, both the
tax increases agreed at the beginning of the year and the spending sequester will be a drag on growth in
coming quarters, offsetting some of the strength from the private sector recovery. Overall, GDP growth for the
year is projected to slow somewhat, compared with 2012, to about 2.0 percent in 2013, before strengthening
to 2.8 percent in 2014 and 3.0 percent in 2015.
13. The economy of the Euro Area remains weak despite improved financial conditions and some
signs of strengthening. The funding costs in core Euro Area countries have declined, and lending has started
to grow again. Imports, exports, and industrial production have all returned to positive (albeit modest) growth.
However, borrowing costs in high-spread economies remain very high; unemployment is crushingly high in
periphery economies; and weak growth is compromising progress on the fiscal front. GDP for the Euro Area is
projected to contract by 0.6 percent in 2013, with annual growth slowly strengthening to 0.9 percent in 2014
and to about 1.5 percent by 2015.
14. The strength in the Japanese economy reflects the effects of a large quantitative easing, fiscal
stimulus and structural reforms. The structural measures announced include deregulation of the agriculture
and electricity sectors, a relaxation of rules in health care, investment tax incentives, (including FDI); some
corporate governance reforms; and a partial relaxation of restrictions on the investment behavior of pension
funds. Growth is projected to come in at 1.4 percent this year and in 2014 and at 1.3 percent in 2015.
15. Prospects for developing countries vary widely, reflecting local economic and policy conditions.
Overall, growth in developing-country is expected to firm somewhat in the years ahead, with GDP growing by
5.1 percent in 2013 and gradually rising to 5.6 percent in 2014 and 5.7 percent in 2015. This aggregate story,
however, masks considerable regional and country-level variation. At least four classes of developing countries
can be identified:
 Several countries in East Asia, Sub-Saharan Africa and a few in Latin America are growing rapidly
and are already close to or above potential, and therefore at risk of overheating.
 Several large middle-income countries, such as Brazil, India, Russia, South Africa, Turkey and
Vietnam, have struggled to regain pre-crisis growth rates despite significant stimulus.
 Some countries are dealing with high unemployment and economic slack due to the severity of
the post-crisis downturn (developing Europe) or due to social and political turmoil (Middle East
North Africa).
 The majority of developing countries are performing well, with output gaps closed or closing.

12
F. RISKS TO OUTLOOK
16. Although the risk of a major crisis in Europe has subsided, a new set of risks is gaining
prominence:
 Withdrawal of quantitative easing in the United States. The eventual tapering of quantitative
easing in the United States and other high income economies is likely to cause interest rates
to rise for developing countries. Higher rates may generate difficult adjustments and possibly
domestic crises, especially in countries where public and private sector indebtedness has been
on the upswing.
 Afasterthanexpecteddeclineincommodityprices. Over the past year, energy and metals prices
have been easing in response to supply and demand-side substitution induced by high prices
(metal and energy prices are down 30 percent and 14 percent since their early 2011 peak). If
commodity prices were to decline faster towards their long-term equilibrium than envisaged
in the baseline, commodity exporting developing countries could experience serious fiscal
setbacks and weaker GDP growth, although commodity importers would stand to gain.
 Implications of a radical relaxation of fiscal and monetary policy in Japan. The 21 percent real
effective depreciation of the yen between September and April could dampen developing
country exports to Japan as well as in third markets where they compete with Japanese
exports. However, some developing countries (especially in East Asia) could gain from yen’s
(real) depreciation and higher demand for Japanese exports and larger FDI flows to the extent
that they supply parts and components to Japan’s production networks. Finally, by adding to
the looseness of global monetary conditions, this policy could lead to strong capital flows and
potentially add to overheating pressures, especially in East Asia.

13
2011 2012 2013e 2014f 2015f
Global Conditions
World Trade Volume (GNFS) 6.2 2.7 4.0 5.0 5.4
Consumer Prices
G-7 Countries 5.3 -0.6 -0.1 0.9 1.0
United States 2.4 2.1 2.4 2.5 2.5
Commodity Prices (USD terms)
Non-oil commodities 20.7 -9.5 -4.7 -1.1 -1.5
Oil Price (US$ per barrel) 104.0 105.0 102.4 101.0 101.0
Interest Rates
$, 6-month (percent) 0.8 0.5 0.7 1.1 1.4
Real GDP growth
World 2.8 2.3 2.2 3.0 3.3
High income 1.7 1.3 1.2 2.0 2.3
Euro Area 1.5 -0.5 -0.6 0.9 1.5
Japan -0.5 2.0 1.4 1.4 1.3
United States 1.8 2.2 2.0 2.8 3.0
Developing countries 6.0 5.0 5.1 5.6 5.7
East Asia and Pacific 8.3 7.5 7.3 7.6 7.5
ANNEX
GLOBAL AND REGIONAL ECONOMIC ENVIRONMENT
Table 1: Global Economic Outlook
Table 2: East Asia and Pacific: GDP Growth Projections
Source: Global Economic Prospects: June 2013. The World Bank
Source: Global Economic Prospects: June 2013. The World Bank
2010 2011 2012 2013/f 2014/f 2015/f
Developing East Asia 9.6 8.3 7.5 7.3 7.6 7.5
China 10.4 9.3 7.8 7.7 8.0 7.9
Indonesia 6.2 6.5 6.2 6.2 6.5 6.2
Malaysia 7.2 5.1 5.6 5.1 5.1 5.3
Philippines 7.6 3.9 6.6 6.2 6.4 6.4
Thailand 7.8 0.1 6.5 5.0 5.0 5.5
Vietnam 6.4 6.2 5.2 5.3 5.4 5.4
Developing EAP excluding China 6.9 4.6 6.2 5.7 5.9 6.0

15
A. MACROECONOMIC CONDITIONS CONTINUE TO IMPROVE, BUT
GROWTH REMAINS SLUGGISH
17. Vietnam’s macroeconomic conditions continue to improve as its economy enters the third
year of relative stability. With moderate inflation, a stable exchange rate, increased reserves and reduced
country risks, Vietnam is trying to put an end to the recurrent episodes of macroeconomic instability that
started in 2007. Inflation (year-on-year, henceforth, y/y) has fallen from a peak of 23 percent in August 2011 to
6.7 percent in June 2013 (top-left panel, figure 5). The official exchange rate has been relatively stable and, in
a welcome move when the dong came under pressure recently, authorities widened the exchange rate band
by 1 percent rather than continue to defend the currency (top-right panel, figure 5). The stock of reserves
with the Central Bank has more than doubled in the past two years, with reserves covering up to 2.8 months
of imports at the end of the first quarter of 2013 (middle-left panel, figure 5). Vietnam’s sovereign spreads and
country default swaps are hovering at their lowest levels since the onset of global economic crisis (middle-
right panel, figure 5).
18. However, macroeconomic stability, in the absence of broad structural reforms, has not been
sufficient to lift the economy from its long spell of slow growth. Policymakers have been consumed in
recent years with trying to stabilize the economy, with the hope that once macroeconomic stability is achieved,
growth will automatically resume. But even as the economy has stabilized, growth has slumped. In fact growth
has been below 7 percent for the sixth consecutive year, with the economy expected to grow in 2013 at its
second slowest pace since the early-1990s (bottom panel, figure 5). Efforts to stimulate the economy through
tax breaks and accommodative monetary policy have faced diminishing returns, while raising fiscal deficits
and creating new contingent liabilities (see Section F). Without accelerating structural reforms, especially in
the banking and SOE sectors, Vietnam faces the risk of a prolonged period of slow growth (see Part III).
19. Unless broader and deeper structural reforms are pursued, the recent gains in macroeconomic
front could prove to be fragile for a number of reasons. First, slower growth may intensify demand for
further loosening of monetary and fiscal policies, with the risk of stoking inflationary pressures and reversing
the recent gains in macroeconomics stability. Second, if the implementation of structural reforms is delayed
further, investors’ confidence would be undermined, further worsening growth prospects. On the external
side, Vietnam’s economy remains susceptible to a further slowdown in the global economy, since its declining
revenue performance and rising public debt which leaves little room for significant counter-cyclical policies.
PART II: RECENT ECONOMIC DEVELOPMENTS INVIETNAM
02

16
Figure 5: Macroeconomic Conditions Remain Stable, but Growth Is Weakening
Source: SBV, GSO, IMF, and the World Bank
0
5
10
15
20
25
J-11 A-11 J-11 O-11 J-12 A-12 J-12 O-12 J-13 A-13 J-13
Inflation rate (y/y, in %)
Resolution 11
16000
18000
20000
22000
J-11
M-11
M-11
J-11
S-11
N-11
J-12
M-12
M-12
J-12
S-12
N-12
J-13
M-13
M-13
Exchange rate (VND for 1 US$
Resolution 11
1.6
1.9 1.8
1.6
2.2 2.3 2.3
2.7
2.8
0
1
2
3
Q1-11 Q3-11 Q1-12 Q3-12 Q1-13
International reserves (in months of imports
Resolution 11
2.3
2.7
2.8
0
100
200
300
400
500
600
700
J-11
M-11
M-11
J-11
S-11
N-11
J-12
M-12
M-12
J-12
S-12
N-12
J-13
M-13
M-13
Cost of borrowing in the international capital marke
Resolution 11
Sovereign spreads
CDS, 5 years
5.1
9.5
4.8
7.8
5.4
6.4
4.9
3
4
5
6
7
8
9
10
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Real GDP Growth (%)
annual
3-year moving average
East Asian Crisis
Global Economic Crisis
Break-up of Soviet Union ????
44

17
B. THE REAL SECTOR: IS SLOW GROWTH HERE TO STAY?
20. Vietnam’s economy is experiencing its longest spell of slow growth since the onset of economic
reformsinthelate-1980s. RealGDPgrewby5percentin2012,thelowestlevelsince1998 1
. The economy
extended its slow growth into the first half of 2013, registering a growth rate of 4.9 percent in the first quarter
and 5 percent in the second quarter (left panel, figure 6). This is the first time that Vietnam has experienced
two consecutive years of sub-5 percent growth in the first half of the year since it started publishing quarterly
GDP. In fact what had distinguished Vietnam from other countries is its ability to recover rapidly after an
economic shock—be it during the East Asian crisis in 1999 or the global financial crisis in 2009. However,
Vietnam has found it harder to take timely and decisive actions to jumpstart its economy from the current
growth slowdown.
21. Vietnam is the only large developing country in the East Asia and Pacific region other than
China whose post-crisis growth rate has been lower than its pre-crisis level. The economies of Indonesia,
Malaysia, Philippines and Thailand have all grown faster in the post-crisis period (2010-13) than prior to the
crisis (2005-08) as can be seen in the right panel of figure 6. And China’s pre-crisis growth rate was exceptionally
high. On the other hand, Vietnam’s post-crisis growth rate (5.8 percent) has been one percentage point lower
than its pre-crisis level (6.8 percent). Indonesia and Philippines—two countries that had historically grown at
a much slower pace than Vietnam—have been growing more rapidly than Vietnam since 2010.
22. Growth has been uniformly decelerating in all the sectors, though agriculture and industry
seem to be particularly hard hit. The services sector expanded by 5.9 percent in 2012 and contributed 2.2
percentage points to overall growth. Growth in the agriculture, forestry and fishery sector decelerated to 2.7
percent in 2012 from 4 percent in 2011 due to unfavorable weather conditions, diseases in livestock and falling
prices of most agricultural products. Manufacturing growth also slowed down, reflecting weakening domestic
demand and rising inventories. Agriculture and industry, which together account for 70 percent of labor force,
contributed just around 3 percentage points to growth, compared to a 3.8 percentage point contribution
during the 2005-11 period (left panel, figure 7).
Figure 6: Vietnam’s Declining Economic Growth: From the Perspective of
Its Own History and In Comparison With Its Regional Peers
Source: GSO (GDP based on 2010 price); World Development Indicators
0
2
4
6
8
10
q1-05
q1-06
q1-07
q1-08
q1-09
q1-10
q1-11
q1-12
q1-13
Growth rate (quarterly )
Growth rate (annual )
11.9
8.8
5.9 6.3
5.2
6.1
6.8
5.85.4 5.7
4.3
4.8
0
2
4
6
8
10
12
14
Pre-Crisis Post-Crisis
China Indonesia
Philippines Vietnam
Malaysia Thailand
Real GDP growth rate (in %)
1
Vietnam recently revised its GDP series and used 2010 as the base year. According to the new series, the economy grew by 5.25 percent in 2012.

18
23. All demand side components of GDP except net exports have also been growing slowly. Private
consumption and investment, which account for over 90 percent of Vietnam’s GDP, showed a sharp decline.
Private consumption grew 3.5 percent while investment rose merely 1.9 percent in 2012, compared to 5.3
percent and 9.8 percent respectively during the 2009 -2010 period. Net exports turned positive in 2012 due
to strong export performance and slowing import growth. Merchandise exports grew by 18.2 percent in
2012, driven by stronger growth in the foreign-invested (FDI) sector. Reduced consumption growth and a
slowdown in investment meant that merchandise imports grew at a subdued rate of 6.6 percent in 2012 (right
panel, figure 7).
Figure 7: Contribution to Growth: Production Versus Demand
1.5 1.2 1.3 1.0 0.6
2.9
2.5 2.4
2.0
2.0
3.2
2.8 2.6
2.2
2.3
-1
0
1
2
3
4
5
6
7
8
2005 2010 2011 2012 Q1-13
GDP growth
Contribution to growth by production/supply (in %)
Services
Industry
ConstrucƟon
Primary
0.1
-0.4 -0.5 -0.2 0.1
2.1 1.9
2.3 2.0 1.6
0.4
0.3
0.4
0.4
0.3
4.9
3.5
4.3
4.1
3.4
-1
0
1
2
3
4
5
6
7
8
2005 2009 2010 2011 2012e
Net exports
Investment
Govt.
consumption
Private
consumption
GDP growth
Contribution to growth by sources of demand (in %)
Box 3: Government’s Response to the Growth Slowdown
In January 2013 the Government issued Resolution No. 2, announcing a number of measures to assist
enterprises and individuals to deal with the current economic difficulties. These measures included: (i)
delayed payment of corporate income tax (CIT): 6 months for payments due in Q1 2013 and 3 months
for Q2 and Q3/2013; (ii) deferring payment of value added tax (VAT): 6 months for payments due in
Q1 2013. The tax incentives were intended for: (i) Small and medium enterprises (SMEs); (ii) Labor-
intensive enterprises in certain sectors; (iii) Enterprises engaging in sale, leasing, financial leasing of
houses; and (iv) Enterprises that produce iron, steel, cement, construction tiles. The government’s
estimates show that total deferred tax payment will amount to about 9.1 trillion dong in the first four
months of 2013. In addition, the Prime Minister has also authorized the Ministry of Finance to propose
to the National Assembly a lowering of Corporate Income Tax (CIT) to 20 percent for SMEs and to
10 percent for enterprises engaging in investment, sale and lease of social housing (for low-income
households), starting from July 1, 2013. These measures have subsequently been approved by the
National Assembly.
Despite these measures the corporate sector remains in difficulty. In the first four months of 2013,
nearly 16,600 firms closed or suspended their operations, up 16.9 percent from last year. At the same
time, nearly 23, 800 new enterprises were established, down 1.2 percent compared to the same period
last year. High borrowing costs, an unfavorable business environment and accumulated inventory are
often cited as the reasons for shutdown or bankruptcy of many enterprises.
Source: MPI, MOF, Various sources from media
Box 3: Government’s Response to the Growth Slowdown

19
24. One of the worrying signs is the steady and across the board decline in investment rates. Total
investment in the first quarter of 2013 is estimated at 29.6 percent of GDP, nearly 13 percentage points below
the peak achieved in 2007 (left panel, figure 8). While a 40 percent or higher investment rate was neither
sustainable nor desirable—it was based on excessive lending by banks to inefficient SOEs—a reduction of
nearly 10 percentage points over a period of three years seems hasty and unplanned. Some decline in state
sector investment was expected given the stimulus spending during 2009-10, spending that was intended to
be temporary to begin with. The declining investment ratio from the Non-State (domestic) sector is, however,
worrisome, as this sector has been hit hard by falling domestic demand, rising interest rates and a slowdown in
credit growth during the last two years.
25. While foreign direct investment remains high, it is declining progressively as a share of the
economy. In the past five years, implemented (or disbursed) FDI has hovered between $10.5 to $11.5 billion
(right panel, figure 8). This has been viewed as a sign of foreign investors’continued commitment to Vietnam,
that they are undeterred by problems of macroeconomic instability or slowdown in structural reforms.
Implemented FDI as a share of GDP, however, has been steadily falling over the past six years, from a peak of 12
percent of GDP in 2008 to 7 percent in 2012. Despite a falling FDI/GDP ratio, and continued macroeconomic
problems, Vietnam is still considered to be one of the most attractive destinations for foreign investors in the
East Asia region (see box 4), largely on account of its low wages, favorable demography, ideal location and
political stability.
Figure 8: Contribution to Growth: Production Versus Demand Side Components
Source: GSO (GDP based on 2010 prices; World Development Indicators
15.9
12.9
15.9 14.7 12.3 11.5 10.9
16.4
13.4
13.3 13.9
12.8 11.9 10.9
10.4
11.8
10.0 9.9
8.2
7.1 7.8
42.7
38.2 39.2 38.5
33.3
30.5 29.6
0
10
20
30
40
50
2007 2008 2009 2010 2011 2012 q1-13
Total
Foreign
Non- state
(domestic)
State
Investment by ownership (% of GDP)
8.0
11.5
10.0
11.0 11.0
10.5
10%
12%
10% 10%
8%
7%
0
2
4
6
8
10
12
14
0%
2%
4%
6%
8%
10%
12%
14%
2007 2008 2009 2010 2011 2012
FDI Implemented
FDI/GDP (left scale) FDI in USD Billion
(right scale)

20
Box 4: Vietnam Remains An Attractive Destination for Foreign Investors
Two recent surveys reflect continued interest of foreign investors in Vietnam.
According to the 2012/13 ASEAN
Business Outlook Survey by AmCham
Singapore and US Chamber of
Commerce, Vietnam remains the most
popular location for expansion within
the ASEAN region by a wide margin.
Thailand is ranked second, followed
by Singapore and the Philippines (see
adjacent figure).
Similarly, the 2012/13 National
Business Survey of the Singapore
Business Federation (SBF) showed
that Vietnam is the second most keen
overseas investment destination for its
members after Myanmar (see adjacent
figure). The traditionally popular
investment destinations such as China
and India seem to be less favored than
in the past. Indonesia and Thailand
remain close competitors to Vietnam
as the other overseas ventures of
interest to SBF members.
Source: ASEAN Business Outlook Survey, 2012/13; SBF National Business Survey 2012/13.
Vietnam
Vietnam
Thailand
Thailand
Americas
India
0% 5%
9%
12%
12%
8%
15%
12%
14%
18%
2012
2011
17%
21%
24%
21%
11%
11%
11%
18%
10% 15% 20% 25% 30%
China (including Hong Kong)
Singapore Philippines
Philippines
Indonesia
Indonesia
Myanmar
Myanmar
Cambodia
Cambodia
Malaysia
Malaysia
Laos
Location of Expansion in ASEAN
Top 10 keen Overseas Venture
1%2%2%
6%6%7%8%
11%
57%
26. The problems facing the industrial sector seem to be coming largely from domestic enterprises
catering mostly to the domestic market. Production slowdown is reflected quite clearly in modest growth
in the Jan-May index of industrial production (IIP), which grew at only 5.2 percent, compared to 6.2 percent a
year ago. Similarly, the purchasing manager index (PMI) for the manufacturing sector shows a rather sobering
picture with PMI remaining below 50 marks (implying contraction) for most of 2012 and 2013. In June 2013, PMI
slumped to 46.4, its lowest level since July 2012 (left panel, figure 9). The lackluster PMI score is consistent with
a weakening of household consumption, with total retail sales of goods and services in the first five months of
2013 up a mere 4.8 percent in real terms compared to 6.6 percent during the same period of 2012 (right panel,
figure 9). On the other hand, exports are still growing at a healthy pace, indicating that production problems
seem to be largely confined to enterprises producing for the domestic market.
Box 4: Vietnam Remains An Attractive Destination for Foreign Investors

21
C. PERFORMANCE OF THE EXTERNAL SECTOR CONTINUES TO BE
IMPRESSIVE
 Exports
27. Vietnam’s export performance continues to be strong and resilient to domestic problems.
Exports grew at 16 percent during the first four months of 2013 after achieving a growth rate of 18.2 percent
in 2012 and 34.2 percent in 2011. While earnings from commodity exports are declining, due to falling prices,
Vietnam traditional labor-intensive manufacturing exports such as garments, footwear and furniture continue
to sustain rapid growth. A noteworthy addition to the export basket has been the exports of hi-tech and high-
value products (e.g., cell phones and parts, computers, electronics and accessories, automobile parts), that
have emerged as the largest and fastest growing export items in 2012. As table 3 shows, Vietnam exported
$12.7 billion worth of cell-phones and accessories in 2012, compared to $3.7 billion of rice, $6.1 billion of
seafood and $7.3 billion of footwear. In 2013, exports of cell phones and accessories are expected to exceed
$18 billion, overtaking garments as the largest export item from Vietnam.2
2
According to South Korean Embassy, with Samsung’s rapid expansion in Vietnam, exports of cellphones are expected to exceed US$30 billion by 2015.
Following Samsung’s success, LG Electronics is establishing a cell phone factory in Vietnam as well. With their entry, a number of ancillary units have
started to relocate to Vietnam, giving rise to the prospect that Vietnam could emerge as one of the largest exporters of cell phones in the world.
Figure 9: Both PMI and Retail Sales Growth Point to a Slowdown in Domestic Demand
42
44
46
48
50
52
54
M-11 S-11 J-12 M-12 S-12 J-13 M-13
Expansion
Contraction
Purchasing Manager Index (PMI)
0
4
8
12
16
20
24
28
32
36
M-08 M-09 M-10 M-11 M-12 M-13
Retail Sales and Services (in %)
Real growth (%)
Nominal growth (%)

22
Export Turnover 2012 Value Change in %
US$ Bln Share (%) 2011 2012 4M-13
Total export value (f.o.b price) 114.6 100.0 34.2 18.2 16.0
Crude oil 8.2 7.2 44.2 13.6 2.1
Non-oil 106.3 92.8 33.4 18.6 17.0
Agriculture
Rice 3.7 3.2 12.6 0.4 -5.2
Other Agricultural Commodities 9.9 8.6 39.9 9.2 -11.3
Seafood 6.1 5.3 21.9 -0.3 -3.5
Low cost manufacturing
Garment 15.1 13.2 25.3 7.5 18.0
Footwear 7.3 6.3 27.9 10.9 14.2
Wood products 4.7 4.1 13.7 17.9 13.1
Hi-tech
Electronics and computers 7.8 6.8 30.1 68.1 44.5
Cell phones and accessories 12.7 11.1 98.4 98.8 97.0
Transport vehicles and parts 4.6 4.0 49.2 32.2 18.5
Others 34.6 30.2 34.0 8.7 3.1
Domestic sector 42.3 36.9 26.5 1.2 3.8
Foreign sector (including oil) 72.3 63.1 40.8 31.1 23.7
Table 3: Merchandise Exports
Figure 10: Vietnam’s Exports Basket has Changed Considerably in the Past Ten Years
Crude oil
20%
Rice
4%
Agriculture
20%
Garments
16%
Footwear
11%
Electronics

computers
3%
Other
26%
2002
Crude oil
7%
Rice
3%
Agriculture
9%
Garments
13%
Footwear
7%
Electronics

computers
7%
Phones
and parts
11%
Tranport
vehicles
and parts
4%
Machinery
and parts
4%
Plastic
products
3%
Other
32%
2012
Source: General Department of Customs
Source: General Department of Customs, General statistics Office, the World Bank

23
Figure 11: Vietnam’s Export Destinations Have Changed Little in the last Ten Years
28. Vietnam’s export basket has quietly undergone a significant transformation in the last ten
years. Crude oil and agriculture including rice, which accounted for 44 percent of Vietnam’s total export value
in 2002, have seen their share plummet to 19 percent in 2012. In the same period, the share of low-value
manufacturing exports (garments and footwear) also fell from 27 percent to 20 percent. Hi-value export items,
which had a negligible share in 2002, now account for more than a fifth of Vietnam’s exports (see figure 10).
29. While the export basket has transformed, export destinations have barely changed in the past
decade. Vietnam’s top three export markets in 2002 were Europe, the US and Japan, accounting for 49 percent
of its exports. The corresponding number in 2012 was 46 percent (see figure 11). The modest decline in the
share of exports going to advanced countries has been captured by its neighbors, namely China and ASEAN.
Given that South-South trade is increasing at 1.5 times the rate of growth of North-South trade (see box 2), it is
important for Vietnam to continue to diversify its export destinations and explore new markets in Africa, South
Asia and Latin America.
China
9%
Japan
15%
USA
14%
EU
20%
ASEAN
14%
East Asia
(excl.
Japan)
10%
18%
2002
China
11%
Japan
11%
USA
17%
EU
18%
ASEAN
15%
East Asia
(excl.
Japan)
10%
18%
2012
Rest of the WorldRest of the World
 Imports
30. Import growth slowed considerably in 2012, but is picking up again in 2013. Lower demand for
capital investment and intermediate goods, as well as weaker private consumption, caused import values to
increase at a moderate rate of 6.6 percent in 2012. Imports from the domestic sector contracted by 7 percent
during 2012, reflecting a substantive cut in public investment and weak domestic retail sales, whereas imports
from the FDI enterprises grew at 22.7 percent during 2012—constituting 52.7 percent of the total import bill.
Imports have revived in recent months, growing at 17 percent (y/y) during April 2013. The restoration of import
growth, especially positive growth for the domestic sector, indicates an improvement of both investment and
consumption demand in the near term. Imports of machinery, equipment, raw materials and intermediate
goods has been rising faster in 2013 compared to 2012, implying that a new cycle of investment and production
may be underway—offsetting to some extent the pessimism about investment demand discussed earlier.
Imports of automobiles contracted by 2.8 percent in April 2013 compared to a much bigger contraction of
32.2 percent during 2012.
Source: General Department of Customs, General Statistics Office, the World Bank

24
Table 4: Merchandise Imports
Figure 12: Vietnam’s main imports
Import Turnover 2012 Growth in %
US$ bn Share (%) 2011 2012 4M-13
Total import value (c.i.f price) 113.8 100.0 25.8 6.6 17.0
Capital Goods 9.0 7.9 61.6 -9.3 -22.9
Machinery and Equipment 16.0 14.1 13.0 3.2 10.0
Intermediate Goods
Garment and Leather Materials 3.2 2.8 12.5 7.1 13.4
Computer and Electronics 13.1 11.5 53.1 67.0 61.0
Phones and Parts 5.0 4.4 82.0 85.3 92.6
Materials
Steel 6.0 5.2 4.5 -7.2 12.6
Plastics 4.8 4.2 26.1 0.9 14.5
Fabrics 7.0 6.2 25.5 4.6 16.1
Chemicals 2.8 2.4 27.2 2.3 -5.0
Fibers and Weaving Yarns 1.4 1.2 30.4 -8.4 3.9
Cotton 0.9 0.8 56.1 -16.7 37.0
Fertilizer 1.7 1.5 46.1 -4.8 13.2
Pesticides 0.7 0.6 16.6 8.1 22.1
Products
Petrol and Gasoline 9.0 7.9 61.6 -9.3 -22.9
Chemical Products 2.4 2.2 16.6 2.1 9.1
Pharmacy 1.8 1.6 19.3 20.7 8.7
Paper 1.2 1.0 15.4 9.0 12.7
Automobiles 2.1 1.8 6.8 -32.2 -2.8
Domestic Sector 53.8 47.3 21.0 -7.0 6.6
Foreign Sector 59.9 52.7 32.1 22.7 27.0
Source: General Department of Customs
Motor
vehicles
8%
Machinery

equipment
26%
Petro
products
14%Agricultural
Metal
11%
Chemicals
6%
Plastics
4%
Textile
material
22%
Hi-tech
intermediat
e
5%
2002
Motor
vehicles
3%
Machinery

equipment
20%
Petro
products
11%
Agricultural
materials
4%Metal
11%
Chemicals
6%
Plastics
6%
Textile
material
16%
Hi-tech
intermediat
e
23%
2012Motor
vehicles
6%
Machinery

equipments
19%
Petro
products
10%
Agricultural
materials
3%
Metals
8%Chemicals
5%
Plastics
3%
Textile
materials
16%
Hi-tech
intermediat
es
3%
Other
27%
2002
Motor
vehicles
2% Machinery

equipments
14%
Petro
products
8%
Agricultural
materials
3%
Metals
8%
Chemicals
5%
Plastics
4%
Textile
materials
11%
Hi-tech
intermediates
16%
Other
29%
2012

25
Figure 13: Vietnam’s Imports by Sources
31. The composition ofVietnam’s imports has changed, largely reflecting the changes in its exports
basket and move to a more high-tech industrial landscape. The share of machinery and equipment,
petroleum products, textile materials, plastics, and motor vehicles in total import value has gradually fallen,
while the share of high-tech intermediate products has increased nearly five times—from 3 percent of the
total import bill in 2002 to 16 percent in 2012 (figure 12). The share of many other items such as agricultural
materials, metals and chemicals in total imports has remained unchanged in the last one decade.
32. Vietnam’s imports from China have significantly increased, while shares of other countries in
the import bill have commensurately declined. Vietnam imported one-quarter of its import needs from
China in 2012, compared to only 11 percent in 2002 (figure 13). This trend is similar to what we observe in many
other developing countries, where China has gradually displaced advanced economies to emerge as their
primary trading partner. This process has been facilitated by growing intra-enterprise trade by multi-national
companies, a dramatic decline in logistics costs and the move to increasingly form efficient global supply
chains. The rise of Chinese share in Vietnam’s imports has meant a smaller share for most other countries, but
mostly by Japan, EU and ASEAN countries.
China
11%
Japan
13%
USA
2%
EU
10%
ASEAN
24%
East Asia
(excl.
Japan)
28%
12%
2002
China
25%
Japan
10%
USA
4%
EU
8%
ASEAN
18%
East Asia
(excl.
Japan)
22%
Rest of the WorldRest of the World
13%
2012
 Trade Balance
33. Vietnam is expected to continue to enjoy a surplus in its trade balance in the near-term, though
the size of the trade surplus may shrink. Vietnam used to have a problem of persistent trade deficits. The
level of trade deficit peaked in 2008 at $18 billion, equivalent to 20 percent of GDP. The trade balance has since
improved and Vietnam posted a trade surplus in 2012—the first time since 1992—thanks to strong growth
in exports and subdued imports. It is also important to note that while the economy as a whole is running
a deficit in its trade account, the foreign direct investment sector has been recording a trade surplus. With
imports starting to pick up in the first half of 2013, Vietnam’s trade surplus is expected to get smaller in the
coming years.

26
-2.7
-4.0
-2.4 -2.7
-1.4
-3.6 -3.0 -4.2
-6.4
-8.9 -9.4
-11.6
-20.2
-24.7
-17.2
-14.8
-16.1
-11.5
-4.3
-0.1
0.2 0.0 0.6 1.2 2.5 1.8 1.2 1.3
3.4
4.9
6.5 6.1 6.6
4.3
2.2
6.3
12.3
3.6
-25
-20
-15
-10
-5
0
5
10
15
1995 1997 1999 2001 2003 2005 2007 2009 2011 4m-13
Domestic sector
FDI sector
Total
Figure 14: Vietnam’s Trade Balance (in US$ billion): Domestic Versus Foreign Sectors
Figure 15: External Accounts (% of GDP) Figure 16: Foreign Reserves (months of imports)
Source: General Department of Customs (exports in f.o.b and imports in c.i.f price)
Source: SBV, IMF and World Bank Staff Estimates
 Current Account Balance and International Reserves
34. Vietnam posted its largest ever current account surplus in 2012, though future surpluses are
likely to be considerably smaller. Booming exports, a sustained flow of external capital (private and official)
and remittances and lackluster import performance all contributed toVietnam’s record current account surplus
of 5.9 percent of GDP in 2012. With a capital account surplus of 5.8 percent of GDP, its balance of payments was
in surplus by 9.3 percent of GDP, with the remaining amount accounted for by errors and omissions (figure 15).
The surplus in the balance of payments helped in building up its international reserves, which went from 2.2
months of import cover at the beginning of 2012 to 2.8 months by the end of first quarter 2013. The reserve
build up was one of the factors contributing to the stable macroeconomic environment (figure 16).
Figure 12: External accounts (% of GDP) Figure 13: Foreign reserves (months of imports)
1.6
1.9 1.8
1.6
2.2 2.3 2.3
2.7
2.8
0
1
2
3
Q1-11 Q3-11 Q1-12 Q3-12 Q1-13
-11.9
-6.6
-4.1 0.2
6.4
13.7
12.1
6.7
5.2
5.9
-15
-10
-5
0
5
10
15
2008 2009 2010 2011 2012
Capital account
Current account
Overal balance
SURPLUS
DEFICIT
-11.0
-6.0
-3.8 0.2
5.9
12.6 11.1
6.1 5.3
5.8
-15
-10
-5
0
5
10
15
2008 2009 2010 2011 2012e
Capital account
Currentaccount
Overall balance
Surplus
Deficit

27
Source: GSO
Source: GSO
D. INFLATION HAS STABILIZED, BUT INFLATIONARY EXPECTATIONS
HAVE NOT
35. Inflation is in single digit and relatively stable. Headline inflation (y/y) was at 6.7 percent in June
2013, a steep deceleration from 18.1 percent in December 2011. The decline of inflation has been largely
contributed by the easing of food prices and the effect of stabilization measures. Food prices grew by just
1 percent (y/y) in December 2012 and 1.5 percent in June 2013, generally due to an adequate supply of
agricultural products and reduced growth in household consumption throughout the year. However, core
inflation averaged around 10 percent, reflecting a series of increases in the prices of goods and services that
are administratively managed.
36. A large part of inflation has been due to administrative price hikes, which are likely to continue
in the foreseeable future. In the past six months, increases in prices of healthcare, transport and education
services alone account for about 40 percent of the inflation rate. On the other hand sectors where prices have
been largely determined by market forces have seen marginal or negative price increases (figure 18). Since user
charges for many of the government provided services remain below cost, one would expect further increase
in the inflation rate during the remaining months of 2013 as these prices are adjusted to market levels.
-5
0
5
10
15
20
25
-1.0
0.0
1.0
2.0
3.0
4.0
May-11 Nov-11 May-12 Nov-12 May-13
Monthly
year -on-year
0
10
20
30
40
May-11 Nov-11 May-12 Nov-12 May-13
Headline
Food
Core
Figure 17: Inflation has been Low and Relatively Stable in Recent Months
Figure 18: CPI across different goods and services
0
10
20
30
40
50
60
May-10 Feb-11 Nov-11 Aug-12 May-13
Beverage tobacco
Garment, hats, footwear
Household appliancies
0
10
20
30
40
50
60
May-10 Feb-11 Nov-11 Aug-12 May-13
Healthcare
Transport
Education

28
E. MONETARY POLICY EFFECTIVENESS HAS BEEN HINDERED BY
BANKING SECTOR PROBLEMS
37. Efforts by the authorities to support growth through monetary policy relaxation have had
limited impact. The easing of inflation in the past twelve months has provided the State Bank of Vietnam
the space to gradually ease monetary policy to support growth. The State Bank of Vietnam has slashed its
key policy rates by 800 basis points and lowered the deposit rate cap on local currency accounts by 650 basis
points since March 2012 (figure 19). Policy rates are now below the level where the tightening cycle began and
deposit rates have fallen sharply as well. The growth of money supply has also been fast, with broad money
(M2) rising at 25.7 percent (y/y) in May 2013. In spite of substantial loosening of monetary policy, total credit
to the economy from the banking system is estimated to have grown by only 2.9 percent in May 2013 (y/y)
compared to the annual target of 12 percent (figure 20).
38. Low credit growth can be attributed to several factors. First, with their balance-sheet impaired
by rising NPLs, the commercial banks have been cautious in extending further credit to a stagnant real sector.
They have also been more aggressive in collecting debt. Therefore, as reported by the SBV, credit institutions
loaned VND570 trillion in January and more than VND400 trillion in February, but loan collection was still large
enough to offset these increases, resulting in negative credit growth in the first two months of 2013. Second,
flushed with extra liquidity, the credit institutions have turned to bonds as an alternative to lending to the
real sector. The first four months of 2013 saw an approximately VND82 trillion government and government-
guaranteed bonds being sold (out of a target of VND208 trillion of revenue from bond sales in 2013), much of
which were subscribed by the credit institutions.
39. The effectiveness of monetary easing will continue to be constrained by the poor health of the
banking system. The interest rate cuts have yet to boost lending and the flow of capital to private sector,
mainly SMEs, which continue to complain about their limited access to bank credit. Credit activity remains
subdued as banks have become more reluctant to lend due to increased risk perception, while credit demand
has waned in light of weaker business prospects. Under such circumstances, further monetary easing is likely
to have only limited impact on growth, but could add to concerns surrounding credit quality and negative
consequences on macroeconomic instability. Therefore, in order to restore the functions of the credit market
and make monetary policy more effective, restructuring of the banking sector (and the associated restructuring
of SOEs) continues to be an imperative.
4
12
14
16
Jun-10 Mar-11 Dec -11 Sep -12 Jun-13
Discount rate Refinancing Rate
0
10
20
30
40
Apr-10 Jan-11 Oct-11 Jul-12 Apr-13
Total Credit Total Liquidity (M2) Total Deposit
6
8
10
Figure 19: Key Policy Rates Figure 20: Growth in Monetary Aggregates (in %)
Source: SBV

29
F. FISCAL DEVELOPMENTS AND POLICIES
 Aggregate Fiscal Discipline
40. Vietnam’spublicfinanceshavecomeunderstressduringthepastfewyearsonaccountofslower
growth, lower revenue buoyancy and increased stimulus spending. During 2012 fiscal deficit increased
to 4.8 percent of GDP (under GFS definition) as revenue collection to GDP ratio fell to a record low of 22.8
percent (left panel, figure 21) and despite government’s effort to reign in capital spending.3
Primary deficit,
which excludes interest payments, was closer to 3.6 percent of GDP in 2012. As a result of higher deficits,
government’s debt increased from 48 percent of GDP in 2011 to 52 percent in 2012, with domestic debt to GDP
ratio rising to a record level of 23 percent. With government set to borrow nearly VND 208 trillion during 2013,
domestic debt is expected to hit a new high this year.
Figure 21: Vietnam’s Fiscal Deficits and Public Debt have been Rising in Recent Years
Source: World Bank staff estimates based on MOF published data
0.4
3.6
2.2
7.2
3.0
3.5
4.8
4.5
-0.4
2.5
1.1
6.1
1.8
2.2
4.0
3.3
-1
0
1
2
3
4
5
6
7
8
2006 2007 2008 2009 2010 2011E 2012E 2013B
Deficit to GDP ratio (in %)
Fiscal deficit
Primary deficit 19
21
26
30
29
27
27
26
29
30
28
29
4
8
9
13
14
16
18
17
18
22
20
23
23
29
35
42 44 43 45 43
47
52
48
52
0
10
20
30
40
50
60
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
External
Debt
DomesƟc
Debt
Total
Debt
Debt to GDP ratio (in %)
3
Vietnamese accounting standards suggest that at 4.3 percent of GDP, this is still just within the government’s medium-term target of
maintaining the overall fiscal deficit at below 4.5 percent of GDP per year from 2011 to 2015.

30
 Steadily Declining Revenue Performance
41. Revenue collection has been steadily declining in the past five years. Vietnam used to have one
of the highest revenue to GDP ratios in the East Asia region; but the situation has changed in more recent years.
Total revenue has been on a declining trend since mid-2000s when it peaked at around 30 percent of GDP and
has been gradually dropping since then to an all-time low of 22.8 percent of GDP in 2012 (left panel, figure 22).
The spike in 2010 (29.6 percent of GDP) was due to rapid economic recovery from the post crisis stimulus and
high oil prices. Total revenue collection in 2012 grew by 10 percent in nominal terms compared to an average
growth rate of 20 percent in 2010 and 2011. Revenue outturn in 2012 is estimated at close to 100 percent. The
general tendency in the past has been to overshoot the revenue target due to underestimation in the annual
State Budget.
42. Slowdown in revenue collection has been due to a combination of a slowing economy and the
government’s response in terms of tax breaks for small and medium enterprises. One of reasons for weak
revenue performance appears to be the declining share of fees, charges, non-tax revenue and capital revenue,
which are related directly or indirectly to revenue from land and oil. Their combining share has fallen from 5.4
percent of GDP in 2007 to 2.2 percent of GDP in 2012. Tax collection as a share of GDP has also declined over
time from its peak level of 24.4 percent of GDP in 2008 to 20.5 percent in 2012, largely on back of a slowing
economy. CIT collections have fallen from 6.9 percent of GDP to an estimated 6.7 percent of GDP between
2010 and 2012 and VAT collections from 7.2 percent to 6.6 percent over the same period. Revenue from oil is
estimated to have declined from 3.8 percent of GDP in 2011 to 3.2 percent of GDP in 2012, though collections
were higher than projected – average price per barrel of crude was $105 in 2012 compared to an $85 estimate
in the budget.
43. AroundonequarteroftotalrevenueareestimatedtobecollectedfromStateOwnedEnterprises
and another quarter from foreign invested enterprises. The latter have to some extent helped to sustain
CIT and VAT collections. Many private domestic firms on the other hand have closed down in 2012 as noted
earlier. In addition to these, revenues from selling and leasing of land for industrial development fell, as did
revenues from trade taxes due to scheduled tariff reductions and lower imports in 2012.
Figure 22: Revenue Performance and Composition of Tax Revenue
24.3
23.5
24.4
20.6
22.4
21.1
20.5
19.8
2.8 2.7 2.0
2.5
1.9
1.4 1.0 1.2
1.8 2.7 2.2
2.2
2.4
1.6
1.2 1.1
29.7 29.4 29.3
25.8
27.3
24.3
22.8 22.1
0
5
10
15
20
25
30
35
Total
Grant
Capital
Fees, non-
tax and
charges
Tax
42.2
30.2
23.3
35.5
11.1
11.1
11.3
4.5
2.2
7.5
9.9
11.1
0
20
40
60
80
100
2006
2007
2008
2009
2010
2011
2012
2013
Othertaxes
Personal Income Tax
Nat. Res. tax
Trade taxes
Value Added Tax
Corporate Income Tax
Breakdown of Tax Revenue (%)Revenue to GDP Ratio (in %)

31
 Composition of Spending is Increasingly Skewed Against Investment
44. In response to these developments, and in line with its policy to enhance public investment
efficiency, the government has continued to consolidate capital spending. Total capital spending
(including off-budget) is estimated to have fallen from around 12.6 percent of GDP in 2010 to 9.4 percent in
2011 and 7.8 percent in 2012. This could potentially fall further as the government has already frontloaded
its spending on capital projects through off-budget funds. On the latter, the government had targeted to
spend a maximum of VND 225 trillion through off-budget funds between 2011 and 2015, with VND180 trillion
budgeted for 2011-2013.
45. The growth in recurrent spending has fallen over the course of 2012, but recurrent spending on
the social sectors has remained a priority in the State Budget. The ratio of capital to recurrent spending
has consistently declined in the past three years from 62 percent in 2010 to 44 percent in 2011 and 38 percent
in 2012 (figures 23). This partly reflects the relative priority accorded by the government to the social sectors.
Recurrent spending on both education and health as a share of the total recurrent budget and as a share of
GDP has steadily risen since 2010. The government maintains a policy of ensuring that at least 20 percent of
the State Budget is spent on education and that the health budget grows by at least as much as the overall rate
of growth of the budget.
46. Notwithstanding social sector needs, and given ongoing efforts to consolidate capital
spending, the government will need to find savings from recurrent spending. Vietnam’s current surplus
has declined in the last two years to an estimated 2.3 percent of GDP in 2012. Similarly, the primary deficit
has also increased from an estimated 1.4 percent of GDP in 2011 to an estimated 3.4 percent of GDP in 2012.
This suggests, as noted below, that maintaining fiscal sustainability may require further efforts at promoting
spending efficiency.
16.9
17.9
18.5
20.3
19.7
18.1
18.7
19.3
20.3
19.5
9.2
9.4
9.1
9.1
11.8
14.9
11.6
8.5
7.8
7.1
Expenditure to GDP ratio (%)
Capital
Recurrent
4.4
3.6
4.8 4.3 4.6 4.6 4.5
1.6
1.2
1.9
1.6 1.7 1.7 1.6
3.1
3.0
3.3
3.0
2.9 2.9
2.7
0.6
0.6
0.7
0.6 0.6 0.6
0.5
Budget Actual Budget Actual Budget Estimate Budget
2010 2012 2013
Social Sector Recurrent Spending (% of GDP)
Education Health Social Security Other Social Expenditure
2011
0
5
10
15
20
25
30
35
Figure 23: Composition of Expenditure: Capital and Recurrent

32
 2013 State Budget
47. The 2013 State Budget approved by the National Assembly in December 2012 projects more
moderate revenue and spending growth compared to recent years. Revenue is expected to grow at 10
percent in nominal terms (1 percent real growth compared to projected real GDP growth of 5.5 percent in 2013).
Spending is expected to grow at 8 percent in nominal terms (1 percent contraction in real terms) compared to
an average nominal growth of 15.2 percent in 2010-2012. Implementation of the 2013 State Budget in the first
quarter has been broadly in line with target. Revenue collection is at around 21 percent of budget at the end
of the first quarter, but will likely pick up over the course of the year. Similarly capital spending is at around 20
percent of budget, though this may be due to project start up time.
 Debt Sustainability Analysis
48. The latest joint World Bank-International Monetary Fund Debt Sustainability Analysis (DSA)
assesses Vietnam at low risk of debt distress, but there are important downside risks. Public external
debt (domestic and external) has increased slightly to 51.5 percent of GDP in 2012 from 47.9 percent of GDP
in 2011. Public sector debt dynamics over the medium to long-term have deteriorated somewhat compared
to last year’s DSA, largely on account of slower growth projections, lower revenue buoyancy and higher fiscal
deficits. Public and external debt sustainability indicators are projected to remain below their applicable debt
thresholds.
49. Despite this, the government will need to maintain its ongoing control over spending growth
to ensure medium-term fiscal sustainability. The above DSA results hinge on a baseline macroeconomic
scenario in which government reduces the pace of spending considerably below historical levels. Even a small
increase in the pace of spending growth, or maintaining primary deficits at the current levels, will lead to a rapid
deterioration in debt dynamics. Most importantly, the baseline scenario assumes no realization of contingent
liabilities and little progress on structural reforms. Therefore any systemic shock may also contribute to a rapid
rise in public debt.
Debt indicator Government target 2012
Public Debt/GDP 65 percent by 2020 51.5 percent
Public External Debt/Export Revenue 25 percent
Total Public Debt Service/Revenue 25 percent
Table 5: Debt burden indicators4
4
Government targets are taken from Prime Minister’s Decision 929 on Public Debt Management approved on July 17, 2012

33
50. With a slowing economy, the government needs to manage tighter fiscal conditions with
potentially large needs for economic restructuring. Economic restructuring is necessary for sustained
economic growth over the medium to long-term. It will however have short-term challenges both in terms of
potentially lower growth and in terms of fiscal costs. The latter are currently not accounted for in the 2013 State
Budget. Some of these fiscal could be met through the government’s ongoing efforts to consolidate capital
spending, though attention also needs to be paid in generating efficiencies on the recurrent side. Similarly,
any reduction in tax rate should be done in a revenue-neutral way to ensure that the government can continue
to mobilize adequate resources to meet is growing infrastructure and social sector needs.
G. NEAR-TERM OUTLOOK
51. Vietnam’s economy is expected to grow at a moderate rate of around 5.3 percent during 2013
and 5.4 percent in 2014. The slower than potential growth projection is based on the fact that it will take
several years to address the structural problems facing the country. However, in our baseline scenario (see
table 6) we assume continuation of the good spell of macroeconomic stability, a reasonable export growth and
no imminent threat of a financial or economic crisis. Inflation is expected to increase during the second half
of the year on account of planned rise in administrative prices, hike in civil servants salary, and the year-end
seasonal factors, with inflation ending the year at around 8.2 percent.
2010 2011 2012/e 2013/p 2014/p
Real GDP (% change, y-y %) /1 6.4 6.2 5.2 5.3 5.4
Consumer Price Index (% change, year-end) 11.7 18.1 6.8 8.2 7.9
Government Fiscal Balance (% GDP) /2 -2.8 -2.9 -4.8 -4.0 -4.0
Public sector debt (% GDP) /3 51.7 47.9 51.5 50.4 50.5
Current Account Balance (% of GDP) -3.8 0.2 5.9 5.6 3.3
1/ GDP based on 2010 price
2/ Includes off-budget items
3/ Public and public-guaranteed debt
52. There are however several downside risks to our projections. First, slower growth may intensify
demand for further loosening of monetary and fiscal policies, with the risk of stoking inflationary pressures
and reversing the recent gains in macroeconomics stability. Second, if the implementation of structural
reforms is delayed further, investors’confidence would be undermined, further worsening growth prospects.
On the external side, Vietnam’s economy remains susceptible to a further slowdown in the global economy,
since its declining revenue performance and rising public debt which leaves little room for significant
counter-cyclical policies.
Table 6: Vietnam’s Key Economic Indicators

35
A. BANKING SECTOR UPDATE
 Financial Sector Fragility Remains, but Risk of a Systemic Crisis Has Receded
53. During 2012 the banking sector saw a significant deterioration in its financial situation as well
as in the quality of its assets. Non-performing loans (NPLs) as reported by commercial banks increased from
2.9 percent at the end of 2011 to 4.5 percent by March 2013. SBV reported an NPL ratio of 8.6 percent for the
banking sector at the end of June 2012. Indicating that the banks have aggressively used provisioning for their
NPL treatment, SBV lowered the NPL estimate to 7.8 percent in December 2012 and further to 6 percent in
February 2013.5
The reliability of these numbers, however, remains a matter of concern given the low quality of
financial data. Independent estimates show the NPLs to be significantly higher than the official estimates. 6
The
profitability of banks has also deteriorated considerably in 2012. The return on assets for the banking sector
has fallen from 1.2 percent in 2011 to 0.79 percent in 2012, with JSBs seeing a bigger decline than the SOCBs
during the same period.
54. The structural weaknesses in the system, coupled with the increased economic and financial
volatility of past years, had heightened the risks facing the banking sector. A combination of several
inter-related factors—weak governance, excessive exposure to and cross-ownership with state-owned
enterprises (SOEs), and a fragmented regulatory and supervisory architecture—have gradually undermined
the robustness of the sector. Weaknesses in corporate governance, lax internal controls and management
practices, and complex shareholding structures among Joint Stock Banks (JSBs) that promote poor lending
practices are known to have been the source of many of these vulnerabilities. In addition, the regulatory and
supervisory architecture is fragmented—spread across several departments in SBV and MOF—with no single
agency being responsible for monitoring systemic risks.
PART III: AN UPDATE ONTHE RESTRUCTURING AGENDA
03
5
As per the reported financial statements of seven big banks accounting for roughly 40 percent of total loans outstanding in the system, as much as
VND15.5 trillion was used for provisioning for loan write-offs during 2012.
6
The main reasons for variation in different estimates of NPL have to do with different accounting and classification standards and poor transparency. In
a recent statement, Fitch, a credit rating agency, said that they believe system-wide NPLs to be four times higher than the 4.5 percent number reported
by the banks.

36
55. Restoration of macroeconomic stability and tight credit policy of SBV have prevented the
vulnerabilities from growing bigger. The rapid expansion of deposits and credit in the banking system
during the first decade of 2000s—from 44 percent of GDP to 114 percent in the case of deposits and from
39 percent to 115 percent of GDP in the case of credit (left panel, figure 24)—facilitated rapid growth of the
economy, but also contributed to its mounting vulnerabilities. One of the key sources of vulnerability was
the exposure to inefficient and under-performing SOEs, especially for the SOCBs. Though the share of credit
going to SOEs has been declining, in 2009, SOEs still accounted for 29 percent of credit, with two-thirds coming
from SOCBs (right panel, figure 24). The growth of credit and the share going to SOEs both fell during 2011
and 2012, arresting any further deterioration in banks’soundness.7
Similarly loans to real estate and property
developers are also reported to have fallen from a peak of more than 40 percent in 2009 to fell to less than 20
percent at the end of 2011; however, part of the this decline is also associated with change in the definition of
real estate loans.. SBV also forced the mergers of three weak banks and capped their new lending amount to
the volume of debt collected (i.e., zero net lending growth). With continued growth in deposits, limited growth
in credit and SBV’s active support, the system’s liquidity has been restored. However, the stock of NPLs are yet
to be resolved and the root causes of financial fragility have not been addressed actively.
Figure 24: Banking Sector: It’s Better to Grow Slow Than to Grow More Vulnerable
42%
34%
29%
17%
91% 94%
65%
60%
0%
20%
40%
60%
80%
100%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Credit to SOEs
SOEs borrowing from SOCBs
(% of total credit to SOEs)
Banking Sector exposure to the SOEs
44
59
90
114
100
39
59
86
115
95
30
60
90
120
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012e
Deposit and Credit in the Banking Sector (% GDP)
Deposit
Credit
Note: In 2010, SBV changed the way loans are classified by borrowers (SOEs and the rest); therefore data from 2010
are not directly comparable to the previous years.
Source: State Bank of Vietnam
 Restructuring Efforts on part of the Government
56. Establishment of the Vietnam Asset Management Company (VAMC) has so far been the most
visiblesteponthepartoftheGovernmenttoresolvetheNPLproblems. Aftermorethanayearofdiscourse
and debate, Decree 53 on the establishment and operation of a national asset management company was
issued by the Prime Minister on May 18, 2013. The Decree empowers SBV to establish the Vietnam Asset
7
Some of this decline is purely because of changes to the way loans to SOEs are being classified

37
Management Company (VAMC) as a not for profit, one-member limited liability company that is fully owned
by the State with a charter capital of VND 500 billion (equivalent to $24 million). VAMC is expected to buy
bad debts from banks at book value through special zero interest, five year maturity bonds or at market price
without the bonds. The banks can use the bonds for refinancing loans from SBV and are obliged to make
annual provision in their operational expense at a rate of not less than 20 percent of the value of the bond. At
the time of maturity of the special bonds, banks will repurchase bad debts from the AMC at book value and
return the special bonds to AMC.
57. VAMC, while being part of SBV, is expected to enjoy some authority and responsibility.
According to the Decree, it will be able to purchase and sell bad debts and collateral, restructure debt, adjust
debt payment conditions, convert debts to capital of the loan customers, invest, repair, upgrade and use and
lease the collateral, organize asset auctions and even provide guarantees to other organizations, businesses
and individuals to borrow money from credit institutions. If a credit institution with more than 3 percent NPL
ratio refuses to sell bad debts to VAMC, SBV can carry out an inspection or hire an independent auditor or
valuation company to assess the quality and value of assets of those banks and use the audit results to decide
the amount of NPLs, purchase of bad debts, to make provisions and to comply with adequacy ratios prescribed
by SBV. At the same time,VAMC will disclose its annual financial statements, which are audited by independent
auditors, and the procedures and methods for valuing and selling of debts and assets.
58. Another important part of the restructuring process has been an increase in mergers and
acquisition (MA) activities among banks and increasing the share of foreign investors in the banking
sector. These include the merger of three weak banks (Tin Nghia, Ficom Bank and SCB), acquisition of Habu
Bank by SH Bank, sale of an 85 percent stake of Trust Bank to a group of investors (led by Thien Thanh Group)
and merger of Western Bank and PVFC. Foreign investors increased their presence in the banking sector with
the purchase of 20 percent stake of Tien Phong Bank by a group of investors led by DOJI group, 15 percent
state bought by Mizuho Bank in Vietcombank and 20 percent stake purchased by Mitsubishi UFJ in Vietin Bank.
Because of these MAs the number of domestic commercial banks has been reduced from 43 in November
2011 to 39 by the end of 2012. In 2013, there are other potential MAs among banks, as well as the purchases
of bank stakes to non-bank institutions. There is a new bank being created as well (i.e. the Central Credit Fund
was recently transformed into a Cooperative Bank). But, the merger of several weak banks has not necessarily
created a new healthy bank and therefore their underlying problems remain unaddressed. Second, there is
a risk that control of banks by non-bank corporates could lead to conflict of interest, encourage connected
lending and more systemic risks down the road.
59. The ongoing efforts to improve loan classification and provisioning have been delayed. In
January 2013, SBV issued Circular 02 on loan classification and provisioning, requiring banks to comply with
stricter standards closer to international practices in calculating NPLs for all types of bank assets, including
those that Decision 493 had missed.8
However, the implementation of the circular, initially planned on June
01, 2013, was delayed by one year because of lack of readiness on part of the banks.9
In this connection, the
continuation of Decision 780 on the classification of rescheduled loans will continue to give room to the banks
(and related borrowers) to flexibly interpret the loan classification system and to underreport NPLs.
8
As among other things, Circular 2 will cover the following additional aspects: (i) require banks to downgrade loans if it rated a borrower higher than other
banks as reported by the Credit Information Center; (ii) tighten rules for deducting collateral from loan values to compute exposures for provisioning
purposes; and (iii) introduce provisioning for banks’holding of corporate bonds.
9
Another reason for the delay, it is alleged, is the concern that reported NPLs would sharply increase after Circular 2 is implemented. This increase will
cause new problems for the banks trying to get rid of excess NPLs and for the national asset management company (VAMC) that has a tiny equity capital
base relative to the size of NPLs.

38
60. SBV has also been forceful in requiring banks to lower the lending rates, for both new and
existing loans, putting additional stress on banking sector profitability. It is believed that more than 60
percent of the loan portfolio is subject to lending rates of below 15 percent, and new loans in priority sectors are
provided at 10 percent or lower rates. Despite all these efforts, credit growth has been anemic and with strong
growth in deposits, commercial banks have turned to government bonds as a safe investment channel.
 Success Will Require a Multi-pronged Approach
61. The Government’s approach to restructuring its banking sector is considerably different from
what is generally considered as good practice. First, accurately measuring the size of the NPLs through
special audits of banks and using them to estimate the recapitalization needs are important for a successful
restructuring process. InVietnam, there have been some ad-hoc external audits of weak banks, but no systemic
efforts to undertake financial and portfolio audits of the larger and systemically important financial institutions.
The size of NPLs and the recapitalization costs therefore remain uncertain. Second, most banking sector
restructuring involves costs, which are absorbed into the government budget, often stretching over a number
of years. The Government of Vietnam has however decided not to put any tax-payers’ money towards the
restructuring exercise and instead has asked VAMC to issue special bonds with zero interest rates. In addition,
the charter capital of VAMC is minuscule given the size of NPLs outstanding in the economy. Third, the AMC is
expected to buy bad debts from banks according to the book value of the outstanding debt minus the unused
provisions for such debts.10
Good practice however suggests that bad assets should be bought at market prices
or at fair value based on special audit assessment. Finally, there remains a heavy reliance on administrative
measures to solve problems—deposit rate caps, lending rate caps, monopolization of certain trade (e.g., gold),
and mergers of selected weak banks—that often create distortions and prove costly for the economy in the
medium to long-term.
62. Resolution of NPLs will require a proactive multi-pronged approach. The resolution of NPLs
through the VAMC will depend on its attractiveness to banks as well as its pro-activeness in addressing NPLs
(as opposed to it serving as a temporary warehouse for NPL). The VAMC design requires banks to provision
20 percent per year against the VAMC bonds without giving them an earning asset (VAMC bonds that will be
exchanged for the NPLs have a zero coupon rate). The access to liquidity using VAMC bonds may also be of
interest to only a handful of banks. Furthermore, if the assets are transferred and warehoused, with no active
managed or disposition, they may actually lose value while the VAMC waits to grow out of the problem (do
nothing approach, which could lead to higher cost of resolution in the future). In any event, only part of the
NPL stock will be addressed through the VAMC. Banks will thus need to actively restructure and resolve NPLs
in-house. Inadequate supporting regulation (insolvency, bankruptcy, out of court options, etc.) and a judicial
system not trained or experienced in addressing such cases further constrains corporate restructuring and
NPL resolution. Given the exposure to SOEs in particular, reforming the SOEs need to be undertaken soon. For
successful and sustainable NPL resolution, it needs to be seen as part of the broader financial and economic
restructuring program as it stands little chance of being effective in isolation.
10
There is also provision to buy at market prices but not with the special bonds.

39
B. STATE-OWNED ENTERPRISE REFORMS
63. More than two years after the government set out to reform the SOE sector, progress has
been limited. The general framework for SOE restructuring was laid out by the Government in the Socio-
Economic Development Plan 2011-15, which was approved by the National Assembly in November 2011. The
Governmental Resolution 01/NQ-CP (dated January 2012) then set out a reform agenda for State Economic
groups and Corporations. This was further articulated in Decision 704 in June 2012 and Decision 929 in July
2013, both by the Prime Minister. Decision 704 covers the reform measures to strengthen SOE corporate
governance and Decision 929 outlines the restructuring framework for the state economic groups and state
general corporations for period 2011-15. The reform efforts, however, have been limited to preparation of new
regulations by various line ministries and developing restructuring plan by the SOEs. Most of these regulations
have yet to be approved and will take few years to be implemented. Against the target of equitizing 93 SOEs
it 2012, it seems only 12 SOEs were equitized.
64. Work is ongoing to build on the existing legislation to create a comprehensive framework for
the management of SOEs. Key ongoing efforts include:
• Classification of SOEs. Consolidation of all the SEG and GC restructuring plans to update Decision
14 (2011) on the role of the State in different sectors and to classify them by the level of government
ownership. This regulation is expected to promote equitization in SOEs by suggesting that state
ownership should concentrate on strategic areas including: military, monopoly industries, provision
of primary goods and services, and high technology sectors.
• Law on the management of state capital invested in enterprises. This draft law aims to better define
the roles and responsibilities of various ministries, agencies and the Prime Minister with regard to
the management of state capital. The current draft does not call for appointment of an autonomous
and professional agency to centrally manage state capital because of the prevailing view that no one
agency can effectively manage and represent the State in all the 1,300 SOEs. However, according to
the people drafting the legislation, Vietnam does intend to move toward such a regime in the long-
run as the number of SOEs is reduced.
• Enterprise law, SOE chapter revisions: The plan is to ‘supplement not redraft’ the law with a focus on
streamlining the regulatory process for SOEs. Failures like Vinalines and Vinashin have illustrated to
government officials that the corporate governance framework needs revision and SOE governance
in general must be improved. The need for both internal and external reporting and ME has been
called for including evaluation that that is linked to the remuneration of SOE management.
• Disclosure of information by SOEs. Several regulations are under preparation that requires SOEs to
disclose financial information (see box 5) and to entrust the Ministry of Finance with the responsibility
to monitor and report on SOE performance.
65. Successful restructuring of SOEs will be difficult to achieve without strong inter-agency
coordination. Currently, different ministries and agencies are drafting their SOE-related regulations
independently, without sufficient inputs from and consultation with other relevant ministries and agencies.
This is resulting in overlapping mandates and further fragmentation of the legal framework in which SOEs
operate. Similarly, several agencies are collecting information and data on SOEs, sometimes duplicating each
other’s effort and at other times working with fragmented and incomplete information. Therefore improving
the inter-ministerial coordination of the SOE restructuring process by strengthen existing arrangements like
national Steering Committee for Enterprise Restructuring and Development (NSCERD) or establishing new
arrangements is critical.

40
The findings from recent World Bank research support the prevailing view that current information disclosure in
Vietnam needs attention. The analytical work suggests that while SOEs report various forms of financial and non-
financial information to the Government, the quality of information is unsatisfactory and key information required
for proper oversight, monitoring and evaluation are missing.
The standard of public disclosure is below levels in comparable jurisdictions and regional competitors. With no
Economic Groups and only eight percent General Corporations reporting ‘summarized financial information’ on
their website, public information disclosure by SOEs in Vietnam is at worst non-existent and at best outdated,
ambiguous and is often contradictory (seeTable below). It is also apparent that being in the spot-light can increase
the demand for information as many of the troubled SOEs have been subject to additional requirements.
Sample of Vietnamese SOEs’current website content
The following steps could improve SOE information disclosure and thus contribute to SOE efficiency. Overlaying
this, is a fundamental requirement to ensure that there is a political consensus around the need for reform, and
an understanding of the benefits that reform can bring. Without a strong drive for reforms, groups that benefit
from existing SOE policy will be able to block progress and ensure reforms that might disempower them take a
back seat. The ideas include:
• Enhance public disclosure and do not focus merely on internal disclosure.
• Disclose information on the SOEs at one central place (website), with a national agency being in charge
of coordinating the process. The task of collection, compilation and reporting of the information to the
central agency should be the responsibility of the SOEs.
• Simplify information requirements and build a more straight forward legislative framework and a
standardized information disclosure system.
• Incentivize compliance by SOEs to the legislative and regulatory framework by rewarding compliant
enterprises and penalizing non-complaint ones.
• Phase in the enhanced disclosure process by piloting it with a select set of SOEs. One such phasing
could start with the Economic Groups, then expand to General Corporations and finally to the remaining
SOEs with 100 percent state equity.
Source: Unlocking SOE Efficiency in Vietnam: How Information Disclosure Can Help? Policy Note, The World Bank (2013).
Type of Information (%)
Number
with
Website
Basic
Information on
SOE
News and
Strategy
Overview
Annual report or
FSs or Auditor
report
Summarized
Financial
Information
SOE sample 89 100% 87% 16% 8%
Of which: EGs 11 100% 100% 45% 0%
Of which: GCs 12 100% 50% 8% 8%
Publishing License No: 463-2012/CXB/34-35/LĐ and QĐXB No: 243 QĐLK/LĐ Issued on 01 June 2012.
Designed by Golden Sky Co., Ltd. Tel: 84-4-39728458
Box 5: SOE Information Disclosure

Vietnam's Recent Economic Development 2013

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (19)

Destaque

Destaque (19)

Semelhante a Vietnam's Recent Economic Development 2013

Semelhante a Vietnam's Recent Economic Development 2013 (20)

Mais de Quynh LE

Mais de Quynh LE (20)

Último

Último (20)

Vietnam's Recent Economic Development 2013