Vietnam – Country Analysis

Introduction

Vietnam, officially the Socialist Republic of Vietnam, is the easternmost country on the Indochina
Peninsula. With an estimated 94.6 million inhabitants as of 2016, it is the 15th most populous
country in the world. Vietnam is bordered by China to the north, Laos and Cambodia to the west,
part of Thailand to the southwest, and the Philippines, Malaysia, and Indonesia across the South
China Sea to the east and southeast. Its capital city has been Hanoi since the reunification of North
and South Vietnam in 1976, while its most populous city is Ho Chi Minh City.

Successive Vietnamese imperial dynasties flourished as the nation expanded geographically and
politically into Southeast Asia until the Indochina Peninsula was colonised by the French in the mid-
19th century. The Vietnamese fought French rule in the First Indochina War. After nine years of war,
the Vietnamese declared victory in the decisive battle of Điện Biên Phủ in 1954. The nation was
thereafter divided into two rival states, communist North—the Democratic Republic of Vietnam, and
anti-communist South—the Republic of Vietnam. Conflicts intensified in the Vietnam War with
extensive US intervention in support of South Vietnam from 1965 to 1973. The war ended with
North Vietnamese victory in 1975. North and South Vietnam were then reunified under a communist
government in 1976.

The newly established country remained impoverished and politically isolated until 1986 when the
Communist Party initiated a series of economic and political reforms that facilitated Vietnamese
integration into the world economy. Since 2000, Vietnam's GDP growth rate has been among the
highest in the world.

Vietnam's land is mostly hilly and densely forested, with level land covering no more than 20%.
Mountains account for 40% of the country's land area, and tropical forests cover around 42%. The
Red River Delta in the north, a flat, roughly triangular region covering 15,000 square km (5,792 sq
mi), is smaller but more intensely developed and more densely populated than the Mekong River
Delta in the south. It is criss-crossed by a maze of rivers and canals.

Southern Vietnam is divided into coastal lowlands, the mountains of the Annamite Range, and
extensive forests. Comprising five relatively flat plateaus of basalt soil, the highlands account for 16%
of the country's arable land and 22% of its total forested land. The soil in much of the southern part
of Vietnam is relatively low in nutrients as a result of intense cultivation. The northern part of the
country consists mostly of highlands and the Red River Delta.

Due to differences in latitude and the marked variety in topographical relief, the climate tends to
vary considerably for each region. During the winter or dry season, extending roughly from
November to April, the monsoon winds usually blow from the northeast along the Chinese coast and
across the Gulf of Tonkin, picking up considerable moisture. The average annual temperature is
generally higher in the plains than in the mountains, especially in southern Vietnam compared to the
north. Temperatures vary less in the southern plains around Ho Chi Minh City and the Mekong Delta,
ranging from between 21 and 35 °C (69.8 and 95.0 °F) over the course of the year. In Hanoi and the
surrounding areas of Red River Delta, the temperatures are much lower between 15 and 33 °C (59.0
and 91.4 °F), while seasonal variations in the mountains and plateaus and in the northernmost are
much more dramatic, with temperatures varying from 3 °C (37.4 °F) in December and January to 37
°C (98.6 °F) in July and August. As Vietnam receives high rain precipitation with an average amount
of rainfall from 1,500 millimetres to 2,000 millimetres during the monsoon seasons; this often
causes flooding, especially in the cities with poor drainage systems. The country is also affected by
tropical depressions, tropical storms and typhoons. Vietnam is one of world's most vulnerable
countries to climate change with 55% of the population living in low-elevation coastal areas.

Macroeconomic Parameter Status

1) National Income

Vietnam’s Gross National Income (GNI) data was reported at 4,764,958.000 VND bn
in Dec 2017. This records an increase from the previous number of 4,314,321.000
VND bn for Dec 2016. Vietnam’s Gross National Income (GNI) data is updated
yearly, averaging 603,688.000 VND bn from Dec 1989 to 2017, with 29
observations. The data reached an all-time high of 4,764,958.000 VND bn in 2017
and a record low of 27,601.000 VND bn in 1989.

2) Inflation

The annual inflation rate in Vietnam decreased to 2.88 percent in May 2019 from
2.93 percent in the previous month. Food prices fell further (-0.68 percent from -
0.28 percent in April) and cost of education services slowed (6.17 percent from
6.87 percent). Meanwhile, prices went up at a faster pace for housing and
construction materials (4.21 percent from 3.25 percent); transport (2.28 percent
from 1.36 percent); household appliances and goods (1.32 percent from 1.31
percent); and garment, footwear, hat (1.79 from 1.74 percent). Annual core
inflation, which excludes volatile items, edged up to 1.90 percent in May from 1.88
percent in April. On a monthly basis, consumer prices rose 0.49 percent, following
a 0.31 percent rise in April. Inflation Rate in Vietnam averaged 6.30 percent from
1996 until 2019, reaching an all time high of 28.24 percent in August of 2008 and a
record low of -2.60 percent in July of 2000.

3) Rates Of Interest

The benchmark interest rate in Vietnam was last recorded at 6.25 percent.
Interest Rate in Vietnam averaged 7.23 percent from 2000 until 2019, reaching an
all time high of 15 percent in June of 2008 and a record low of 4.80 percent in
August of 2000. In Vietnam, interest rates decisions are taken by The State Bank of
Vietnam. The official interest rate is the Refinancing Rate.

4) Deficits

Vietnam recorded a Government Budget deficit equal to 3.70 percent of the

country's Gross Domestic Product in 2018. Government Budget in Vietnam averaged
-2.69 percent of GDP from 1988 until 2018, reaching an all-time high of 1.20
percent of GDP in 2006 and a record low of -9.90 percent of GDP in 1988.
Vietnam’s trade deficit widened to USD 1.3 billion in May of 2019 from USD 0.81
billion in the same month a year earlier. It was the largest trade gap since
February 2017, as imports increased 8.3 percent from a year earlier to USD 22.8
billion, mainly due to higher purchases of vegetables and fruits (64.9 percent);
electronic, computers and components (13.5 percent); phone and components
(36.2 percent), and cars (25.8 percent). Meantime, exports went up at a softer 7.5
percent to USD 21.5 billion, boosted by higher sales of chemicals (57.3 pct);
vegetables and fruits (15.8 percent); phones and components (19.5 percent);
vegetables and fruits (15.8 percent); footwear (13.8 percent); and textiles and
garments (10.8 percent). Considering the first five months of the year, the
country's trade balance recorded a USD 548 million shortfall, as exports rose 6.7
percent year-on-year to USD 100.7 billion and imports went up 10.3 percent to USD
101.3 billion. Balance of Trade in Vietnam averaged -304.63 USD Million from 1990
until 2019, reaching an all time high of 2258 USD Million in March of 2018 and a
record low of -3888 USD Million in December of 1996.

Fiscal Policy
The Vietnam economy under central planning and heavy subsidy system was not
efficient and manifested in weak economic performance, large fiscal deficits and
high inflation. To improve the economic system, by the end of 1986, the National
Assembly of Vietnam passed a comprehensive set of legislations called Doi Moi to
radically transform the command economy into a more open, market-oriented one.

Fiscal policy before Doi Moi could be described as expansionary for a number of
reasons. First, the government budget under central planning acted as planned
distributor and a pool of fund for the state sector. The characteristics of a
centrally planned economy made the government budget expansionary as a
consequence, since government had to use budget expenditure to cover massive
loss for the inefficient state actors during this period.

Second, hardly any revenue from taxes and fees were collected before 1990 due to
the economy’s poor performance and an incomplete tax system. The government’s
revenue relied mainly on two sources: agricultural tax and state capital fees,
whereas major tax categories such as corporate tax and income tax were non-exist
before 1990.

Third, even though revenue was limited, the demand for government spending was
remarkably high to service Vietnam’s industrialization process after independence,
which was offset by aid from Soviet countries, allowing the government’s budget
deficits to remain large for almost 15 years after independence.

Heavily relying on external funding, a sudden drop in capital flow from overseas
during the Cold War triggered a major shock to the government’s fiscal position.
Vietnam’s position in this context made it difficult to borrow from IMF or ADB. To
keep the economy rolling, on average 63 percent of the government’s budget
deficit was financed by printing money between 1986 and 1990. The result was a
very high rate of inflation, surging to 454 percent in 1986 and sustaining above 300
percent level for two years. To finance a deficit without further inflation, the
government had no choice other than borrowing from or taxing the private sector.

The modern tax system included important tax categories such as Special
Consumption Tax, Personal Income Tax and Corporate Income Tax. Fiscal
decentralization further helped tax collection procedures become more efficient,
withdrawing excessive money circulating within the private sector, at the same
time improving the fiscal position of the central government.

On the expenditure side, the government budget expenditure was separated from
state corporate finance, and state companies had to be accountable for their
profits and losses. The government gradually reduced and eventually eliminated
subsidies to SOEs, thus substantially reducing current expenditure and financing
from the state budget to cover losses of these enterprises. However, the result of
this reform during this period was limited: the government expenditure as a share
of GDP consistently rising. During 1990-1993, spends averaged 18.6 percent. This
figure reached 25 percent in 1993 and remained broadly constant at this level until
1997. Besides, to respond to the adverse effect of the Great Recession,
government expenditure was increased by almost 2 percent of GDP.

In 2009, in order to respond to the global economic downturn accompanied with a

number of pressures onto the domestic economy, the government of Vietnam
implemented various measures to prop up aggregate demand, i.e., interest subsidy
for small and medium businesses, public investment, tax exemption, and social
welfare programmes. This stimulus package was divided into two parts, the first
part was approved and implemented in the early 2009, and the second one is the
extension of the first package, began from the last quarter of 2009. The second
stimulus package was introduced to link short and medium term economic goals,
ensuring the economy continue its recovery path out of the recession, at the same
time stabilizing macroeconomic volatility and secure social welfares in the last
months of 2009 and early months of 2010.

Since 2011, to revive the economy and push spending among business communities
the Vietnamese government reduced its budget revenue significantly via the
implementation of various tax reduction and tax deferral schemes, especially for
SMEs. Slower economic growth in 2012 (5.2 percent; compared to 6.2 percent in
2011) allowed the government to extend its support to SMEs through a series of
expansionary measures.

The World Bank and the Government of Vietnam launched a joint report in October
2017 titled: “Vietnam Public Expenditure Review (PER): Fiscal Policies towards
Sustainability, Efficiency, and Equity”. Vietnam looks to continue to reform tax
policies to strengthen domestic revenue mobilization, through a number of specific
policy options as follows:

• Broadening the VAT and CIT base

• Increasing excise rates on several non-merit goods (for example tobacco, beer
and alcohol)

• Expanding the PIT base in line with international practice

• Building a unified property tax system, replacing the existing land tax policies

• Rationalizing the revenue policies on natural resources and the environment

Monetary Policy
From 1976 to 1989, like other centrally-planned economies, Vietnam’s single-tier
banking system was owned and controlled by the state. The State Bank Of Vietnam
(SBV) provided nearly all domestic banking services through a vast branch network.
Bank lending was state directed, and credit rationing was imposed because
financial resources were scarce. Trade and infrastructure finance were managed
by two specialized banks. The Bank for Foreign Trade of Vietnam (BFTV),
established in 1963, had a monopoly over the financing of foreign trade and foreign
exchange transactions. The Bank for Investment and Development of Vietnam
(BIDV), established in 1958, handled the financing of public works, infrastructure
projects, and equipment for SOEs.

During this period, SBV offices served as the interface between state planning, the
national budget, and state entities including some 12,000 SOEs. The SBV’s task was
to ensure that financial resources were allocated to economic units in accordance
with the plan. Under central planning, the SBV was not required to carry out many
traditional functions of commercial banking such as credit analysis or risk
management. Domestic and international payment systems functioned poorly, and
payment by check between provinces would often take from two to six months. As
a result, many enterprises ignored the check payment system and instead used
couriers to make direct cash payments.

The ratio of currency outside banks to nominal GDP reached 9.2 percent in 1986 as
the government attempted to monetize sharply rising fiscal deficits as revenue
growth failed to keep pace with rising expenditures. SOEs in Vietnam lacked fiscal
discipline as they operated under the soft budget constraint that was common
among socialist countries. To circumvent credit rationing, they engaged in
unauthorized credit creation through various means such as abuse of the check
payment system and use of supplier credits as a substitute for borrowing in credit
markets. These practices had inflationary consequences, created financial
problems for the SBV, and contributed to a deterioration of the consolidated
balance sheets of SOEs.

The 1987-89 macroeconomic and fiscal crisis and hyperinflation provided the
impetus for the comprehensive and coordinated Doi Moi reforms that included
reforms in public finance and in Vietnam’s banking and financial sector. In 1988
the Prime Minister created a two-tier system consisting of the SBV as the central
bank and four state-owned commercial banks (SOCBs). In addition to the BFTV and
BIDV, two new SOCBs were created out of two SBV departments. The Industrial and
Commercial Bank of Vietnam (ICBV) was created out of SBV’s industrial and
commercial loan department, and the Agricultural Bank of Vietnam (ABV) was
created from the agricultural credit department. In addition, the government
ended BFTV’s monopoly on financing foreign trade and BIDV’s monopoly on
providing long-term finance. The intent was to increase management autonomy
and responsibility, and to introduce the pressure of competition in order to
improve bank performance.

Without the banking reforms, the government’s other structural reforms and
stabilization measures would have been less effective. The combined effect of
unification and massive devaluation of the exchange rate, legalization of gold
trading, domestic price liberalization, sharp increases in deposit interest rates,
imposition of a hard budget constraint on most SOEs and curtailment of credit
growth, all acted together to lower inflation expectations and induced major
adjustments in the composition of household liquid assets which were previously
predominated by gold, rice and US dollar assets.

The decision to raise the interest rate for household deposits in the formal banking
system increased confidence in the domestic currency and encouraged households
to deposit their dong assets in bank accounts.

As regards the current conduct of monetary policy, the National Assembly and the
government both play a role. Similar to the U.S.—whose constitution gives its
national legislative body, the U.S. Congress, formal and practical authority over its
central bank, the Vietnamese central bank does not have exclusive responsibility
to design an independent monetary policy. Unlike countries that have adopted
inflation targeting policies, the SBV has limited operational independence.

Similar to India and China, Vietnam uses a mix of market-based instruments and
changes in reserve requirements to carry out monetary policy. The SBV would like
to reduce its reliance on direct instruments, preferring to use indirect instruments.
However, given the current level of financial market development and weaknesses
in the monetary transmission mechanism, Vietnamese monetary authorities have
no qualms about employing direct instruments to get the job done.

Recommendations

During the past quarter century, Vietnam has emerged as one of Asia’s great
success stories. In a nation once ravaged by war, the economy has posted annual
per capita growth of 5.3 percent since 1986—faster than any other Asian economy
apart from China. Vietnam has benefited from a program of internal restructuring,
a transition from the agricultural base toward manufacturing and services, and a
demographic dividend powered by a youthful population. The country has also
prospered since joining the World Trade Organization, in 2007, normalizing trade
relations with the United States and ensuring that the economy is consistently
ranked as one of Asia’s most attractive destinations for foreign investors.

For a developing country, the conduct of active fiscal policy faces many
challenges. The first set of uncertainties consists of exogenous factors: regional
and international macroeconomic environment. The second round of problems is
endogenous: history, political system, social tension, and various factors related to
the domestic economy, especially price volatility. However, the toughest task for
an efficient conduct of fiscal policy lies within the ability of the government itself
to change its policy course over a short period in response to the changing
economic conditions. In cases where the general price level behaves atypically, it
is even more important for the government to remain flexible, actively changing
fiscal policy stance over time to respond to significant fluctuations in output and
prices. Flexibility is, hence, an art that every government should master for the
successful practice of macroeconomic management

A strict inflation targeting regime is not appropriate for Vietnam. Its rigid rules
constrain policymakers to operate in a framework that requires inflation to take
priority over more pressing development objectives. Vietnam is in the process of
becoming more integrated with a world economy that is increasingly prone to
uncertainty. Policymakers urgently need to respond flexibly to changing global
conditions with discipline and with intelligence. For this reason, it is unwise to
embrace an inflexible monetary policy framework that ties their hands. Rather,
they need to explore alternative strategies that may be even more effective in
maintaining stable prices, while also providing a favorable environment for a pro-
development structural transformation of the economy. I argue that a stable and
competitive real exchange rate is that superior alternative, precisely because it
sets as a target a key macroeconomic relative price that is realistic, sustainable,
and growth enhancing.

Domestically oriented companies, such as those in the financial-services or retail

sectors, are much more threatened by slower growth in Vietnam than are
companies that use the country as an export base for manufactured goods. Since
prospects for growth vary substantially from sector to sector, each company must
understand and manage its own specific problems. The expected slowing in the
expansion of the labor force also has significant implications for companies.

Improving competitiveness and using the latest global best practices should be
priorities for Vietnamese companies in the private sector. They should emphasize
long-term value and bottom-line profits rather than merely seeking to increase
top-line revenue. Too many domestic Vietnamese companies spend too much
energy competing on price and too little on product quality, features, and
branding and on developing unique offerings that can command premiums. These
companies must develop programs to recruit employees and train them so that
their skills and productivity improve. They should also take a more professional
approach to retaining and promoting their best workers, through incentive
packages and greater management autonomy.

Going forward, FDI will be a major source of capital and drive exports in Vietnam.
The government needs to focus on quality FDI and support domestic enterprises in
moving up the value chain if it wants to retain its export competitiveness and
achieve a sustainable growth. The government also needs to focus on priority
sectors such as high-tech manufacturing, logistics, high-tech farming, travel,
healthcare, and education in the next decade, in addition to the key sectors such
as textiles, footwear, metal processing, and minerals.