Vietnam - Performing a tricky juggling act

The highest inflation rate in Asia acted as a blowtorch as Vietnam suffered very hostile macroeconomic conditions in 2011.

VIR’s Nguyen Hanh talks with Victoria Kwakwa, World Bank country director for Vietnam, to see if the country can hope for some winds of change in 2012.

Inflation pressures are slightly reducing, reflected in the country’s month-on-month consumer price index (CPI) staying below 1 per cent during the past five months. When can the currently tight monetary policy be loosened?

I think moving from stabilisation to stimulating growth is really a balancing act. It’s very good that Vietnam’s inflation is beginning to come down. But, the year-on-year inflation for 2011 is up to more than 18 per cent. My sense is that growth has been squeezed a bit, but not by that much.

Growth is not as high as it was three years ago, but 5 plus or almost 6 per cent is decent growth.

I do take the point that enterprises complain about access to credit and liquidity.

But there’s, I think, an issue of allocating efficiency - how you get the liquidity and the resources to the enterprises that really generate jobs. That’s really a challenge that the system has. So try to make sure the financial intermediary system works well to allocate capital and credit.

I think when inflation goes down to levels that are almost close to single-digits, then you can look at what’s happening on the growth side. My sense is that the focus still needs to be on stabilisation. It’s hard to tell the precise time to ease the monetary policy. Vietnam needs to continue to monitor the inflation trends.

Some analysts now forecast Vietnam’s macroeconomic conditions will continue to be very hostile at least until the end of the second half of 2012. Do you agree?

I don’t see any reason why the inflation situation shouldn’t get better in 2012. If the government stays on track continuing to address the inflation challenge and really works on economic restructuring to address some of the efficiency issues in the economy, I think the country will have pretty good results. The World Bank predicted Vietnam’s inflation would be about 10.3 per cent in 2012.

Is the ugly macroeconomic picture, particularly the highest inflation level in Asia, undermining Vietnam’s internationally-recognised achievements in poverty reduction as the poor are said to be the ones who suffer the most in such situations?

It’s generally accepted that Vietnam has done very well both on the economic and social fronts. The current economic situation is a challenge. But growth of 5 per cent plus is still quite high and overall we haven’t seen numbers to suggest that poverty reduction gains have diminished. But it’s still the case that people’s welfare levels are being adversely affected.

How should Vietnam handle social equality and protecting the poor in the context of very high inflation and a lack of confidence in the local currency?

Vietnam has done very well in getting the majority of Vietnamese people to benefit from growth.

I think part of the response has to be really strengthening the social protection system for the most vulnerable, the poorest of the society and people who are vulnerable to fall back into poverty.

Vietnam has a lot of programmes that try to help poor people, but they are very fragmented. Many of such programmes cross several ministries and local level procedures are very complicated. Thus, at minimum there has to be some consolidation of the current system and programmes and then an effort to provide instruments that allow the government to very quickly respond to help the poor when a crisis happens.

For example, when electricity tariffs were increased, the government stepped in, giving some financial help to poor households. Clearly that’s not adequate, but may be that’s all the government could do because it doesn’t have a framework and a system of social protection and instruments it can quickly bring to the table.

Restructuring state-owned enterprises (SOEs) is one of the three mandates that the government has taken on board as recently instructed by the Party. The other two are restructuring public investment and restructuring the financial and banking sector. But, the government embarked on reforming SOEs two decades ago. What should it do to reinvigorate the SOE restructuring process?

My understanding is various plans are being prepared to really concretise the action the government will take, so we wait to see those plans. We’re ready to support the government financially as well as in terms of policy advice and analytical work to implement the restructuring plans.

This is very important time to move forward with some actions when the new administration is in the place, when you have a new 10-year socio-economic strategy and a five-year socio-economic plan.

You’re right, a lot was said about SOEs reform and investment issues, but concrete actions are needed to really move forward. There have been many equitisations, but only for small enterprises. The big enterprises didn’t get touched and they got even bigger with the creation of economic groups.

But it’s not just equitisation, it’s really about corporate governance, transparency, accountability, giving SOEs clear targets and performance monitoring.

On the public investment side, the decentralisation of investment decisions at provincial level has led to a situation where there is overinvesting in certain areas. Take industrial parks, for example. There’s an oversupply of industrial parks. Too many have been built and several of them are empty or not full.

Decisions about investment made on the basis of sound economic and financial merits should be a big part of public investment restructuring, because capital would then be allocated more efficiently than it is now.

In the financial sector in particular, Vietnam must try to address the issues of capital adequacy, non-performing loans and regulatory oversight, and the issue of supporting the banks to be able to adequately assess risk and manage risk.

My sense is the government knows the solutions and this is a responsible government that wants to do the right things and continue to move Vietnam forward. I think bringing this determination into concrete action is what is needed to go forward.

VIR

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