For 2009, the IMF and the World Bank are forecasting growth rates between 4.75 to 5.5 per cent — well below the historical average of 7.5 per cent, and lower than the official government target of 6.5 per cent. Even though imports are falling faster than exports, narrowing the trade deficit, Vietnam’s current account deficit is still expected to be around 8 per cent of GDP this calendar year. With international reserves covering only around three months’ of imports and an expected weakening of capital inflows (FDI, portfolio and private remittances inflows), vulnerability on the balance of payments front is constraining the degree of monetary easing and fiscal stimulus available to the authorities.

This calls for particular attention to be paid to the financing of government budget deficits. The fiscal stimulus needs to be well-targeted, to alleviate poverty and enhance efficient infrastructure projects, rather than piecemeal tax and interest-rate relief for small-medium enterprises. Pushing on with state-owned enterprise reform (particularly state-owned commercial banks reform) would also add to fiscal sustainability. On the monetary side, the authorities devalued the dong against the US dollar by 2.4 per cent in June 2008, and then by a further 3 per cent more recently. There is, however, renewed pressure on the dong, and continued flexibility on the exchange rate is needed to enhance the effectiveness of monetary policy for any given reduction in official interest rates.

Vulnerability of the banking sector has already been discussed in an earlier piece. It is encouraging that the State Bank of Vietnam has since then initiated large-scale onsite supervision of banks and in general, tightened its prudential supervisory functions which are now brought together within a single department of the Bank. In addition, conditions for granting bank licenses have also been tightened so that perhaps there will not be a continuation of the trend towards large SOEs moving into the financial sector for quick profits.

In short, there appear to be some indications that the crisis of mid-2008 in Vietnam and the current global recession are resulting in moves towards significantly improving the country’s macroeconomic institutions. A start has already been made with the State Bank, and hopefully this will continue through to the Ministry of Finance in order to deal with longer-term fiscal sustainability.

Vo Tri Thanh talks of a new development paradigm based on strong national and international institutions. Perhaps the current crisis could result in political will committed to institution strengthening, both in Vietnam and more broadly un the region.