IMF chief tells Vietnam to reform

IMF managing director Christine Lagarde. Source: Flickr

Vietnam could be vulnerable to external financial shocks if it does not introduce banking reforms and restructure state-controlled enterprises, IMF managing director Christine Lagarde has said.

If it did not reform, Vietnam was not in a position to weather a financial storm as monetary policies were tightened globally, a significant fall in commodity prices and the Chinese slowdown, she said during a visit to Ho Chi Minh City to meet the Communist Party’s leaders.

Vietnam’s outgoing parliament convened for a final session this week that will see a new leadership and cabinet take power three months early, abandoning the normal timeframe of the electorate choosing a new legislature first.

That means Prime Minister Nguyen Tan Dung will be removed from office earlier than expected, hastening his surprise departure after the Communist Party congress in January where he was overlooked for the prime post of party chief.

Lagarde said: “The risk is that from being slightly vulnerable, Vietnam could become very vulnerable to external shocks. It would expose the Vietnamese economy and that would not be good for the Vietnamese population.”

Vietnam has grown and reduced poverty since integrating with the world economy and gross domestic product is forecast to grow at 6.6 per cent this year, according to Bloomberg.

Nguyen Tan Dung said he was looking to raise the economic expansion target to 7 per cent from the current 6.7 per cent.

The benchmark VN Index of Vietnamese stocks fell 0.6 per cent at the close on Monday. The gauge has gained 10 per cent since this year’s low on January 21.

The poverty rate had dropped to 13.5 per cent from a daunting 60 per cent in 1993 and its economic growth was expected to be “solid” at more than 6 per cent in 2016, Lagarde said. Vietnam had one of the world’s most open economies, she said.

“Vietnam has done very well to have the ability to maintain macroeconomic stability in an environment which is challenging because the rest of the world is not growing at the pace and the potential we would like to see is quite remarkable,” Lagarde said. “It has done very well in terms of reducing poverty and it has not increased inequality, which often comes with growth.”

Vietnam’s expansion since 2008 was less impressive than in the two preceding decades and it had failed to match income growth seen elsewhere in the region in similar stages in development, she said.

Vietnam needed to make greater use of exchange-rate flexibility to reduce the impact global setbacks and build up external reserves, she said. State-controlled enterprises and banking debts needed to be addressed to offset its aging population that could drag down future growth, Lagarde said.

“We believe the banking system needs to be made stronger, better and more capitalised with less stressed assets in its balance sheets so the banks can actually fuel the economy,” Lagarde said.

Public debt of about 60 per cent of GDP and one of the world’s fastest-aging populations could mean Vietnam faced trouble in the near future, she said.

“When you have the combination of high debt and slightly declining working age population, you need to be very careful with your macroeconomic stability,” she said. “You need to be very careful with the revenue you generate and how you spend it.”