Slow reforms cloud Vietnam's economic growth outlook: IMF

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Workers of the state owned group Electricity of Vietnam repair a utility pole in front of an ACB bank branch in Hanoi

Slow restructuring of Vietnam's banks and state companies contributed to the International Monetary Fund's decision last week to cut the nation's growth forecasts.

The IMF lowered its projection for Vietnam's growth to 5.2 percent this year from 5.8 percent previously, and to 5.2 percent in 2014 from 6.4 percent in its report on April 29. The reduction of this year's forecast is the biggest cut among Southeast Asian countries after Singapore, while the 2014 cut is the biggest downward move for any Asian country, the data showed.

The cuts signal "that it will be important to carry through with the reforms the government has said it intends to," said Sanjay Kalra, the IMF's Hanoi-based resident representative, in a telephone interview on May 3. "Structural reforms have moved a bit slower than one might have expected or is desired."

Deputy Finance Minister Truong Chi Trung said in February that the government would unveil a plan by June to restructure the biggest state-owned companies. Prime Minister Nguyen Tan Dung's administration has missed its earlier target for the creation of an asset management company to address bad debt in banks that has crimped consumption and slowed economic growth.

Vietnam's economy expanded 5.03 percent last year, the slowest pace since 1999. The central bank cut interest rates in March, the seventh such reduction since the start of 2012, in a bid to spur lending, even as the World Bank said the country's issues can't be resolved with monetary easing.

Additional steps

The government's master plan to restructure state companies and overhaul the financial system lacks clear action steps, with a slow pace of share sales and the banking reform lacking timelines, said Truong Dinh Tuyen, a member of the country's National Financial Monetary Policy Advisory Council, at a conference last month in the town of Nha Trang.

Credit in Vietnam grew 1.4 percent as of April 23 compared with the end of 2012, Thoi Bao Ngan Hang newspaper reported May 6. Credit growth last year was an "anemic" 9 percent, lower than an earlier target of 15 percent, according to the World Bank.

Restoring the nation to a higher and sustainable growth path will require the acceleration of banking and state-owned enterprise reforms, with planned structural changes "implemented decisively and additional steps considered," the IMF said on April 26, in a statement after a mission from the agency concluded an 18-day visit to the country.

"There is a need not just to merge banks but to really improve governance and to recapitalize them," Kalra said. "Their balance sheets need to be improved, their depositor base needs to strengthen, and their loan portfolios need to be diversified."

Good start

The planned asset-management company has missed an end-of- March deadline for beginning operations. Setting it up "would be a good start, and an indication from the authorities that they understand that this is a big enough problem to require a system-wide approach,"

Kalra said. The entity "would help address the liquidity problems at some banks, but for now we don't know how the recapitalization issue would be addressed."

The IMF forecasts for this year put Vietnam behind regional peers including Indonesia, Myanmar and Thailand. The Philippines last week received an investment-grade rating from Standard & Poor's, while Indonesia's economy grew 6.02 percent in the first quarter, a 10th straight quarter of above-6-percent growth.

The Ho Chi Minh Stock Exchange's VN-Index has advanced 18 percent this year, compared with gains of almost 16 percent for the Jakarta benchmark and more than 23 percent for the Philippine index.

Vietnam reported a wider-than-estimated trade deficit of $1 billion in April. Inflation slowed to 6.61 percent last month, the lowest since September 2012, even as core inflation, which excludes raw food and energy, remains high and limits the room for further rate cuts, the IMF said on April 26.

"The issue is less the level of the rates and more a question of whether further cuts in policy rates can increase credit growth," Kalra said. "Banks are reluctant to lend even if they have resources, in part because they are concerned about the economy's prospects and their own balance sheets."

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