1. Viet Nam: Recent Economic Developments and Near-Term Prospects Bahodir Ganiev Country Economist Viet Nam Resident Mission Launch of the Asian Development Outlook 2009 Update Ha Noi, Viet Nam; 22 September 2009

2. Outline 1.Recent economic developments (January-August 2009) 2.Near-term macroeconomic outlook (rest of 2009 and 2010) 3.Policy Recommendations

3. Part 1 Recent Economic Developments

4. Viet Nam is weathering the global economic crisis relatively well. Growth of GDP in Selected Countries, 2003-2009 (Relative to the same period a year earlier, %) Source: IMF and Asian Development Outlook 2009 Update.

5. Its economic slowdown appears to have bottomed out in early 2009. Viet Nam: Growth of GDP by Sector, 2004-2009 (Relative to the same period a year earlier, %) Source: General Statistics Office of Viet Nam.

6. Inflation decelerated sharply but was still higher than in many other countries. Inflation in Selected Countries, 2003-2009 (Year-to-date period average, %) Source: IMF and Asian Development Outlook 2009 Update.

7. The SBV kept monetary policy fairly loose. Growth of Selected Monetary Aggregates, 2007-2009 (Relative to the same period a year earlier, %) Source: State Bank of Viet Nam and ADB staff estimates.

8. The Government adopted a number of fiscal stimulus measures in January-May 2009. Source: Ministry of Finance of Viet Nam and ADB staff estimates. Fiscal Stimulus Measures, 2009 (Trillion dongs unless otherwise indicated) Amount Potential Direct Impact on the Budget 20092010 Measures affecting government revenue 28.0-28.09.2 Measures affecting government expenditure and net lending 117.6113.5-24.7 Total 145.6-141.533.9 Billion US dollars 8.6-8.31.8 % of GDP 8.7-8.51.8

9. In June 2009, the National Assembly raised the ceiling on the 2009 fiscal deficit. Government’s Budget Plan, 2009 (% of GDP) OriginalRevised On-budget revenue and grants21.520.0 On-budget expenditure25.227.2 On-budget fiscal balance (Government’s definition)* -4.8-7.0 Off-budget expenditure and lending (net) 3.28.5 Overall fiscal balance** -6.9-15.7 * Includes revenue carried over from 2008 (as revenue) and amortization of public debt (as expenditure). ** Excludes carried over 2008 revenue and amortization of public debt but includes net off-budget expenditure and lending. Source: Ministry of Finance of Viet Nam and ADB staff estimates.

10. The shortage of foreign exchange in the formal market persisted. Exchange Rates, 2008-2009 (Dongs per US dollar) Source: State Bank of Viet Nam and ADB staff computations and observations.

11. Both exports and imports declined, and the trade deficit narrowed further in the first half of 2009. Selected Trade Indicators, 2006-2009 * Based on the balance-of-payments definition. Source: State Bank of Viet Nam and ADB staff estimates.

12. The current account balance turned into surplus, but the overall balance of payments recorded a deficit. * Excludes the Government's foreign exchange deposits at the State Bank of Viet Nam and the foreign exchange counterpart of swap operations. Source: State Bank of Viet Nam and ADB staff estimates. Current Account Balance and Gross Official Reserves, 2006-2009

13. Part 2 Near-Term Macroeconomic Outlook

14. The forecast of growth for 2009 is revised up and the forecast of growth for 2010 is maintained... Source: General Statistics Office of Viet Nam and ADB staff projections. Viet Nam: Growth of GDP, 2006-2010 (%)

15. …with growth expected to accelerate considerably in the second half of 2009 and in 2010... Source: General Statistics Office of Viet Nam and ADB staff projections. Viet Nam: Growth of GDP, 2006-2010 (Relative to the same period a year earlier, %)

16. …and to outpace growth in most other Asian countries. Source: Asian Development Outlook 2009 Update. Growth of GDP in Selected Countries, 2007-2010 (%) 2007200820092010 Indonesia6.36.14.35.4 Malaysia6.24.6-3.14.2 Philippines7.13.81.63.3 Singapore7.81.1-5.03.5 Thailand4.9 2.2-3.23.0 Viet Nam8.56.24.76.5 Southeast Asia6.4 4.10.14.3 Developing Asia9.5 6.13.96.4

17. Inflation is now forecast to be higher than predicted in ADO 2009… Viet Nam: Period-Average Inflation, 2006-2010 (%) Source: General Statistics Office of Viet Nam and ADB staff projections.

18. …remaining higher than inflation in most other countries in the region. Source: Asian Development Outlook 2009 Update. Inflation in Selected Countries, 2007-2010 (Period average, %) 2007200820092010 Indonesia6.49.85.06.0 Malaysia2.05.41.12.6 Philippines2.89.33.24.5 Singapore2.16.50.02.0 Thailand2.2 5.5-0.52.0 Viet Nam8.323.06.88.5 Southeast Asia4.0 8.62.54.1 Developing Asia4.4 6.91.53.4

19. The fiscal deficit is projected to widen in 2009 and narrow in 2010. Viet Nam: Overall Fiscal Balance, 2005-2010 (% of GDP) Source: Ministry of Finance of Viet Nam and ADB staff estimates and projections

20. Public and publicly guaranteed debt will remain manageable. Public and Publicly Guaranteed Debt, 2005-2010 (% of GDP) Source: IMF and ADB staff estimates and projections

21. The current account deficit is expected to narrow in 2009 but widen in 2010. Growth of Merchandise Trade and Current Account Balance, 2006-2010 Source: State Bank of Viet Nam and ADB staff projections

22. Risks to the Outlook Slower global economic recovery Slower growth in Viet Nam Spike in world commodity prices Higher inflation in Viet Nam Buildup of inflation and devaluation expectations and a significant decline in demand for dong- denominated assets Higher inflation, larger current account deficit and slower growth

23. Part 3 Policy Recommendations

24. Recommendations  Strike a balance between stimulating growth in the short term through demand-side measures and safeguarding macroeconomic stability over the medium term  Avoid taking additional fiscal stimulus measures before thoroughly assessing the medium-term impacts of the measures that have already been adopted  Strengthen macroeconomic management (especially coordination of macroeconomic policies, forecasting, data disclosure, and policy coordination)  Adopt, and start publishing data on, an appropriate indicator of core inflation

25. Recommendations (continued)  Eliminate the shortage of foreign exchange in the formal market (through a combination of tighter monetary policy, increased sales of foreign exchange, and greater flexibility of the SBV’s reference exchange rate)  Ensure that banks are prepared for a possible increase in non-performing loans after interest rate subsidization ends  Intensify efforts to raise the efficiency of the economy and to ease supply-side constraints on growth (notably by accelerating economic reforms)  Speed up the implementation of ODA-financed projects

26. Xin cám ơn!