The Top Five Financial Issues for the

Coming Decades






1 Vote
With all the turmoil in investment markets, I have found it useful to try to estimate major
financial issues that will influence the American economy over the next few years and
several decades. This will summarize my current findins ranked in order of total dollar
value. All of these !ro"lems need to "e resolved for the future via"ility of our way of
life. I think it is o"vious that if the "iest !ro"lem is not solved, what we do with the
other four will "e of little conse#uence.
Issue $%& The estimated asset write'downs resultin from the ())*'())+ credit crisis.
The International ,onetary -und has estimated this to "e .1.1 trillion. /ess than half of
this has "een realized to date. The time frame for this to "e totally realized is one to
three years. The !otential for this estimate to "e too hih is limited to a cou!le hundred
"illion at the most. The !otential for this estimate to "e too low de!ends on whether or
not we see an extended downward s!iral in home !rices and the associated worsenin of
credit markets. Worst case scenario is !ro"a"ly another .1 to .1.% trillion, corres!ondin
to defaults on ()0 to 1)0 of home mortaes.
Issue $2& 3.4. national de"t of .2.2 Trillion. This fiure is o"tained from the 5/on'tern
-inancial 6utlook7, 3.4. 8overnment Accounta"ility 6ffice, 9an. ())+. 8overnment
estimates envision a "alanced "udet "y ()11. If you "elieve this, I would like to sell
you a well known "ride over the :ast ;iver. <owever, I will use that to !roject the
national de"t to row to .%.= Trillion in the next five years. The !ro"a"ility that this is
too hih an estimate is extremely low. The !ro"a"ility that the national de"t will
"e larer than .%.= Trillion in ()11 is very hih. -urthermore, I am ske!tical that a
"alanced "udet will "e achieved, not only in five years, "ut even in 1) years. The risk is
hih that the national de"t will continue to row throuh deficit s!endin for many years
to come. I do not have a rational way to estimate an u!!er limit for the national de"t in
five years or "eyond.
Issue $1& The unfunded lia"ilty of the 4ocial 4ecurity 4ystem is estimated to "e .>.*
Trillion ?8overnment Accounta"ility 6ffice, 9an. ())+@. This num"er could "e hiher with
inflation a"ove the re!ort estimate A a!!roximately 10. The time frame for this fiure is
several decades.
Issue $(& The unfunded lia"ility of ,edicare is estimated "y the 8overnment
Accounta"ility 6ffice to "e .12.1 Trillion. Aain, hiher inflation could raise this
estimate. The time frame is several decades.
Issue $1& The cost of im!orted oil. ,any sources have estimated the ())+ cost for
im!orted oil to "e a!!roximately .+)) Billion at an averae !rice of .1() to .11) !er
"arrel. The estimate for the hidden cost of oil A added military ex!ense, environmental
ex!ense, health care ex!ense, infrastructure deradation, etc A was a!!roximately .+(%
Billion !er year in ())>. 4ee the followin we"site for details on the hidden
cost&
. www.setamericafree.orCsafDhiddencostofoil)1)%)*.!df
If we assume the ())> hidden costs and the estimated ())+ !urchase cost to "e
a!!lica"le for the next 1) years, the cost of im!ortin oil over that time frame is
a!!roximately .2+.* Trillion. The likelihood that this too hih an estimate is extremely
small. To lower the cost not only does the !rice of oil have to stay at or "elow current
levels, the amount of oil we im!ort must stay at or "elow current levels and there must
"e no inflation for 1) years. With that scenario, the !resent value of a cash flow of .1.>
Trillion !er year is .2% Trillion at a discount rate of %0.
It is much more likely that the annual cost for im!orted oil will rise from the .1.> Trillion
!er year. If the cost rises "y 1)0 !er year ?!ro"a"ly too small a fiure@, the !resent
value of the cash flows over 1) years is a!!roximately .%+ Trillion. The cost of
continuin current enery !olicy is somewhere "etween .2% Trillion ?an unrealistic lower
"ound@ and somethin larer than .%+ Trillion. <alf of this money is !aid to entities
outside of our economy and can only return to us "y !urchase of our assets. A lot of the
hidden cost remains within our economy, "ut none contri"utes to hiher !roductivity.
The hidden costs are "asically maintenance ex!enses.
Major Financial Issues and Recent Policy
Responses
Ees!ite the !ossi"ility of sustainin hih rowth over the medium'
term, vulnera"ilities in economic rowth and the financial systems still
remain in Viet Fam. There are a num"er of reasons for such a
concern. To a certain extent, Viet FamGs economy still relies
sinificantly on external resources to finance its investment'savins
a!. ,eanwhile, domestic ca!a"ility to efficiently serve and a"sor"
those resources is #uite limited and the economy has "een financially
nurtured "y rather ailin "ankin systems. ,oreover, the economy can
"e hit "y international trade and ca!ital flow shocks or a lo"al
recession.
The Banking System
The first issue concerns the non'!erformin loans ?FH/s@ of the
"ankin industry. It has one down sinificantly in recent years "ut the
sustaina"ility of loan #uality is seriously #uestiona"le in the future.
4ome major factors may increase future FH/s. The lare 46:sG and
!u"lic investments inefficiency, and the conflict of interest issues
related to the lendin of funds raised throuh "ond issuances of 46:s
could result in the loss of re!ayment ca!a"ility of those "orrowers.
,oreover, the risks associated with real estate and securities'related
loans, which were su"stantial in several 94IBs, are #uite hih in the
context of hih inflation and an asset "u""le.
6"viously, one of the key measures in conjunction with restructurin
the "ankin system is to reform the 46: sector. 4ince ())%, 46:
reform has chaned sinificantly in nature, with its focus shifted to
lare 46:s with the oal of their e#uitization and listin on the stock
market. 4everal state "usiness rou!s were esta"lished, ho!in to
ain stroner com!etitiveness in the new environment and
international markets thanks to im!rovements in their efficiency and
manaement ca!a"ility. At first, the transformation of lare 46:s was
allowed as an ex!erimentJ "ut later on this somehow "ecame a
movement and nearly all of them have enaed in various kinds of
"usiness activities, includin financial ones. There are concerns a"out
the trans!arency of the 46: reform !rocess and risk manaement of
these "usiness rou!s.
The "ankin industry has also faced a !roloned dou"le mismatch
!ro"lem ?maturity mismatch and currency mismatch@. Formally, short'
term de!osits account for *%0 of total de!osits, "ut the share of
medium'and lon'term loans in total credit rose from ((0 in 1==% to
a"out 2)0 in recent years ?this fiure is much hiher for some 94IBs
in ())*@. At the same time, commercial "anks have only "een allowed
to use a"out (%A1)0 of short'term de!osits to make medium and
lon'term loans. The risks seem to "e manified in the !resence of
direct lendin and conflict of interest issues, es!ecially when related to
loans of #uestiona"le real estate deals and other "i !rojects.
The currency mismatch was most severe durin 1===A())( due to
shar! increases in forein currency de!osits and a decrease in forein
currency loans, measured as shares in total de!osits and total loans,
res!ectively ?Figure 18 K HE- 1)1.2LB M 1 !ae N@. It has recently "een
narrowed, "ut remains !ro"lematic due to its sensitivity to the
exchane rate and interest rate fluctuations, es!ecially in the context
of a rather hih deree of dollarization.
17
The 4BV has attem!ted to
radually eliminate dollarization. <owever, this is no easy task as some
contradictin !olicies continue to "e in !lace ?such as !olicies for
encourain remittances@ and in the context of havin ca!ital flows.
The !ro"lem of macroeconomic !olicy consistency should "e looked
into for reater clarity. Ionsistency "etween monetary and exchane
rate !olicies is a!!roached as, accordin to 9ohnston and 6tker';o"e
?1===@, the relationshi! "etween exchane rates ?:;s@ and interest
rates at a !oint in time and the sustaina"ility of these !olicy mixes
over time. The consistency at a !oint in time can "e "est
demonstrated "y the conditions of covered and uncovered interest rate
!arities ?IIH and 3IH@.
18
These two !arities indicate the interde!endent
relationshi! "etween the domestic interest rate and :; at a !oint in
time, when investors consider different returns on various financial
assets to maximize return on their !ortfolios. The !olicy consistency
over time determines the sustaina"ility of the chosen !olicy mix. The
risks and costs of this kind of !olicy inconsistency are ineffectiveness
of monetary !olicy and encouraement of s!eculative activities. This
!oint can "e illustrated "y two case studies& the intensification of
dollarization durin 1==+A ())1, and the 5mini'crisis7 in 1==>A1==*
?Box 1@.
The !resent situation seems to "e reversed due to the weakenin 34E
and increasin VFE'denominated interest rates ?Table 16 K HE-
1%*.%LB M 1 !ae N@. The VFE "ecame more attractive than the 34E ?a
reason for the declinin deree of dollarization@. This has contri"uted
to the encouraement of VFE'"ased forein exchane investments in
such as local "onds, real estate, e#uity markets, and forein currency
"orrowins for im!orts ?iven hih inflation and ex!ectation of
sta"ilityCa!!reciation of nominal :;@. 4ome of these kinds of
investments can also "e s!eculative.
Box 3: Dollarization, Double Mismatches and !eculati"e
#cti"ities
-ollowin the 3IH condition, it can "e o"served that durin 1==*A
())1, iven the ex!ectation of further exchane rate ?:;@ de!reciation
and lower VFE'denominated interest rates, the !u"lic had shifted from
the !referred !ortfolio in favor of 34E ?Ta"le 1>@. This was !articularly
the case in ())) when the -:E raised the !rime rate to remarka"le
levels. Eue to ca!ital controls, commercial "anks attem!ted to attract
foreincurrency de!osits for de!osits a"road to earn the differential
s!read. The de!osits a"road rose remarka"ly, from 34E %1* million in
1==+ to 34E (.)++ "illion in ())) and 1.1=* "illion in ())1 ?A!!endix
B@. In other words, the macroeconomic !olicy inconsistency in favor of
holdin 34E was a major underlyin determinant of the dollarization
intensification durin 1===A())1, and in certain circumstances this
encouraed commercial "anks to s!eculate on currency ains rather
than focus on !roductive investments.
The mini'crisis in 1==>A1==* is another illustration of the daner of
macroeconomic !olicy inconsistency and !ro"lem of dou"le mismatch
?Vo et al ())1@. In 1==> the very hih VFEdenominated interest rates
attracted a su"stantial increase in "ankin de!osits, while credits were
hardly ex!anded due to the hih lendin rates and tiht reulations on
credit ceilins. ;eserves in commercial "anks rose su"stantially and
many "anks had excessive reserves ?some "anks even refused to
acce!t more de!osits@. This situation created incentives for "anks to
evade overnment controls. A letter of credit ?/I@ was one im!ortant
channel for evasion since u! to that time /Is were excluded from
credit ceilins. /Is were seen as an off'"alance activity of "anks,
eneratin o!acity on the "alance sheets of "anks.
-irms also attem!ted to evade reulations on limits of forein'currency
"orrowins ?only im!orters and other im!ort'related activities can
o"tain loans in forein currencies@. Althouh at that time Viet Fam had
im!osed certain restrictions on IA and LA, the flows of funds from
a"road throuh deferred !ayments on /Is had "een outside those
restrictions. Eomestic enter!rises were allowed to have their trade
credit uaranteed "y commercial "anks throuh deferred /Is. In fact,
this was e#uivalent to enter!rises "orrowin short'term forein
currency loans from a"road throuh domestic commercial "anks.
,oreover, in an environment of a very hih VFE interest rate and
limited forein currency loans, "ut with sta"ility and riidity of
exchane rates as an im!licit overnment uarantee aainst forein
exchane risk, there was, of course, a stron incentive for domestic
firms to "orrow from a"road. Thus "oth commercial "anks and firms
had incentives to lend and "orrow throuh /Is.
As a result, domestic firms ?"oth 46: and !rivate enter!rises@
"orrowed a lare amount of short'term 34E loans. The amount of /Is
was estimated to have accumulated to 34E 1.% "illion "y early 1==*.
Fet flows on short'term de"t increased sinificantly, from a"out 34E
1() million in 1==1 and 1==2 to 34E 111 million in 1==% and 34E ((2
million in 1==>. It had "ecome thereafter larely neative in 1==*.
The conse#uences were severe. -irst, it widened the IA deficit at an
alarmin level ?A!!endix B@. 4econd, a lare !art of this short'term
"orrowin was channelled into a s!eculative real estate market,
resultin in a market "oom. But the market turned into "ust later, in
early 1==*, when those firms could not !ay "ack the de"t. Third, it
weakened the "ankin system and the financial sector as a whole.
Around 2)0 of the /Is ?e#uivalent to 1 !ercent of the 8EH@
uaranteed "y commercial "anks "ecame "ad de"ts.
As a result, the 46IBs and some other 94IBs defaulted on these
uaranteed short'term de"ts, leadin to the concern a"out the level of
forein exchane reserves and a"out Viet FamGs commitment to
international financial arranements. The 4BV had to use forein
reserves to "ail out these commercial "anks. It was estimated that the
stock of forein reserves fell "y the e#uivalent of % weeks of im!orts.
Viet FamGs soverein credit ratin was lowered from Ba1 to I.
,oreover, the evasion of "anks weakened the effectiveness of the
monetary !olicy "ecause the direct control mechanism was eroded,
distortin monetary areates. In addition, it enerated u!ward
!ressure on the exchane rate. Eue to a shar! increase in demand for
forein exchane "y the end of 1==> and early 1==*, the 4BV
"roadened the "and "etween sellin and "uyin rates of forein
exchane from 10 to %0 in -e"ruary 1==*. In addition, in mid'1==*,
the 4BV set strict limits on the amount of deferred /Is and tihtened
controls over commercial "anksG /I uaranteein. To im!ort oods on
the restricted oods list a de!osit e#uivalent of +)0 of each /I was
re#uired instead of the !revious )'1)0 level. As a result, durin the
second half of 1==+, the value of late /I !ayments fell from around
34E 1%) million to some 34E ()) million at the end of 1==+.
Another issue is that the manaement ca!a"ility at "oth the macro'
and micro'levels cannot kee! !ace with the new develo!ment
dimensions of the "ankin sector. In fact, there are still shortcomins
in the "ankin industry as much as there is still a weak financial
ca!acity of commercial "anks ?low IA;, low reserves and low loan
#uality@ and weak risk manaement. Accordin to a survey "y :rnst O
Poun, the "anksG a!!lication of 1=C(% !rinci!les ?1C(%@ does not fully
com!ly with the BA4:/ Iore Hrinci!les ?Fuyen ())*@. -urthermore,
the underdevelo!ment of a reulatory framework with limited
su!ervision and monitorin ca!acity of the key "odies, the 4BV, the
,6- and the 44I, makes "ankin activities less trans!arent and more
fraile. As mentioned "y Vo et al ?())*@,
Viet FamGs "ankin system is still vulnera"le due to limited
su!ervision, monitorin and overnance ca!acity. 6n'site monitorin
and su!ervision is constrained due to inade#uate #uantity and #uality
of human resources. 6ff'site su!ervision, meanwhile, fails to meet
contem!orary re#uirements in com!ilin and !rocessin information.
/endin su!ervision has yet to cover all credit'related financial
institutions due to lack of effective colla"oration amonst authorized
aencies and de'facto institution'"ased financial system overnance.
Iertain international !ractices and standards have "een recently
ado!tedJ yet "ankin overnance standards enerally have yet to
meet the IA,:/ and BA4:/ !rovisions.
The 4BV is now underoin more radical reforms to "e a modern,
relatively inde!endent central "ank. The 8overnment also "ean
reformin the entire su!ervision system towards the esta"lishment of
a new sinle su!ervision system like the -4A ?-inancial 4ervice
Authorities@ in the 3L.
The Stock and Bond Markets
Eurin a stock market "oom, the reatest concerns of the Vietnamese
authorities have "een how to control s!eculative activities that make
the stock market too volatile and at the same time, how to facilitate
lon'term investment for the develo!ment of the economy as a whole.
-acin such challenes, the 44I has re!eatedly warned investors of
risks associated with overheatin in the marketGs develo!ment,
followed "y the 4BVGs measure to restrain loans to "ank'"acked
securities com!anies in Eecem"er ())>. Within a few days, the 44I
!romulated six measures to im!rove reulation and monitorin of the
securities marketGs o!erations, includin& ?i@ !ost!onin the liftin of
maximum shares of listed com!anies !ermitted to forein investorsJ
?ii@ coo!eratin with the 4BV to monitor lendin for security
investment, re!o transactions and other transactions related to
security collateralization of commercial "anksJ ?iii@ investiatin
securities com!anies which re!ortedly discriminate "etween
customers, andCor misuse informationJ ?iv@ re#uirin listed com!anies
to disclose and disseminate their o!erational and financial results as of
())> to "etter inform investors in the marketJ ?v@ re'reisterin
re!resentative offices of forein investment funds in Viet FamJ and
?vi@ !romotin further information disclosure so that investors can
make "etter informed, rational investment decisions.
<owever, the reaction of the stock market !roved that such !olicy
measures were not sinificantly effective. There has not yet "een a
clear sin of market fever relief ?-iure =@. In order to !rotect the
sta"ility of the "ankin system in !articular, and the financial system
as a whole, with the fear that stock'collateralized loans could "ecome
FH/, in A!ril ())*, the 4BV decided to im!ose a ceilin of 10 of total
lendin for stock collateralized loans ?Eirection )1CQE'F<FF@. The VF'
Index afterward has fluctuated with a declinin trend.
Eevelo!ment of the stock market in Viet Fam is o"viously very much
de!endent on the 46: reform !rocess. To "e aware of the !ro"lem,
the overnment has focused on reformin lare 46:s with a
determined action !lan. Accordin to a !u"lic announcement !lan,
there are a"out (,1)) 46:s at !resent, of which a"out 1,%)) have
"een or will "e e#uitized over ())>'()1). This suests also that close
to +) cor!orations and lare firms will have to o !u"lic. ,oreover,
%%) 46:s were to "e e#uitized in ())*. <owever, in ())*, only >%0 of
these 46:s were successfully e#uitized. As stock market indexes have
"een declinin, the overnment was o"servedly !uzzled over the
trade'off "etween the financial sur!lus it could ain from initial !u"lic
offerins ?IH6s@ and im!lementation of the committed 46: reform
schedule. In turn, this has created a serious dise#uili"rium in the stock
market. With the IH6s of some lare state'owned cor!orations ?e..
Eam Hhu ,y, Bao Viet Insurance Iom!any, and Vietcom"ank@, the
market sentiment is that the 8overnment is desirous of ettin a
reater financial sur!lus from such IH6s.
-urthermore, there are also some concerns a"out the role of the 4tate
Ia!ital Investment Ior!oration ?4III@, which was set u! in ())%
closely followin the model of 4ina!orean Temasek. ,otivations are
to remove a conflict of interest concernin line ministries or !rovinces
and to achieve a more rational and efficient use of state ca!ital
throuh divestin state shares, includin outriht sale, and seekin
strateic !artners and merers. The 4III is also determined to
increase trans!arency when utilizin state ca!ital, includin in
o!erations of entities in which it is vested. Althouh the 4III has a
!rofit oriented mandate, whether it could "e a market sta"ilizer
remains #uestiona"le. ;isks due to the aent'!rinci!al relationshi! can
arise if there is not effective su!ervision over the 4III and the 4III
does have sufficient ex!ertise in dealin with com!lex financial
activities ?more a"out the 4III in Box 2@.
Box $: %ole o& the '('
The 4III "ean o!erations in Auust ())> to concentrate state
shareholdin in the e#uitized 46:s under one sinle entity. Im!ortant
com!anies in its !ortfolio include Vina,ilk, Hacific Airlines, -HT, and
Bao ,inh. By the end of ,arch ())*, the 4III had received ownershi!
rihts from 211 e#uitized 46:s with a total "ook value of a"out 1.2
trillion don. By the end of ())*, the 4III ex!ected to receive
ownershi! rihts in 1,)11 enter!rises, excludin "anks, with state
holdins of *.( trillion in "ook value and an estimated market value of
1> trillion don.
The 4III has classified e#uitized 46:s into three rou!s, A, B, and I.
It will concentrate on strenthenin or restructurin enter!rises in
8rou! A, which o!erates in sectors considered strateic. 8rou! B
enter!rises with ood !otential will "e su!!orted for listin on the
stock market. 8rou! I com!rises enter!rises where the state does not
need to invest in them over the lon term. 4III will radually sell
state shares in com!anies of this rou!. In ())*, it !lanned to sell
stakes in %) com!anies with a total "ook value of a"out ((* "illion
don ?34E 12.( million@.
6ne area that needs to "e clarified is the role of the 4III in relation to
the 8eneral Ior!orations or :conomic 8rou!s which o!erate under the
holdin com!any structure. At !resent, it a!!ears that 4III will
receive ownershi! rihts on a case'"y'case "asis. ;e!ortedly, for the
two "anks to "e e#uitized later this year, Vietcom"ank and ,<B, it has
"een instructed "y the Hrime ,inister to receive the rihts.
3ntil now, !olicy res!onses for develo!in an effective "ond market,
which is #uite a lon'term !rocess, have "een insufficient and
ina!!ro!riate. :#uity markets may exist where "ond markets fail to
thrive. The "ond market in Viet Fam is still very modest and lacks
necessary com!onents includin the followin
1)
&
An a!!ro!riate leal framework with the effectiveness of a
judiciary systemJ
<ih #uality of information and ado!tion of strict accountin and
disclosure standardsJ
The !resence of inde!endent risk'ratin and other information
eneratin aenciesJ
An efficient and relia"le clearin and settlement arranementJ
and
4ome forms of tax incentives durin the initial stae of
develo!ment.
,oreover, the "ond market in Viet Fam is heavily dominated "y
8overnment "onds. It is necessary, however, to strenthen the role of
the 8overnment as the !rimary issuer.
With the o!enin of the economy, full !artici!ation in the reional and
international "ond markets is unavoida"le. Viet Fam has "een involved
in all dimensions of reional financial coo!eration, includin the
reional surveillance system, the Ihian ,ai Initiative ?I,I@, the
reional "ond market develo!ment and monetary !olicy and :;
coordination. <owever, the effectiveness of such involvement is very
limited and o"viously de!ends very much on how the country can
effectively develo! its domestic "ond market. The !ractical issues of
enaement in the A4:AF stock market link and in the reional "ond
market are "asically theoretical now and have yet to "e !ut into
!ractice.
Foreign Capital Inflows
20
Viet Fam continues to "e on the riht track for attractin -EI with a
more li"eral and neutral investment environment. ;ecently, the
8overnment has moved towards unifyin domestic and forein
investment reulations, aimin to esta"lish a level !layin field for
"oth domestic and forein investors. Iommitments to the WT6,
es!ecially those of the services sector, are #uite "road and dee! and
are in favor of -EI. ,ajor o"stacles, however, still exist such as red
ta!e and corru!tion, an inconsistent and "arely trans!arent system of
leal documents and un!redicta"le !olicy chanes. The recent slow
!ace of -EI realization
*1
has also revealed major "ottlenecks in
attractin -EI in an efficient manner due to weaknesses in the
infrastructure and a shortae of skilled la"orers.
6EA inflow has "een the result of the radual strenthenin of a set of
common commitments "etween the Vietnamese overnment and the
donor community in line with the <anoi Iore 4tatement ?<I4@ on aid
effectiveness ?Table 17 K HE- 11=.+LB M 1 !ae N@. In !articular, in ())>,
the overnment issued Eecree 111C())>CFE'IH ?in re!lacement of
Eecree 1*C())1CFEIH in ())1@ to accelerate decentralization of 6EA
manaement and utilization, ivin full res!onsi"ility to !roject
executin aencies for a!!raisal, a!!roval and im!lementation of 6EA'
financed !roramsC!rojects. <owever, some shortcomins in this field
such as the modest effectiveness of anti'corru!tion !rorams and the
lack of ca!acity for monitorin and evaluation, es!ecially at local level,
necessitate more radical solutions. /ast "ut not least, havin
trans!arent and effective !u"lic'!rivate !artnershi! ?HHH@ schemes are
still #uestiona"le.
;eardin !ortfolio flows with trade in services, financial li"eralization
and WT6 commitments im!lementation, -I:s were allowed to "e
transformed into share'holdin com!anies ?since ())2@. The
overnment also !rovided uidance for !urchasin and sellin
securities "y foreiners at the 4TI. ,oreover, the 6rdinance on
-orein :xchane ,anaement issued in Eecem"er ())% ave
!ermission for individuals to o"tain overseas "orrowins and domestic
economic entities to make overseas lendin if they met necessary
conditions. 4oon after, it led to some uncontrolla"le !ro"lems related
to external de"t monitorin. As a result, the 4BV had to delay issuin
a Iircular for uidin the im!lementation of the 6rdinance. As a
reflection, althouh the LA is now relatively o!en for ca!ital inflows,
Viet Fam needs to think seriously a"out the se#uencin of full LA
li"eralization in conjunction with im!rovements in the financial
su!ervision system.
Macroeconomic Policies
In an economy o!en to ca!ital inflows, !olicy consistency over time
re#uires the authorities to have either a very stron commitment to a
!eed :; or !ursue a flexi"le :;. <owever, efforts to maintain
macroeconomic !olicy consistency are constrained "y the well'known
5im!ossi"le trinity7 or 5im!ossi"le tri'lemma,7 which states the
im!ossi"le coexistence of exchane rate sta"ility, free movement of
international ca!ital, and monetary autonomy.
**
Holicymakers can have
several macroeconomic !olicies to res!ond to ca!ital inflows such as
sterilization, revaluation of the nominal exchane rateCreater
exchane rate flexi"ility, and fiscal austerity. 6ther !olicy measures
such as li"eralization of ca!ital outflows, controls on ca!ital inflows,
and trade li"eralization can also "e im!lemented. The effectiveness of
such !olicies is !resented in #!!endix ' K HE- =1.1LB M 1 !ae N.
A!!endix I shows that not one sinle !ossi"le !olicy res!onse to a
sure in ca!ital inflow is !erfect in terms of achievin "oth oals of
macroeconomic sta"ility and economic rowth. :; flexi"ility and
a!!reciation seem to "e the "est effective res!onse to lare ca!ital
inflows "ecause it avoids side effects attendant to other !olicy
res!onses. But it could also create a !olicy inconsistency that is very
much de!endent on external conditions, such as the !osition of the
forein currency the local currency is !eed to. That in turn would
encourae short term s!eculative ca!ital inflows. 4terilization is often
costly and ineffective, "ut remains most the commonly used since
!olicymakers are enerally reluctant to allow the exchane rate to
a!!reciate "ecause of fears of underminin ex!ort com!etitiveness
and the resultin lower economic rowth. -iscal tihtenin could "e a
ood o!tion, yet it faces several limitations, es!ecially in terms of
a!!roval and action. ,oreover, it could lead to lower investment and
hence, a lower economic rowth rate if !u"lic investment still accounts
for a lare share of total investment.
;ecently, 4BVGs conduct of monetary !olicy turned out to "e more
com!licated as it faced two !ro"lems, namely, increasin
macroeconomic !olicy inconsistencies ?Ta"le 1>@ and the 5im!ossi"le
trinity7 as ca!ital inflows sured, es!ecially in ())*. The 4BV has had
to consider a trade'off "etween exchane rate sta"ility and inflation
taretin !olicy. Basically there have "een two main aruments to the
dilemma facin the 4BV. The first is that a!!reciation can hurt ex!orts
and economic rowthJ yet historically the 4BV has !ursued a rather
weak VFE !olicy in order to !romote ex!orts. The second is to let VFE
a!!reciate which seems to "e in line with macroeconomic
fundamentals and forein exchane "ehavior of many other :ast Asian
economies and moreover, it could "e a sin for the economy that the
VFE is no loner only in a !osition of de!reciation ?9H ,oran ())*@.
4o what is the choice "y the 4BV in !racticeR
In eneral, the 4BV and the overnment are more concerned a"out
the !ossi"le neative im!act of a!!reciation on ex!orts and the
slowdown of economic rowth. In 9anuary ())*, the 4BV widened the
tradin "and of the VFEC34E from S ).(%0 to S).%0 around its daily
reference rate. The VFEC34E a!!reciated in nominal terms of only
).(0 for the whole year of ())*. At the same time, the 4BV ke!t all
official interest rates such as refinancin, discount and "asic rates
unchaned since early ())> in order to !rovide a sta"le sinal to the
market ?Figure 1) K HE- 12>.*LB M 1 !ae N@, althouh the rates set "y
commercial "anks increased slihtly ?Ta"le 1>@. While sta"ilizin the
nominal :;, the 4BV #uickly "uilt u! its forein exchane reserves,
which increased from 34E 11.% "illion in ())> to 34E (1 "illion "y the
end of ())*.
As inflation accelerated in the first half of ())*,
*3
the 4BV only
attem!ted to sterilize the excess li#uidity throuh the 6,6 and the
increased reserve re#uirements. It is re!orted that the 4BV reularly
withdrew u! to VFE 11,)))A12,))) "illion ?34E >++'+*% million@ !er
week from circulation since ,ay ())*. At the end of the year, this
fiure rose to as much as VFE 1%,)))A1>,%)) "illion ?34E =1+A1.)11
million@ ?World Bank ())*@. 4ince 9une ())*, the 4BV has raised its
reserve re#uirements. -or VFE de!osits under 1( months, the
com!ulsory reserve rate increased from %0 to 1)0J for VFE de!osits
"etween 1( and under (2 months, from (0 to 20. Iorres!ondinly,
rates for forein currency de!osits are from +0 to 1)0 and from (0
to 20.
But the sterilization was ineffective and costly ?II:, ())+@. The
money su!!ly ?"oth ,( and domestic credit@ ex!anded shar!ly in
())* in com!arison with that of !revious years since ())1, which was
already hih ?Ta"le >@. The inflation rate jum!ed from =.20 in ())2,
+.20 in ())% and >.*0 in ())>, to 1(.>0 in ())*. The 4BV was
reconized "y the 8overnment to "e 5!er!lexed7 in conductin
monetary !olicy, which was considered a major cause, toether with
cost'!ush and demand'!ull reasons, of hiher inflation. ,oreover, in
the context of the weakenin 34E and increasin international
commodity !rices, kee!in the sta"ility of the nominal VFEC34E also
meant a sinificant im!ort of international inflation.
To "e more !roactive in controllin the money su!!ly, the 4BV in the
last few months introduced several !olicy measures&
By the end of Eecem"er ())*, the tradin "and of the VFEC34E
was cautiously widened to S ).*%0 and as a result, the nominal
VFEC34E a!!reciated "y ).10 over the first two months of
())+J
In 9anuary, lendin restrictions for stock investment chaned
from 10 of total loans outstandin to ()0 of charter ca!ital,
which limits !otential rowth in such investment creditJ
4ince 1 -e"ruary ())+, the rates of com!ulsory reserve
re#uirements have "een raised to 110 ?from 1)0@ for VFE and
forein currency de!osits under 1( months, and to %0 ?from
20@ for those de!osits "etween 1( months and under (2
monthsJ
Also since 1 -e"ruary ())+, all official interest rates have "een
increased, from >.%0 to *.%0 for the refinancin rate, from
2.%0 to >.)0 for the discount rate, and from +.(%0 to +.*%0
for the "asic rateJ and
In !articular, in the second week of -e"ruary ())+, the 4BV
decided to issue "y 1* ,arch ())+ 1>%'day'"ills worth VFE
(),1)) "illion with a cou!on of *.+0 and re#uested a
com!ulsory !urchase "y 21 commercial "anks.
What can "e o"served in the followin days ahead is that some 94IBs,
which have a maturity mismatch !ro"lem "ecause a sinificant
!ro!ortion of their lendin consists of medium and lon'term loans
?e.. those oin to the real estate market and consum!tion of dura"le
oods@, will not have sufficient li#uidity to meet the new !olicy
measures. The inter'"ank market "ecame too heated with overniht
rates of (%A1)0. As a result of the 5li#uidity chaos,7 the 4BV was
forced to !um! out VFE 11,))) "illion. Those "anks were, however, in
a difficult !osition in terms of li#uidity "ecause they held T'"illsC"ills
issued "y the 4BV. They increased their annual VFE de!osit interest
rates to 12.>0 to mo"ilize as many as de!osits they could. The race
for hiher de!osit interest rates amon commercial "anks "ean. It
calmed down only "y the end of -e"ruary ())+ as the 4BVissued
directive re#uested that all commercial "anks not raise annual de!osit
interest rates more than 1(0 and !romise to meet the li#uidity of the
"ankin system throuh the inter'"ank market with reasona"le rates.
The li#uidity chaos once aain shows how hih the cost could "e if the
!olicy of kee!in the nominal sta"ility of :; !ersists in conjunction
with the maturity mismatch !ro"lem in the "ankin system or even
only in some commercial "anks ?due to weak su!ervision@ and the
ina!!ro!riate !olicy actions leadin to more serious macroeconomic
!olicy inconsistencies. The fact that the 4BV had to use some
administrative measures to control the situation will have hiher costs
due to distortions in resource allocation. This action, thouh tem!orary
and necessary, can "e seen as a ste! "ackward in the !rocess of
im!rovin monetary instruments.
*$
The movements of the some key
macroeconomic varia"les in the first two months of ())+ will make the
!olicy o!tion more com!licated. Inflation rose "y more than >0.
*+
The
rise in de!osit interest rates "y "anks could soften the li#uidity
!ro"lem "ut it im!oses a hiher risk for several "anks.
-iscal tihtenin can "e a ood res!onse to ca!ital inflows. It contains
inflationary !ressure and reduces !ressure on real a!!reciation and
increases interest rates. <owever, u! to now, Viet Fam has had no
serious intention of usin fiscal !olicy as a !olicy com!lement to
monetary and :; !olicies in res!onse to ca!ital inflows. -or a lon
time, fiscal !olicy has followed the 5olden rule,7 meanin the "udet
should have savins, i.e. total revenues are hiher than current
ex!enditures ?Table 18 K HE- 1)).1LB M 1 !ae N@ and the "udet deficit
cannot "e financed "y seiniorae.
;oom for reducin the "udet deficit seems to "e small. <owever, the
"udet deficit is rather hue. Budet revenue still relies heavily on
crude oil ex!orts and im!ort tariffs. The former item has fluctuated
much and moreover, "ecause of some technical !ro"lems, the volume
of crude oil ex!orts will not increase unless new oil resources are
found. The latter item has sinificantly decreased over time due to
trade li"eralization ?Ta"le 1+@. There is also uncertainty a"out the
im!act of tax reforms ?e.. !ersonal income tax, asset tax, etc.@ on
the "udet revenue. 6n the ex!enditure side, the overnment is facin
increasin !ressure on infrastructure develo!ment and u!ward
adjustment of salaries for !u"lic servants ?"ecause of hiher inflation
rates, the overnment was forced to raise !u"lic salaries several times,
"y 1)0A()0 each, durin ())2A())+@. Fevertheless, investment
ex!enditure is reconized as inefficient in terms of selectin !rojects
and dis"ursements ?at least ()A1)0 of investment ex!enditure can "e
saved@.