TAKING STOCK DECEMBER 2019 FINANCE IN TRANSITION Unlocking capital markets for Vietnam’s future development TAKING STOCK DECEMBER 2019 FINANCE IN TRANSITION Unlocking capital markets for Vietnam’s future development TABLE OF CONTENTS ABBREVIATIONS ..........................................................................................................................................................7 ACKNOWLEDGMENTS .................................................................................................................................................8 EXECUTIVE SUMMARY ................................................................................................................................................9 SECTION I: RECENT ECONOMIC DEVELOPMENTS ...................................................................................................13 I.1. GLOBAL ECONOMIC ENVIRONMENT ...................................................................................................... 14 II.2. RECENT ECONOMIC DEVELOPMENTS IN VIETNAM............................................................................... 15 Amidst an unfavorable external environment, Vietnam’s economy remains resilient ..................................... 15 Subdued price pressures and easing monetary policy stance ...................................................................... 17 Fiscal consolidation in progress ................................................................................................................... 19 Strong external position despite lackluster global demand ........................................................................... 22 I.3. MEDIUM-TERM ECONOMIC OUTLOOK AND RISKS ................................................................................. 29 Vietnam’s medium-term outlook remains positive ........................................................................................ 29 Growing risk and mitigation measures ......................................................................................................... 30 SECTION II: THE IMPORTANCE OF CAPITAL MARKETS FOR LONG-TERM FINANCING ..........................................33 II.1. FINANCIAL MARKETS IN CONTEXT ....................................................................................................... 34 II.2. WHY IS THE DEVELOPMENT OF CAPITAL MARKETS SO IMPORTANT FOR VIETNAM? ......................... 35 II.3. RECENT PROGRESS IN VIETNAM.......................................................................................................... 37 Government Bond Market ............................................................................................................................ 38 Corporate Bond Market ................................................................................................................................ 41 Equity (Stock) Market ................................................................................................................................... 43 II.4. KEY REFORMS TO SUPPORT LONG-TERM FINANCING ......................................................................... 45 Pillar 1. Improving the Legal Foundation for Financing .................................................................................. 45 Pillar 2. Improving Governance, Disclosure and Information Dissemination, and Market Infrastructure ......... 45 Pillar 3. Promoting Innovative Products to Respond to Market Needs........................................................... 46 Pillar 4. Widening the Investor Base for Capital Markets ............................................................................... 46 Pillar 5. Strengthening Long-Term Finance through the Government’s Leadership ........................................ 49 II.5. LOOKING TO THE FUTURE .................................................................................................................... 50 REFERENCES .............................................................................................................................................................51 4 TAKING STOCK An Update on Vietnam’s Recent Economic Developments BOXES, FIGURES, AND TABLES BOXES Box I.1. Tax reforms for sustainable growth ................................................................................................... 20 Box I.2. Slow disbursements of public investment in Vietnam ......................................................................... 22 Box I.3. How to explain the export resilience in Vietnam? ............................................................................... 25 Box II.1. Vietnam’s inclusion in the emerging market global bond indexes ...................................................... 49 FIGURES Figure I.1. Global economic growth ............................................................................................................... 14 Figure I.2. World trade and industrial production ............................................................................................ 14 Figure I.3. East Asia and Pacific GDP growth projections ................................................................................ 15 Figure I.4. GDP and sector growth (%, y/y) .................................................................................................... 16 Figure I.5. Contribution to GDP growth (pps) .................................................................................................. 16 Figure I.6. Monthly wage average .................................................................................................................. 17 Figure I.7. Employment by sector .................................................................................................................. 17 Figure I.8. Consumer price index (%, y/y) ...................................................................................................... 17 Figure I.9. Credit growth (%, y/y) ................................................................................................................... 17 Figure I.10. State budget revenue by sources ................................................................................................. 19 Figure I.11. Tax collection by type .................................................................................................................. 19 Figure I.12. Budget (% of GDP) ...................................................................................................................... 20 Figure I.13. Tax revenues (% of GDP) ............................................................................................................. 20 Figure I.14. Slowing budget expenditures ....................................................................................................... 21 Figure I.15. Debt payment from state budget .................................................................................................. 21 Figure I.16. Public investment disbursement ratio, January–September 2019 ................................................. 21 Figure I.17. Balance of payments (% of GDP)................................................................................................. 23 Figure I.18. Nominal VND/US$ exchange rate ................................................................................................. 23 Figure I.19. Export growth ............................................................................................................................. 24 Figure I.20. Contribution to export growth by sector ....................................................................................... 24 Figure I.21. Contribution to export growth, selected countries ........................................................................ 24 Figure I.22. The boom in exports from Vietnam is recent and unique to the U.S. market .................................. 25 Figure I.23. Trade substitution between Vietnam and China, 2019 .................................................................. 25 TAKING STOCK An Update on Vietnam’s Recent Economic Developments 5 Figure I.24. Import growth (y/y, %) ................................................................................................................ 26 Figure I.25. Import composition (% of total) ................................................................................................... 26 Figure I.26. FDI commitment and disbursement ............................................................................................. 27 Figure I.27. Accumulated FDI by sector.......................................................................................................... 27 Figure I.28. Exports-imports of the foreign sector .......................................................................................... 28 Figure I.29. Foreign sector in manufacturing exports ...................................................................................... 28 Figure I.30. The shift in foreign investment in Vietnam ................................................................................... 29 Figure I.31. Ease of Doing Business ranking .................................................................................................. 31 Figure I.32. Vietnam ranking of the top business environment obstacles for firms ........................................... 32 Figure II.1. Higher GDP per capita and credit development are closely correlated