(Bloomberg) -- Vietnam risks being vulnerable to external shocks if it doesn’t push through reforms to strengthen its banking system and restructure state businesses, according to International Monetary Fund chief Christine Lagarde.
The Southeast Asian nation isn’t in a position to withstand economic blows from tightening of monetary policies elsewhere, a deep and prolonged drop in commodity prices and a slowing China without reforms, she said in a March 18 interview in Ho Chi Minh City.
“The risk is that from being slightly vulnerable, Vietnam could become very vulnerable to external shocks,” she said. “It would expose the Vietnamese economy and that would not be good for the Vietnamese population.”
The benchmark VN Index of Vietnamese stocks fell 0.6 percent at the close on Monday local time. The gauge has gained 10 percent since this year’s low on Jan. 21.
The nation’s poverty rate has dropped to 13.5 percent from 60 percent in 1993 and its economic growth is expected to be “solid” at more than six percent this year, Lagarde said in a visit to the country last week, during which she met with the country’s top leaders. Vietnam, which is in the process of a once-in-five-years political transition, now has one of the world’s most open economies, she said.
Remarkable Potential
“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 in the interview. “It has done very well in terms of reducing poverty and it has not increased inequality, which often comes with growth.”
Still, the nation’s economic expansion since 2008 has been slower than the two preceding decades and it has failed to match per-capita-income growth that the region’s most successful economies experienced similar stages in development, she said.
Vietnam also needs to make greater use of exchange-rate flexibility to soften the blows of overseas economic shocks and build external reserves, she said. Reforming the nation’s state-owned companies and resolving bad debt at banks will offset the aging of its working-age population that could be a future drag on growth, according to Lagarde.
Corporate Governance
“We believe the banking system needs to be made stronger, better and more capitalized with less stressed assets in its balance sheets so the banks can actually fuel the economy,” Lagarde said. SOEs need better governance and to refocus on their core businesses, she said.
The country is also at risk with public debt at about 60 percent of gross domestic product and with one of the world’s fastest-aging societies and a working-age population that is beginning to decline.
“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 in the interview. “You need to be very careful with the revenue you generate and how you spend it.”
(Updates with VN Index in fifth paragraph.)
--With assistance from Nguyen Kieu Giang To contact the reporter on this story: John Boudreau in Hanoi at jboudreau3@bloomberg.net. To contact the editors responsible for this story: K. Oanh Ha at oha3@bloomberg.net, Stephanie Phang at sphang@bloomberg.net, Allen Wan
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