A comprehensive framework through which Vietnam can identify its financial system vulnerabilities and develop appropriate policy responses has been provided by a program jointly designed by the World Bank (WB) and the International Monetary Fund (IMF).

The Southeast Asian country’s key financial sector vulnerabilities and developmental challenges have been included in the Financial Sector Assessment Program (FSAP) report, finalized in June but only published in late August, according to the WB.

Besides pinpointing financial vulnerabilities, the FSAP Vietnam report also provides policy recommendations for the further and sound development of the Vietnamese financial system.

The report summarizes the findings of a joint mission from the WB and the IMF that visited the country in October 2012 and January 2013 to conduct the assessment of the local financial system under the FSAP.

In their report, the WB and the IMF said that Vietnam has achieved remarkable progress since the start of its transition from a centrally-planned economy in the mid-1980s to a mixed economy with greater reliance on markets and increased participation of private financial and non-financial institutions.

“These reforms contributed to an impressive performance in the last two decades – since 1990 the annual GDP growth has exceeded 7 percent and per capita income has increased three-fold,” the document reads.

However, in recent years the Vietnamese economy has shown signs of corporate and financial distress, and weaker growth, the report noted.

Several segments of the corporate sector exhibit poor performance and financial distress, and have affected the health of the banking system. Large state-owned enterprises have defaulted on their obligations and several others appear to be overleveraged.

Meanwhile, the banking system has accumulated a significant amount of non-performing loans, estimated conservatively at 12 percent of total loans at the end of 2012, and many small banks have experienced more serious liquidity and insolvency problems in the same period, leading to interventions by the State Bank of Vietnam.

“The reduced lending capacity of the banking system is one of the factors that have contributed to a sharp slowdown of credit growth,” according to the FSAP.

Causes and recommendations

The FSAP attributed the weak performance of the financial sector to a complex array of institutional and regulatory factors, including inadequate governance structures and risk management capacity, weaknesses in financial infrastructure, and deficiencies in financial regulation and supervision.

“Increased macroeconomic volatility in the last five years has compounded these problems and led to further deterioration in the quality of loan portfolios.”

The report also provides a broad set of policy recommendations that can be used to operationalize a comprehensive reform program, including banking restructuring, SOE restructuring, and public investment reform approved by the Vietnamese National Assembly in November 2011.

The recommendations include a plan to work out the large stock of existing non-performing loans, measures to ensure sound new flows of finance and prevent the accumulation of additional non-performing loans, and a set of policy steps designed to protect the financial sector during the reform period.

Launched in 1999 in the wake of the Asian financial crisis, the FSAP brings together WB and IMF expertise to help countries reduce the likelihood and severity of financial sector crises.

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