FINANCING FOR DEVELOPEMENT: SITUATION, CHALLENGES AND PERSPECTIVES The case of Viet Nam

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FINANCING FOR DEVELOPEMENTSITUATION, CHALLENGES
AND PERSPECTIVESThe case of Viet Nam

• Le Viet Duc
• Ministry of Planning and Investment of Viet Nam
  at Informal Experts' Workshop "Development
  Finance Architecture, Paris 6-7/3/2006

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I- Development Finance Architecture of Viet Nam

• 1. Structure of Financial markets in Viet Nam
• a) The monetary market
• The inter-bank domestic currency market set up
  in 1993.
• The inter-bank foreign exchange market set up
  in 1994.
• Treasury bill bidding market established in
  1995.
• Open market operations set up in July 2000.
• The functions of the monetary market in Viet Nam
  are to provide short-term funds for enterprises
  and for the State Budget to secure loanable
  funds for financial institutions and to serve as
  the workplace for the State Bank of Viet Nam to
  exercise options of the monetary policy.

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• b) The long-term capital market including
  mainly the bond (government bonds, corporate
  bonds and project bonds) and share markets
• The bond market was set up and put into
  operation as from 1995.
• The security market of Viet Nam was set up and
  put into operation as from July 2000.
• The security markets operations are
  conducted at two security trading centers, one in
  Hanoi and the other in Ho Chi Minh City.
• Security listing and concentrated transactions
  are carried out at these centers.
• an unofficial security market where unlisted
  securities are traded, comprised of mainly those
  of small and medium enterprises.
• The volume and value of transactions on this
  market is much higher than those on the official
  market.

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2. Management of financial institutions in Viet
Nam

• Financial institutions in Viet Nam can be
  classified into 3 groups
• - Financial institutions managed by the State
  Bank of Viet Nam,
• - Financial institutions managed by the State
  Securities Committee, under the Ministry of
  Finance
• - Financial institutions managed by the
  Government or the Ministry of Finance,

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Financial institutions managed by the State Bank
of Viet Nam
1990 1994 1999 2002 2005 2006
State Owned Commercial Banks 4 4 5 5 5 5
Policy Banks 1 1 1 1
People Credit Funds n.a n.a. n.a. n.a. 905 905
Joint Stock Banks 0 36 48 36 36 37
Joint Venture Banks 0 3 4 5 4 5
Foreign Bank Branches 0 n.a. n.a. 26 28 31
Foreign Bank Rep. Offices n.a. n.a. n.a. 41 42 44
Finance Companies n.a. n.a. n.a. 7 5 6
Leasing Companies n.a. n.a. n.a. 9 9 9
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Financial institutions managed by the State
Security Committee

• 2 Security Trading Centers in Hanoi and HCM City,
  
• 11 Security Companies and Security Investment
  Funds.

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Financial institutions managed by other
governmental agencies or the Ministry of Finance

• The Viet Nam Development Bank,
• 8 Development Investment Funds,
• Social Insurance Funds,
• Postal Saving Companies, etc.
• The Viet Nam Development Bank, carries policy
  lending on behalf of the government, provides
  credit to SOEs and private enterprises, supports
  the development of infrastructure and
  pro-export/import activities, and is in charge of
  the on-lending of the Official Development
  Assistance (ODA).

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3. Vietnamese enterprises can get funding from
the following sources

• - Credit from banking credit organizations and
  Peoples Credit Fund
• - Commercial loans from leasing companies,
  financial companies, investment funds and
  insurance companies
• - Soft loans from the Viet Nam Development Bank.
• - In particular, enterprises with foreign own
  capital can get funding abroad through foreign
  companies or their overseas parent companies.
• - Long-term capital sources through security
  markets.

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4. The situation of financial sources for Viet
Nams Development

• The ratio of capital mobilization for investment
  to GDP increased from 18.1 in 1990 to 31.7 in
  1995, 32.9 in 2000 and 38.9 in 2005.
• The investment capital structure has changed
  towards gradual abandonment of the central
  planning mechanism in investment
• The domestic capital sources are being better
  exploited and account for over 70 of the total
  investment capital.

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Investment capital resourcesin Viet Nam

• Capital from the State Budget
• Capital from banking system
• Capital from capital market
• Official Development Assistance
• Foreign Direct Investment
• Remittances from Vietnamese Overseas
• Other foreign capital (foreign private
  investment)
• Proper Capital of population and enterprises

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Capital from the State Budget

• The total budget revenue in the last five years
  increased by 19.1 per annum.
• The ratio of mobilization to State budget makes
  up 24.4 of GDP
• Thank to the rapid increase in revenue, budgetary
  expenditures have improved.
• The proportion of budget expenditure for
  development investment out of the total budgetary
  expenditure accounting for 28 per annum, higher
  than the target of 25-26.
• Investment from budget occupies 24.5 of total
  investment in 2001-2005 period.

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Mobilization of capital from banking system
strengthened thanks to

• - The national financial situation continues to
  be improved GDP growth rate is high
• - The monetary activities have been flexibly
  governed, putting inflation under control while
  actively supporting development and economic
  structural shifts
• - The ratio of M2/GDP rose quite rapidly, from
  58 in 2000 to 85.2 in 2005
• Annual mobilized capital increases at an average
  rate of 24
• Credit balances increased by 27.6 per annum
• By the end of 2005, in total loans
• Non-public sectors account for 47 of the
  total credit
• State-run businesses occupies 39
• Enterprises with foreign investment
  occupies 14.

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Mobilization of capital from capital market

• The capital market is small
• The bond issuance stands at 9.6 of GDP at April
  of 2006 (USD 4.7 billion). The corporate bond
  market still is an early stage of development.
• The market capitalization of both securities
  trading centers combined reaches 3.2 billion USD
  representing 6.2 of GDP at May of 2006
• The small insurance market has been steadily
  growing and the penetration rate reached 2.03 in
  2005.

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Official Development Assistance

• The ODA funds committed for Viet Nam are
  continuously increasing in 5 years 2001-2005
• Total value of the agreed ODA is USD 14.9 billion
  of which grants account for 15-20
• The total amount of ODA capital according to
  signed treaties reached US11.2 billion of
  which, 80 is soft loans
• Total ODA disbursed reached US7.9 billion
• US100 million of non-refundable aids from nearly
  600 non-governmental organizations.

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Foreign Direct Investment 2001-2005

• The total registered capital reached 20.9 billion
  USD, 39 higher than the target (the target is 15
  billion USD).
• The total obtained capital is 14.3 billion USD in
  comparison with the target of 11 billion USD, 30
  higher than the previous period (1996-2000).
• Foreign direct investment occupied 16.6 of total
  investment, a considerable decrease compared with
  24 in the previous period.

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Remittances from Vietnamese Overseas

• One of the most important sources of income to
  Viet Nam
• Total capital sourced from overseas remittance is
  estimated to reach US18.9 billion since 1991,
  equal to 60 of FDI capital implemented in Viet
  Nam during the same period and is greater than
  the total disbursed ODA since 1993
• the figure neglect unofficial, uncontrolled
  channels. Consequently, the real figure of
  oversea remittance would be higher.

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Other foreign capital (foreign private
investment)

• In comparison to the FDI, the FPI to Viet Nam has
  been negligible as its financial market is still
  relatively weak and undeveloped.
• September 2005, Viet Nam launch the first
  sovereign bond deal with the US 750 million
  10-year issue in the international financial
  markets.
• Nevertheless, Viet Nam will attract more foreign
  direct and portfolio investment in the coming
  years.

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II- Outlook on financing for Viet Nams
development in 2006-2010 period

• 1. Viet Nams general orientation of development
  in the 2006-2010 period
• - GDP growth rate will be 7.5-8 per annum
• - GDP scale in 2010 will be 94-98 billion USD and
  GDP per capita about 1,050-1,100 USD.
• - State budget revenue about 21-22 of GDP
• - Total investment needed about 140 billion USD,
  accounting for 40 of GDP.
• If domestic and international conditions are moro
  favorable, try to get GDP growth rate of above
  8.

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2. Financing for Viet Nams development Forecast
the mobilization capacity of investment resources

• Investment from the State budget is expected to
  reach about 28 billion USD, accounting for 20.2
  of the total investment capital
• Investment from the State preferential credit
  sources is expected to reach 13 billion USD,
  accounting for 9.3
• Investment from SOEs will possibly reach 21
  billion USD, accounting for 15.1
• Investment from individuals and private sector
  may reach 48 billion USD, accounting for 34.4

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Forecast the mobilization capacity of investment
resources

• Investment from FDI (including domestic capital)
  is expected to reach 24 billion USD (2005
  exchange rate), accounting for 17.1
• Investment from other sources may reach 5-6
  billion USD, accounting for 3.8.
• (ODA is calculated in investment balances of
  Investment from the State budget and Investment
  from the State preferential credit)
• Of the total investment, domestic sources are
  expected to reach about 65, external sources to
  reach 35.

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Investment from the State budget

• The total budget revenue in the next five years
  of 2006 - 2010 is expected to account for 21
  22 of GDP.
• The increase in budget revenue may reach 10.8
  per annum.
• The State budget spending structure is expected
  to shift towards more spending for debt
  repayment, assistance and ensuring development
  investment
• The development investment expenditure accounts
  for 29-30 of the total budget expenditure.
• Continue to mobilize investment capital from
  government bond sources.

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Investment capital from State-owned Enterprises
sector.

• Investment capital for development of State-owned
  Enterprises is derived from machinery
  depreciation fund to re-invest, remaining profits
  and credit loans.
• Analyses on investment growth rates from
  State-owned Enterprises with variables
  representing enterprises business outcomes show
  that investment capital from State-owned
  Enterprises can increase fairly, ensuring the
  above demand.

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Capital from banking system

• The objectives of monetary policies over the next
  five years are to control inflation and to
  promote economic growth.
• The banking system will concentrate to attract
  accumulated sources in the population and in
  economic sectors to ensure a sufficient capital
  source for credit loans help promote economic
  development.
• To closely combine monetary policies with fiscal
  policies for stabilizing the macro-economy.
• Total credit for the economy increases 18-20 per
  annum.

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Mobilizing investment capital for development
from private sector.

• Investment capital from private sector will
  increase rapidly 25 per year.
• Common Investment Law and Unified Enterprise Law
  are the most positive factors.
• Capital from Vietnamese overseas is increasing
  rapidly, amounting to over 3 billions USD per
  year.
• With the Securities Law, in 2010, total
  capitalization of securities markets represents
  roughly 10-15 of GDP.

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ODA attraction

• ODA is expected to increase quickly thanks to
  favorable international conditions, the fast
  development of the economy.
• For the whole five years, it is possible to
  mobilize 19 billion USD of capital committed.
• ODA disbursed in the budget is approximately 11
  billion USD in which, the investment spending
  accounts for about 85.

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FDI and foreign indirect capital flow

• Viet Nam has been making every effort in order to
  be competitive to rival economies in attracting
  FDI.
• Thanks to these efforts, the FDI flows are
  forecasted to increase significantly.
• Total FDI newly registered (including newly
  allocated, added capital and indirect investment)
  may reach 23 25 billion USD, in which the added
  capital of on-going projects accounts for about
  35.
• Realized FDI is expected to reach 18-19.5 billion
  USD
• Foreign indirect investment through bonds and
  shares overseas, through the stock exchange and
  other loans for medium and long-term investment
  4.3 billion USD

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Use of investment resources

• Of the total investment planned, investment into
• Agriculture, forestry and fisheries accounts for
  13.5,
• Industry and construction 44.5,
• Transport and post 11.9.
• Education and training accounted 4.2,
• Health care and social welfare 2.4,
• Culture and sports 2.3.

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Priority sectors in investment plan

• Transforming the economic structures in order to
  reinforcing advantages and effectiveness of each
  sector, each region and each product
• Improving the infrastructure of socio-economic
  sectors with emphasis on transportation,
  telecommunication, energy resources, irrigation
  systems and rural infrastructure.
• Developing human resources
• Implementing effectively the program on hunger
  eradication and poverty reduction.

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Solutions to fully mobilize and effectively
utilize financial resources

• Exploit all domestic resources for investments
• - Develop a supportive environment to provide
  favorable conditions for enterprises to invest
• - Resolve current problems for businesses in
  terms of input and output
• - Increase public participation in service
  activities such as education, medical care,
  vocational training, social insurance, scientific
  research
• - Effectively utilize land and other natural
  resources.

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Solutions to fully mobilize and effectively
utilize financial resources

• Strongly mobilize external resources
• - Fully mobilize FDI thanks to United
  Enterprises Law, Common Investment Law and more
  comparative investment environment than other
  nations in the region and in the world Open the
  services sector to foreign investors
• - Develop strategies to attract and utilize
  investments from ODA, with focus on the
  construction of technical infrastructure to
  provide favorable conditions for investors.
• - Encourage overseas Vietnameses to make
  financial or intellectual investments in Vietnam

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Solutions to fully mobilize and effectively
utilize financial resources

• Implementing measures to increase investment
  efficiency
• - completing legal documents and guidelines for
  the implementation of Construction Law,
  Investment Law, United Enterprises Law
• - continue to decentralize investment management
  responsibilities
• - tackle the shortcomings and problems in
  investment management to avoid loss and waste
• - Reinforcing the control of public for
  investment projects.

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Difficulties and challenges posed during the
mobilization of financial sources for Viet Nams
development States capital sources

• The State budget revenue is unstable and limited
• Policies and laws on taxation do not include all
  sources of taxable revenue
• There remain too many tax rates and tax exemption
  and reduction on a large scale
• Many subsidy-like budget expenditures exist
• The efficiency of budget capital utilization is
  low
• The State budget spent on development investment
  is partly dependent on foreign loans
• The solution of bad debts is still faced with
  many problems, including the discrepancy between
  banking reform and SOEs reform.

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Difficulties and challenges Banks capital

• Operation of banking system is weak
• The minimum rate of capital safety of public
  banks is low, only 4.4-6.2, much less than the
  target (8 in 2005)
• Banking services have not fully developed
• The credit quality is still limited
• The ratio of bad debts has not decreased enough.
• The financial situation of enterprises is not
  sound enough.

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Difficulties and challenges ODA

• Absence of an overall orientation of the whole
  country to attract and use ODA.
• The disbursement is slow due to many reasons,
  including complicated procedures and processes in
  the country as well as required by donors.
• The capacity of project management teams
  generally does not meet the requirements.
• Legal framework for ODA management is still not
  comprehensive and clear, legal documents are not
  strictly implemented.
• The mechanism for managing, regulating and using
  ODA at various levels is not consistent.

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Difficulties and challenges FDI

• The proportion of foreign direct investment in
  the total investment is decreasing from 24 in
  the period 1996-2000 to about 16.6 in the period
  2001-2005.
• The attraction of foreign investment in
  agriculture, forestry and fisheries is still
  limited despite certain preferential policies.
• The system of policies and laws is inconsistent
  and incomplete.
• A level playing field for both domestic and
  foreign investments has not been created enough.
• In some production fields such as cement, iron,
  steel, electricity, measures that limit foreign
  investments are still applied.

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III. Recommendations for changes in the
international financial mechanism, which assists
poor countries in financing for development

• Objective ultimate objective of the new
  international financial system is to promote
  growth and alleviate poverty, and its reform
  efforts should be closely linked to this
  objective.
• Regional and international financial cooperation
  can play a key role in attaining this objective.
  We hope the OECD member countries would be able
  to share to developing countries their
  experiences in the process of reforming national
  and international financial institutions

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Recommendations for changes to the international
financial mechanism for development

• Firstly, developing countries need to mobilize
  financial resources both domestically and abroad
  through improving Government budget collection,
  developing internal financial market...
• It should be confirmed that internal resources
  mobilization always plays a decisive role, at the
  same time, important role is of external
  resources.
• Secondly, financial markets should be more
  favorable so that poor countries are able to
  access the markets of richer countries.

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Recommendations for changes to the international
financial mechanism for development

• Thirdly, enhancing financial, technological
  supports and other forms of support for poor
  countries increasing action coordination among
  donors for the goal of helping poor countries.
• Fourthly, building financial regimes that can
  firmly maintain the stability of global and
  regional economy so as to minimize possible
  financial crises impacts on financial market and
  growth of poor countries.

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Recommendations for changes to the international
financial mechanism for development

• Fifthly, building an assured mechanism for poor
  countries to raise their voices in international
  financial fora so that all countries can take
  part in resolving global abd regional issues, and
  those of poor countries themselves
• Especially, international community will give
  developing countries bigger and equal role and
  position in the process of building policy of
  investment for development, policy for building
  and development of international
  financial-monetary markets

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• Thank you for your attention
• and
• wish the Workshop be successful.