Published on January 23, 2008
FINANCING FOR DEVELOPEMENT:SITUATION, CHALLENGES AND PERSPECTIVESThe case of Viet Nam: FINANCING FOR DEVELOPEMENT: SITUATION, CHALLENGES AND PERSPECTIVES The 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 I- Development Finance Architecture of Viet Nam: : 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. Slide3: 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 market’s 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. 2. Management of financial institutions in Viet Nam:: 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, Financial institutions managed by the State Bank of Viet Nam:: Financial institutions managed by the State Bank of Viet Nam: Financial institutions managed by the State Security Committee:: Financial institutions managed by the State Security Committee: 2 Security Trading Centers in Hanoi and HCM City, 11 Security Companies and Security Investment Funds. Financial institutions managed by other governmental agencies or the Ministry of Finance:: 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). 3. Vietnamese enterprises can get funding from the following sources: : 3. Vietnamese enterprises can get funding from the following sources: - Credit from banking credit organizations and People’s 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. 4. The situation of financial sources for Viet Nam’s Development : 4. The situation of financial sources for Viet Nam’s 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. Investment capital resourcesin Viet Nam: Investment capital resources in 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 Capital from the State Budget: : 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. Mobilization of capital from banking system strengthened thanks to:: 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%. Mobilization of capital from capital market: 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. Official Development Assistance : 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 US$11.2 billion; of which, 80% is soft loans; Total ODA disbursed reached US$7.9 billion; US$100 million of non-refundable aids from nearly 600 non-governmental organizations. Foreign Direct Investment 2001-2005: 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. Remittances from Vietnamese Overseas : 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 US$18.9 billion since 1991, equal to 60% of FDI capital implemented in Viet Nam during the same period and is greater than the total disbursed ODA since 1993; the figure neglect unofficial, uncontrolled channels. Consequently, the real figure of oversea remittance would be higher. Other foreign capital (foreign private investment) : Other foreign capital (foreign private investment) In comparison to the FDI, the FPI to Viet Nam has been negligible as its financial market is still relatively weak and undeveloped. September 2005, Viet Nam launch the first sovereign bond deal with the US$ 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. II- Outlook on financing for Viet Nam’s development in 2006-2010 period: II- Outlook on financing for Viet Nam’s development in 2006-2010 period 1. Viet Nam’s 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%. 2. Financing for Viet Nam’s development: Forecast the mobilization capacity of investment resources:: 2. Financing for Viet Nam’s 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%; Forecast the mobilization capacity of investment resources:: 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%. Investment from the State budget: 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. Investment capital from State-owned Enterprises sector. : 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. Capital from banking system : 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. Mobilizing investment capital for development from private sector. : 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. ODA attraction : 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%. FDI and foreign indirect capital flow : 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 Use of investment resources:: 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%. Priority sectors in investment plan:: 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. Solutions to fully mobilize and effectively utilize financial resources: 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. Solutions to fully mobilize and effectively utilize financial resources: 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 Solutions to fully mobilize and effectively utilize financial resources: 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. Difficulties and challenges posed during the mobilization of financial sources for Viet Nam’s development: State’s capital sources: : Difficulties and challenges posed during the mobilization of financial sources for Viet Nam’s development: State’s 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. Difficulties and challenges: Bank’s capital : Difficulties and challenges: Bank’s 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. Difficulties and challenges: ODA : 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. Difficulties and challenges: FDI: 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. III. Recommendations for changes in the international financial mechanism, which assists poor countries in financing for development : 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 Recommendations for changes to the international financial mechanism for development:: 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. Recommendations for changes to the international financial mechanism for development:: 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. Recommendations for changes to the international financial mechanism for development:: 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 Slide40: Thank you for your attention and wish the Workshop be successful.