This document discusses international finance issues in Vietnam. It covers 3 main topics: 1) Balance of payments and the current account deficit issues Vietnam faced during the 2008 global crisis, including rising trade and fiscal deficits, unemployment, and inflation. 2) Managing capital flows, including increasing foreign direct investment, official development assistance, and portfolio investment flows into Vietnam. 3) Vietnam's exchange rate policy of unofficially pegging its currency to the US dollar. The document recommends Vietnam focus on institutional reforms, moving up the value chain, improving infrastructure, and strengthening financial supervision and statistics.

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Heilbronn University
International Economics: International
Finance Issues of Vietnam
submitted to
Professor Gajanan
Written by
Hoa Nguyen (178121)
Jamie Learoyd
Summer Semester 2012

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Table of Contents
I/ INTRODUCTION..............................................................................3
II/ International finance issues in Vietnam ....................................4
1/ Balance of Payments ..................................................................4
2/ Managing capital flows ...............................................................6
a/ Foreign Direct Investment.......................................................6
FDI in Vietnam................................................................................7
Composition of FDI into Vietnam...............................................8
Foreign Invested Enterprise (FIE) .............................................9
b/ Official Developemnt Assistance ..........................................9
ODA in Vietnam..............................................................................9
Pitfalls in utilization of ODA in Vietnam..................................10
c/Portfolio investment flows .........................................................11
3/ Exchange rate policy.................................................................11
III/ Recommendation.........................................................................12
IV/References .....................................................................................13

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I/ INTRODUCTION
Before 1986, Vietnam was a central-planned economy in which the market force
did not play a significant role, the country was closed to international trade. The
results of these policies were an austere economic condition, a dismal standard of
living compare to international standard. Apparently the old economic system no
longer suited Vietnam; the global economy was changing: the derregulation of
barriers in many countries, the increasing pace of international trade and
globalisation.
Aware of the circumstance, Vietnam has embarked on reforming the economy
since 1986, moving toward a more market-oriented economy. Vietnam amended
its Consitution in 1992, acknowledging the existence of private sector economy
and legalizing the role of market. Over the past 25 years, the economy of Vietnam
has been ameliorated, more freedom for people to trade, start up private firms.
Vietnam has become more open to international trade. One notable example was
its effort to become a member of WTO since 1995 which eventually led to the
accession of Vietnam in 2007, becoming the 150th member of WTO. Poverty
reduction, a major concern of macro policies in Vietnam, has recorded
considerable accomplishmet. Vietnam’s GDP per capita,from a very low level of
$210 in 1986, has increased to over $1100 by the end of 2010, a significant
growth rate although Vietnam’s GDP per capita is still at a low level in comparison
with international standards.
Nevertheless, the policy makers in Vietnam has confronted many issues arising
over the last 25 years. Many of those issues pertain to the macro settings of
Vietnam, namely the international finance policy which is the ground for our
discussion in this paper. What we would like to examine of Vietnam international
finance policy are 3 core issues: exchange rate regime, current account, and
managing capital flow. With each issue, we provide the some background theory
for our analysis of the 3 issues. After that we looks at the development of the 3
issues in Vietnam.

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II/ International finance issues in Vietnam
Vietnam’s economic situation begins to deteriorate rapidly as a consequence of
the Global crisis in 2008 the worst since the 1930’s resulting in high inflation, an
increase in unemployment and an adverse effect on the Balance of Payments.
1/ Balance of Payments
Firstly, the Balance of payments is a financial tool implemented by economists in
the macro-environment as a way of measuring activity between governments,
businesses and consumers in terms of imported and exported goods and services;
an important measure on Vietnam’s position in the Global economy.
However, we will pay close attention to the Current Account which is a component
of the BOP. CA = (EX-IM) + NY + NCT . (*Current Acct = (Exports-Imports) + Net
income abroad + Net cash transfer)
With regards to Vietnam the major factor was the twin deficits:
 Trade deficit
 Fiscal deficit
Figure 1.0) shows the drastic
increase in the trade deficit
consequential of the 2008 global
crisis and the effect this brought to
Vietnamese exports. Three of the
major economies in the world, US,
Japan and Europe who accounted for 60% of export activity in trading with
Vietnam, also felt the strain. Therefore as one would expect each of these
countries significantly decreased on their previously imported goods or services
from Vietnam thus a significant decrease in export revenues. Trade deficit reached
US$17.5 billion over 20% of GDP. Le (2009) explains: “Vietnam’s export revenues
fell 6.5% in November 2008 and a further 24% drop in January 2009 (year-on-
year”

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The Fiscal deficit is where government expenditure exceeds its revenues
and with Vietnam we have a prime example of an economy that is not in
equilibrium as their expenditure significantly outweighs its revenues. In 2008 the
fiscal deficit accounted for 4.5-5% of GDP which signified the significant drop in
external demand.
Unemployment
Moreover, the magnanimous losses in exporting led to difficult times for the
businesses that produced and traded such product to the US, Japan and Europe,
therefore many businesses could not guarantee employment within their
organisations for much longer. “According to reports from 41 of the 63 provinces
and cities of Vietnam, 66,700 workers out of 45 million workers lost their jobs in
2008 pushing unemployment rate to 4.65%” (Le, 2009).
Inflation
According to
TradingEconomics
website: “The inflation
rate in Vietnam was
recorded at 10.54
percent in April of 2012.
Historically, from 1996
until 2012, Vietnam
Inflation Rate averaged 7.4000 Percent reaching an all time high of 28.2400
Percent in August of 2008 and a record low of -2.6000 Percent in July of 2000”
Inflation in 2008 was in double figures and still is at present this is a cause for
concern as less food will be eaten by the poor in a country with an annual per
capita income of $835.
These aforementioned factors have significantly hindered Vietnam’s economy
slowing economic growth, sliding from 8.48% in 2007 to 6.23% in 2008 achieving
the lowest rate of growth in the previous decade.
Policy Responses
Evaluating Vietnam’s financial issues within the economy in terms of trade,
inflation and unemployment there has to be significant alterations to macro
decisions if Vietnam is to get out of this economic demise.

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1. Place an emphasis on domestic products by subsidising businesses with
start up costs or allowing them to offer cheaper alternatives.
This will combat against the extreme importation that Vietnam currently run and in
turn will circulate money within its own economy reducing the trade deficit.
2. Issue bonds and/or gilt-edged securities.
Issuing bonds is an efficient means of producing cash flow and in effect allowing
Vietnam to pay off any interest payments be this fixed or indefinite whilst also
producing funds to inject into the economy.
2/ Managing capital flows
Capital flows in Vietnam comprise of Foreign Direct Investment (FDI) inflows,
Official Development Assistance (ODA), and Portfolio Investment Flows. In this
part, we review each area by giving definitions and overviews on the circumstance
in Vietnam.
a/ Foreign Direct Investment
Foreign direct investment is defined as investment in production in a foregin
country. The investment is manifested in acquiring a firm in that foregin country, or
setting up a new branch of an existing business. Mostly FDI comes from
companies, rather than financial institutions, which are more likely to take indirect
investment abrod - for example, purchasing a country's supply of shares and
bonds. (Bishop, 2004).
Globally, FDI grew fast during the 1990s, then it slowed down concurrently with
the global economy in the first few years of the 21st century. Most of FDI flow from
one OECD country to another; there is, however, a steadily increasing trend of FDI
flow to developing countries, particularly in Asia. Mergers and acquisitions are also
another worth-noting trend, as a popular form of FDI. (Bishop, 2004).
Governments attitude nowadays toward FDI is relatively positive with the
expectation that jobs, expertise and technolog will come along with investments,

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helping to invigorate the whole economy. Moreover, FDI is far more enduring than
investment of financial investors which often turns out speculative and unstable.
(Bishop, 2004).
FDI in Vietnam
In reforming an economy like Vietnam, attracting foreign investment is a crucial
element, the Foreign Direct Investment was, therefore, passed in December 1987.
This has stimulated FDI into Vietnam during 1988-2007, 9,492 FDI projects with
committed capital of USD 83.2 billion totally.FDI inflows into Vietnam was also
affected by the global economy. Since the Asian crisis in 1997, FDI into Vietnam
after peaking in 1996 had dropped since then. (Vo and Pham, 2008)
Since the 2nd half of 2004, however, the FDI turned around and has surged,
arriving at more than USD 10 billion with committed capital of USD 21.3 billion.
The surge in FDI recently demonstrates the confidence of investors in Vietnam’s
economic renovation, its development prospect and international integration
process. The rapid increase of FDI can also be attributed to investors intent toward
a restructuring of FDI in Asia in labour-intensive industries – for instance,
garments and manufacturing from China to Vietnam. (Vo et al, .2008)

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Compositionof FDI into Vietnam
Most of the realised FDI was distributed to the manufacturing industry - account
for 42.7% of the FDI overall, oil and gas – account for 18.8%, hotel and tourism –
account for 8.1%, construction – account for 7.2%, offices and apartments (6.2%),
building urban areas and industrial zones (2.8%).
In the 1990s. FDI focus was mainly on import substitution industries. However
from 2000 on, the focus has shifted towards export manufacturing sector and
services sectors. There is also a radical change in FDI trend shifting focus to
industry and construction, services sector. During 2004-2007, total registered FDI
in industry and construction; and services sector increased with the rate of 74.9%,
and 56.0%, which was substantial in reference to the modest increase of
algriculture sector at 26.6%. Until october 2007, industry-construction and services
accounted for 94.2% of the realised FDI, while agriculture accounted for 5.8%.

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Foreign Invested Enterprise(FIE)
In the early 1990s, Foreign Invested Enterprise (FIE) had a trivial role in the
economy. However, since the mid 1990s, FIE has integrated in the economy, and
become an essentail part of the economy. In 1996, FIE employed 222,000
employees, accounted for 7.4% of the GDP, in 2006 FIE had 1,130,000
employees and accounted for 17.1% of the GDP.
FIE in Vietnam has become a driving engine for exporting sector, and the growth
of manufacturing industries, such as textiles, graments; machinery and equipment,
motor vehicle and transport equipment and many others.
b/ Official DevelopemntAssistance
ODA is defined as "those flows to countries and territories on the DAC list of ODA
Recipints and to multilateral development institutions. ODA are capital inflows that
are provided by official agencies - for instance, state and local government or their
executive agencies. The purpose of ODA is to promote economic development
and welfare of develop countries. ODA is concessional in character and provide a
grant element of at least 25%, calculated at a rate of discount of 10%. (OECD
webpage),
ODA in Vietnam
ODA since being resumed in 1993, has played a significant role in investment and
GDP growth in Vietnam. The total ODA for Vietnam in term of commitment has
reached USD 41.2 billion during 1993-2007, USD 30.7 billion of which was gined,
and USD 19.7 billion has been implemented. In the period 1993-2005, ODA

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accounted for approximately 11.4% of the ttotal investment and also 50% of the
investment from State budget.
The allocation of ODA until recently, had been more concentrated in more
developed areas. However, there is a trend that ODA has gradually been
distributed more equally toward less developed areas which have been granted
more ODA.
ODA has focused on may sectors and areas, including: infrastructure
development, poverty reduction, human resources, development and institutional
improvement. Important laws such as Enterprise Law, Land Law, Invesetment
Law, Competition Law, and Anti-Corruption Law were also aided by ODA in their
formulation and consolidation. Another area that ODA helped ameliorate is the
managerial capacity of officials, personnel of ministries and others sectors.
Pitfalls in utilization of ODA in Vietnam
Vo et al (2008) in their paper point out several weakness and limitation in the
usage of ODA in Vietnam. ODA is often misunderstood as a “free gift” because
ignorance and limited awareness. Another issue is the passive role of
governmental agencies who are supposed to actively cooperate with donours.
This comes from the irresponsiveness in devising strategies, policies and
implement ODA into specific programs and projects. Weakness in arrangement
and paucity in human resources for ODA management also impede the
organizational and operational regulations of ODA-financed program. There are

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also many hindrance coming from the legal framework – for example,
inconsistencices between documents on ODA mobilisation, lack of enforcement
concerning regulatory documents on ODA utilization. Monitoring and evaluation
regarding to ODA are also problematic with appalling limitation: lack of strict
compliance, insufficient disciplinary actions in the sphere of financial reporting,
payments and settlement regulations.
c/Portfolio investment flows.
Vietnam has also recorded a boom time in foreign portfolio investment inflow since
2006 as foreign portoflio investors have shown increasing keen interst in Vietnam
equity market with the expectation of higher return asset. In 2006, foreign portfolio
inflows accounted for 2.2% of the GDP; yet only after a year, foregin portfolio had
expanded and accounted for 10.4% of the GDP in 2007. Around 70% of foreign
portfolio into Vietnam in 2006 was invested in stocks, bonds, real-estate; the other
30% was deposited in the banking system.The fervent and substantial foreign
present has partly trigger the financial boom and investments in the real estate
market.
3/ Exchange rate policy
The State Bank of Vietnam (SBV) has unofficially fixed the Vietnamese Dong
(VND) to US dollar depreciatiing proactively at the rate of 1-2%, mainly to adjust to
the difference between inflation rates of the two economies. The rate VND/USD
had the tendency to increase with at a moderate pace during 2006-2007. In 24
months, averat rate of commercial bank went from 15,900 up to 16,200 VND/USD,
a favourable condition in term macro economy. However, during the first quarter of
2008, VND appreciated against USD which led to subsequent chaos in foreign
exchang martket. (Farber et al, 2009)

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The USD/VND exchange rate in 2008 was surging dramatically. In May 2008, the
exchange rate was up to alsmost 18,000 VND/USD which kept on sliding up to
VND19,700 in early of June 2008. The sudden change led to scarcity of USD and
hindrance in exchanging from VND to USD. The exchange rates fluctuate in every
transaction. The spread was relatively vast, even reaching VND 1,00. Foreign
exhcange finally subsided in July 2008 when the free market rate and official rate
converge after stablising effort from SBV raising inter-exchange rate by
2%.(Farber et al, 2009).
III/ Recommendation
One very important reform course for Vietnam is to persist on taking institutional
reform to continuously transform the state-led economic into a more efficienct
institution. This would involve not only reconfiguring the legal framwork but also
reforming the large State Owned Enterprise (SOE) and forging an effectual
administrative and enforcement system.
To start climbing up along the value chain is another imporant issue. Essentially,
Vietnam should diversify export product and consolidate non-price
competitiveness, attract more FDI, and also improve the infrastructure

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(transportational system, electricity), labour and management competencies.
Business environment should be refined; it is critical to create a liberal and neutral
evironment to attract more FDI. In mobilising and utilizing capital inflows, ODA
should be used more efficiently and in a transparent manner in order to increase
foreign participation.
Another issue is to consolidate and improve the monitoring system, namely the
financial supervision capacity. The BOP statistics need improving to enhance
accuracy and consistency, conforming to international standards. Only when their
quality is enhanced, the vulnerabilities and warning signal in the financial system
can be detected to devise necessary precaution.
Last but not least, a healthy financial system should be the focus in the economic
reform. What is required in Vietnam to reach that end includes improvement in
these areas: risk management, adopting international auditing and accounting
standards, recapitalise commercial bank, and enhance human resources capacity.
IV/References
Bishop, A. (2004). Essential Economics. Bloomberg Press.
Farber, A; Nguyen,T; Tran, D; Vuong, H. (2008) The financial storms in Vietnam's
transition economy: A reasoning on the 1991-2008 period
http://ideas.repec.org/p/sol/wpaper/08-023.html
Le, V. (2009) Global Crisis and Vietnam policy’s responses.
http://www.eai.nus.edu.sg/Vol1No2_LeThiThuy.pdf
OECD website. Retrieved on 20 May,2012 from.
http://www.oecd.org/document/4/0,3746,en_2649_34447_46181892_1_1_1_1,00.
html#Definition
Trading Economics website. Retrieved on 20 May 2012 from
http://www.tradingeconomics.com/vietnam/inflation-cpi
Vo, T and Pham, Q.(2008) Managing Capital Flow: The case of Vietnam. ADBI
Institute. http://www.adbi.org/discussion-
paper/2008/05/16/2536.managing.capital.flows.vietnam/