The international ratings agency, Moody's, raised the foreign-currency country ceiling for bonds and notes and the foreign-currency rating for government debt to Ba3 from B1. The government’s first ever sovereign bond issue has received a strong response from international investors, and has reportedly raised $750 million compared with an initial proposal of $500 million. The ten-year dollar-denominated bonds carry a coupon of 6.875 percent, or 256.4 basis points over corresponding US Treasuries.

In the first nine months, agricultural production expanded by 4.1 percent despite a resurgence of avian influenza and drought conditions in parts of the country. GDP originating in the industrial sector recorded a rise of 10 percent in the first nine months, with the manufacturing and construction sub-sectors growing by 11 percent and 8.9 percent respectively.

In the first eight months, exports grew by 18.7 percent y-o-y. Strong prices led to crude oil exports increasing by 29.6 percent y-o-y in value terms, despite a fall in volume of 11.3 percent y-o-y. The other major export, garments, grew only by 0.7 percent in the first eight months. The expiry of the Agreement on Textiles and Clothing marked the onset of quota free trade in the garments sector for WTO member countries. Vietnam, not currently a WTO member, continued to face quotas in the US market which accounts for over 50 percent of its garment exports.

The slow growth of garment exports reflects both increased international competition, as well as problems with domestic allocation of quotas for exports to the US. Vietnam’s exports are once again facing potential anti-dumping actions. The items currently under threat are footwear, bicycles, and wood products. Over the first eight months imports grew 20 percent y-o-y in value terms. Higher prices for commodities such as refined petroleum products and steel have been the main drivers of this increase, rising 44 percent y-o-y and 34 percent y-o-y respectively in this period. Imports of machinery which had picked up in the first four months of the year have since flattened out, showing almost no change compared with the first eight months of 2004.

In the first six months of 2005 the trade deficit widened to around 8 percent compared with 5.4 percent in the same period last year. The current account deficit, which stood at 4.7 of GDP in 2003, is estimated to have declined to around 4 percent of GDP in 2004, aided by strong remittances that reached $3.2 billion. The deficit is mainly financed through ODA and non-debt-creating FDI inflows. Foreign exchange reserves have risen from $7 billion at end-2004 to $8.3 billion in April 2005, representing around 12 weeks of imports of goods and non-factor services.

Steady progress has been made towards WTO membership, but recent statements by negotiating parties suggest that chances of full, non-conditional accession by December 2005 appear limited. Of the 28 countries or groups with which bilateral negotiations are to be conducted, 21 have been finalized. But Vietnam’s ability to wrap up accession by the Hong Kong Ministerial Conference in December 2005 hinges crucially on reaching agreement with the US. For non-conditional accession, Vietnam would need to be provided Permanent Normal Trade Relations (PNTR) status, but the schedule for its consideration and potential approval by the US congress is not yet clear.

Strong growth in oil-related revenues, which have already attained 93 percent of their annual target, should help keep the deficit below the budgeted level of 2.3 percent of GDP in 2005. However, rising oil prices have had an upward impact on the expenditure side as well. Since domestic oil price adjustments have lagged behind international prices, the government has had to compensate domestic oil distribution companies.

Such expenditure is estimated to have attained 0.5 percent of GDP in 2004, but the figure could be higher for 2005. Another factor leading to higher expenditures is the recently announced increase in government salaries and social insurance payments. The estimated cost to the budget for the last quarter of 2005 is VND 4.1 trillion or around 0.5 percent of annual GDP, and about VND 13 trillion will be required in 2006.

The government is likely to step up off-budget infrastructure investment that has been financed through the issuance of bonds. Earlier plans to issue bonds worth US$ 4 billion till 2010 could be revised upwards by as much as 75 percent. While the enhanced spending program is justifiable on the basis of infrastructure requirements, its implementation needs to be accompanied by improvements in project evaluation and moving such expenditure on-budget.

The supply side shocks that sparked inflation in 2004 have not abated. These shocks are the outbreak of avian influenza, bad weather conditions, and hardened international prices of key imports such as oil, fertilizer, cement and steel. Inflation had trended downwards from 10.3 percent y-o-y in October 2004, to around 7.3 percent y-o-y in August 2005, but ticked up to 8.3 percent in October. The government’s original target of 6.5 percent y-o-y for end-2005 will thus be exceeded. While food price inflation which stood at 18.4 percent in October 2004, has come down to 7.6 percent a year later, the prices of non-food items have crept upwards.

Domestic interest rates have faced upward pressure due to inflation as well as increases in US interest rates as bankers perceive that depositors will switch to US dollar deposits if dong rates are left unchanged. Interest rates on one year dong deposits currently range between 8.4 percent and 8.76 percent.

Credit growth accelerated in 2004 reaching 42 percent y-o-y by December. This pace was roughly maintained in early 2005, as the growth rate only fell to 39 percent by May 2005. In 2004, lending in foreign currency rose by 60 percent compared with 38 percent for loans denominated in domestic currency. Expectations of a slow depreciation of the dong combined with lower interest rates on foreign currency lending, appears to have made such lending more attractive.

The main concern with fast expanding credit has been its quality. In recent months the central bank has particularly highlighted risks related to property loans. Credit quality has been hard to assess as banks, till recently, were required to report NPLs based on standards that were significantly weaker than internationally acceptable ones. The central bank’s Decision 493 of April, 2005 raised the classification and reporting on NPLs to international standards. The first reports are expected to be available at the end of 2005.

An important decision in banking sector reform relates to the much awaited approval of a plan for the equitization of Vietcombank, one of the four large state owned commercial banks (SOCBs). The state’s shareholding in the bank is to be gradually reduced to around 70 percent first and eventually to 51 percent by 2010. Total foreign holding of shares will be limited to 30 percent with a single institutional investor allowed to hold a maximum of 10 percent. Recently, it has also been announced that equitization will be extended to other large SOCBs as well.