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
1
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.
2
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.
3
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,
4
Financial institutions managed by the State
Bank of Viet Nam:
State Owned
Commercial Banks
1990
1994
1999
2002
2005
2006
4
4
5
5
5
5
1
1
1
1
Policy Banks
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
95
Financial institutions managed by the State
Security Committee:
• 2 Security Trading Centers in Hanoi and HCM City,
• 11 Security Companies and Security Investment
Funds.
6
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).
7
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.
8
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.
9
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
10
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.
11
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%. 12
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.
13
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.
14
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 (19962000).
• Foreign direct investment occupied 16.6% of
total investment, a considerable decrease
compared with 24% in the previous period.
15
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$18.9 billion since
1991, equal to 60% of FDI capital implemented
in Viet Nam during the same period and is
greater than the total disbursed ODA since
1993;
• the figure neglect unofficial, uncontrolled
channels. Consequently, the real figure of
oversea remittance would be higher.
16
Other foreign capital (foreign
private investment)
• In comparison to the FDI, the FPI to Viet Nam has
•
•
been negligible as its financial market is still
relatively weak and undeveloped.
September 2005, Viet Nam launch the first sovereign
bond deal with the US$ 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.
17
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%.
18
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%;
19
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%.
20
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.
21
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 Stateowned Enterprises can increase fairly,
ensuring the above demand.
22
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
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annum.
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.
24
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%.
25
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
26
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%.
27
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.
28
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.
29
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
30
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.
31
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
32
banking reform and SOEs reform.
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.
33
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.
34
Difficulties and challenges: FDI
• The proportion of foreign direct investment in the total
•
•
•
•
investment is decreasing from 24% in the period 19962000 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.
35
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
36
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.
37
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.
38
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 financialmonetary markets
39
Thank you for your attention
and
wish the Workshop be successful.
40