Academic journal article Journal of Southeast Asian Economies

Banking and Financial Sector Reforms in Vietnam

Academic journal article Journal of Southeast Asian Economies

Banking and Financial Sector Reforms in Vietnam

Article excerpt

I. Introduction

Vietnam has made significant progress in socioeconomic development since Doi Moi some twenty years ago, and is well on the way to become a middle-income country. This was achieved essentially through two phases of economic reforms: Doi Moi 1 (1986-1996), and Doi Moi 2 (2001-2007). The success of Doi Moi 1 in opening the economy to international trade and investment has been amply documented (see, for example, Dollar and Litvack 1998; Leung and Thanh 1996; Riedel 1999). However, the trade and investment regime throughout the 1990s was so tilted towards the state sector that the prospects for continued growth were limited. Almost all the foreign direct investment (FDI) at the time went into joint ventures with the state-owned enterprises where both productivity and profitability were low. It was not surprising that the inflow of FDI began dwindling as early as 1996, well before the onset of the Asian financial crisis in mid-1997 (see Figure 1 below, and Leung forthcoming). Since the new millennium, Doi Moi 2 began "unleashing" the domestic private sector and addressed the discrimination inherent in the trade and investment regime, starting with the Enterprises law in 2000, the Unified Enterprises Law in 2005, the Vietnam-U.S. bilateral trade agreement in 2006, and culminating in the much-discussed Vietnam's entry into the WTO in 2007. This second phase of reforms resulted in rates of economic growth second only to that of China's, fuelled by FDI and remittances, this time linking Vietnam's domestic private sector to the vibrant production network of the Asian region, and fast closing the development gap between Vietnam and its original ASEAN neighbours (Bingham and Leung forthcoming).

At the same time, research shows that, compared with low-income developing countries on the one hand, and high-income developed countries on the other, middle-income emerging market economies are the most vulnerable to financial crises and instability--the 2008 credit crisis in the United States notwithstanding (Reinhart and Reinhart 2008). This paper therefore assesses Vietnam's developments in the banking and financial sector to date, and focuses on deeper institutional reforms in the future. In general, for Vietnam to realize its goal of becoming a modern industrialized economy by 2020, it needs to have world-class public institutions to complement a flexible and entrepreneurial private sector. Nowhere is this more true than in the banking and financial markets where effective policy-making and skilful regulation have to be balanced against profitable risk-taking, all set against a background of commitment to a one-party state where social and political stability still reigns supreme.


This paper is structured as follows. Section II gives a brief summary of the recent financial sector developments and an assessment of the unresolved problems. Section III discusses the asset price bubble and macroeconomic instability of mid-2008, and the extent to which these were directly and indirectly related to the unresolved problems in the financial sector. Section IV points out the need for continued deep institutional reforms in order to take advantage of financial globalization whilst minimizing the risks of financial crises. The concluding section addresses the balance of interests in contemporary Vietnamese society which could affect the likelihood of such reforms being adopted.

II. Recent Financial Sector Developments

The various steps in the liberalization and reform of Vietnam's formal financial sector as the country moved from plan to market have been documented and analysed in the literature (World Bank 2002; Kovsted et al. 2005; IFC 2007, 2008). Without a doubt, the most significant steps include the deregulation of domestic interest rates (on both dong and foreign currency deposits and loans) during the period 1996-2002, the decision in May 2005 to restructure the state-owned commercial banks (SOCBs) and have them equitized by 2010, and of course the recent decision to permit 100 per cent foreign-owned banks to enter the market as per commitment to WTO. …

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