The Socialist Republic of Vietnam

Economic Update
June 2008
Table of Contents
1. Historical Macroeconomic Performance

2. Current Macroeconomic Situation

3. Policy Response to Address Macroeconomic Issues

4. Economic Outlook

Appendix

1
 [DRAFT]

1. Historical Macroeconomic Performance

2
Historical Macroeconomic Performance
– 2003 to 2007
GDP Growth Export Growth
8.4% 8.5% (Y-o-Y)
8.2% 31.5% 30.5%
7.7%
7.2%
22.4% 22.7%
20.6% 21.5%

2003A 2004A 2005A 2006A 2007A 2003A 2004A 2005A 2006A 2007A 2008 YTD
Source: Ministry of Finance Source: Ministry of Trade

Committed FDI (US$ BN)

! Average GDP growth of 7.5% per annum
20.3

! Strong export growth, >23% per annum

12.0

6.8 ! Robust FDI commitment

4.5
3.1

! Effective poverty reduction policies

2003A 2004A 2005A 2006A 2007A

Source: Ministry of Planning and Investment

Vietnam has experienced strong economic growth over the last five years
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Key Economic Indicators

2007 Target 2008 1Q 2008

GDP at current prices (US$ millions) 70,902 75,865 16,400

Real GDP growth (%) 8.5% 7.0% 7.4%

Per capita GDP at current prices (US$) 832 880 – 900 –

(1)
Export Volume (US$ million) 54,400 65,824 13,160

Import Volume (US$ million) 58,921 70,705 21,510

FDI committed (US$ billions) 20.3 – 7.1

Budget deficit (% GDP) (1.7) (2.4) 1.7

(1) Includes services

Source: Ministry of Finance

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2. Current Macroeconomic Situation

5
Current Macroeconomic Situation
– 2007 to 2008 YTD
Inflation is driven by strong credit growth, increased aggregate demand and higher prices
of food, imported commodities and oil
Inflation
(Y-o-Y)

20%

10%

0%

Oct

Nov

Apr
Aug
April

Sept
Jan-07

May

June

Dec

Jan-08

May
Mar

Mar
Feb

Feb
July
Source: General Statistics Office

Trade Deficit (US$ MM)

Jan- Jan-
07 Feb Mar April May June Jul Aug Sept Oct Nov Dec 08 Feb Mar Apr May
0

-1,000

-2,000

-3,000

Source: Ministry of Trade, General Statistics Office

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Imports Support Economic Development
Vietnam’s major import groups assist to promote economic development
! Rising proportion of capital goods imported will help boost future domestic productivity, but have
been subject to rising prices
! Rise in imports in 2007 was due to large industrial machinery and equipment imports to support
national oil refining and exploration, hydro power, factory outfitting and infrastructure
construction
! As a net importer of refined oil, inflation has been impacted. However, situation will be
mitigated when Vietnam’s new oil refinery commences operations, expected in 2009

Imports by Region Imports by Sector

(% by value of imports) (% by value of imports)

Sector 2006A 2007A Sector 2006A 2007A

China 17.4% 20.0% Machinery 15.6% 17.1%
Singapore 14.8% 12.0% Petroleum 14.0% 12.3%
Taiwan 11.3% 11.4%
Steel, Iron & Clinker 7.2% 8.2%
Japan 11.1% 10.1%
Leather & Materials 6.4% 5.3%
South Korea 9.1% 8.6%
Motor Vehicles 2.8% 3.6%
US 2.3% 2.8%
Rest of Asia 19.0% 16.9% Fertilizer 1.6% 1.6%

Others 15.0% 18.3% Others 52.4% 51.9%

Source: Ministry of Trade Source: Ministry of Trade
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Balance of Payments Remains Robust
Current Account (US$ MN)
2003A 2004A 2005A 2006A 2007A 1Q 08E

(497) (164)
(925)
(1,931)

(5,287)
(6,992) Balance of Payments (US$ MN)
(4.9%) (2.0%) (0.9%) (0.3%)
(9.9%)

14.4%
Current Account As % of GDP
5.4% 7.1%
Source: State Bank of Vietnam 4.0% 10,198
1.9%

Capital Account (US$ MN) 4,322

2,993
2,150 2,131
883
24.7%
8.3% 6.0% 5.8% 5.1%
17,540 2003A 2004A 2005A 2006A 2007A 1Q 08E

6,821 BOP As % of GDP

3,305 2,753 3,087 3,088
Source: State Bank of Vietnam

2003A 2004A 2005A 2006A 2007A 1Q 08E

Capital Account As % of GDP
Source: State Bank of Vietnam

Flow of funds from outside of Vietnam has assisted to stabilise the BoP position
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Other Economic Indicators Remain Strong
FDI strength expected to continue throughout 2008 and foreign debt repayments are low

FDI (US$ BN)

5M 2008
14.7
8.0
2007A
20.3
4.1
2006A
12.0
3.3
2005A Realised
6.8
Committed

Source: Ministry of Planning and Investment

Fiscal Balance (VND BN, % GDP) Debt Service Ratio

4,500 6.5%
5.7% < 6.0%
4.9%

(13,300)
(17,213)
(19,210)
(1.6%) (1.8%) (1.7%)
2005A 2006A 2007A Long Term
2005A 2006A 2007A 1Q 2008E Forecast

Fiscal Balance As % of GDP

Source: Ministry of Finance Source: Ministry of Trade, General Statistics Office
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Equity Market Performance has Corrected
Although the VNINDEX has fallen over 60% in 2008 YTD, the 2008 YTD historical P/E has
moderated to around 9.2x, compared to 11.7x in the Philippines, 14.0x in Thailand and 14.9x
in Indonesia

! Rational valuations 2005-2008 YTD Performance of VNINDEX

1,200
! Foreign investors have been net buyers of
Vietnam equities in 2008, indicating their 1,000
confidence in the long term performance in
Vietnam
800

VNINDEX
! Government is seeking to develop a formal 600
OTC market and specialised trading platform
for bonds
400

! Equitisation of SOE continued 200

Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08

Source: Bloomberg

Despite a fall in the local market, foreigners remain net purchasers as equity valuations
have returned to more reasonable multiples
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3. Policy Response to Address Macroeconomic
Issues

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Stabilising Policy Response is in Effect
Government has implemented a comprehensive eight point action plan to curb inflation
whilst allowing for sustainable long term growth
! 2008 GDP growth target reduced to 7% from earlier target range of 8.5% to 9%

! Prime interest rate increased in 2008, in stages by 325 bps to 12%, then
by 200 bps to 14%
– Government and SBV remain watchful and ready to take action when
necessary

! SBV has increased the reserve requirement ratio for banks to 11% from
Monetary
10%
Policy
Management
! SBV managing credit activities of domestic banks to reduce credit growth
to around 30% from around 50% in 2007 and enhance controls to
increase quality of credit in line with international standards

! SBV issued VND20.3 trillion (US$1.3 billion) in SBV bills, compulsory for
41 commercial banks

Recent monetary policies implemented to reduce credit growth

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Stabilising Policy Response is in Effect (cont’d)
Fiscal policies have been targeted to reduce public expenditure, whilst measures for
exchange rate are consistent with Vietnam’s managed exchange rate policy

! Reduce 10% of current Government expenditure (excluding salary) and

around 25% of total capital of projects funded by Government bonds
! Revise list of projects funded by Government without increasing total
investment capital
Fiscal Policy
! SOE spending and borrowing currently under review
Management
– New SOE financial management proposed which requires SOEs’
focus on core business and investment by SOE in banking and
securities subject directly to Prime Minister’s approval
! Acceleration of attraction and disbursement of ODA

! Daily trading band widened from + 0.75% to + 1% in 2008 (flexibility up to

Exchange Rate + 2%)

Management ! Demand and supply to determine the exchange rate
! Regulation against domestic black market activity to be enforced

Government is committed to transparency and is closely watching the situation to take

action when necessary
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4. Economic Outlook

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Outlook
Vietnam remains committed to reducing inflation, with some improvement in 2Q results to date
! Import growth has slowed
! Capital account 2008 YTD remains robust
! FDI in 2008 continues to remain strong

! Inflation continues to be closely monitored with the implementation of

Inflation
policies to reduce price pressure

Balance of ! Trade deficit expected to decrease in 2H 2008, but BoP remains robust
Payments ! In medium term, BoP expected to maintain in surplus

! Continuation of structural reforms of the economy

Continuation of ! Equitisation of SOEs
Economic and
Regulatory ! Further improvement of social economic infrastructure
Reform ! Improved stability of banking sector
! Seek to increase transparency and frequency of economic data disclosure

Vietnam remains committed to long term development and integration into the world
economy
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Outlook for 2008

Comfortable
Comfortable External
External Debt
Debt Position
Position

Stability
Stability in
in Balance
Balance of
of Payments
Payments

Monetary
Monetary Policy
Policy Initiatives
Initiatives by
by State
State Bank
Bank of
of Vietnam
Vietnam

Strong
Strong Foreign
Foreign Direct
Direct Investment
Investment Inflows
Inflows

Robust
Robust Official
Official International
International Reserves
Reserves

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Appendix

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State Budget
VND trillion

2007 2008 1Q 2008

2006
Estimated Projected Estimated

Total Government Revenue 272.9 342.9 332.1 87.3

Total revenue and grants 264.3 315.9 323.0 87.3
Current revenue 244.0 282.6 301.9 81.3
Tax revenue 230.6 265.9 287.7 77.7
Non-tax revenue 13.5 16.7 14.5 3.6
Capital revenue 16.6 29.1 17.6 5.4
Grants 3.6 4.3 3.6 0.7
Brought forward revenue 8.6 27.0 9.1 -

Total Government expenditure 290.1 362.1 364.0 82.8

Current expenditure 181.5 229.3 253.6 62.6
Interest payment 8.9 11.1 15.5 3.8
Transfer to Financial Reserve Fund 0.1 - - -
Capital expenditure 86.1 112.2 99.7 20.2
Brought forward expenditure 22.5 20.7 10.7 -

Overall fiscal balance (17.2) (19.2) (32.0) 4.5

Source: Ministry of Finance

Fiscal balance for 1Q 2008 remains positive

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Detailed Breakdown of Balance of Payments
Current Account Balance (2006 – Q1 08E) Capital Account Balance (2006 – Q1 08E)
(US$ in millions) (US$ in millions)

2006 2007 Q1 2008E 2006 2007 1Q 2008E

CAPITAL ACCOUNT 3,088 17,540 6,821
Trade balance (2,776) (10,360) (7,050)
Exports, f.o.b. 39,826 48,561 13,160 2,315 6,550 1,462
Foreign direct investment (net)
Imports, f.o.b 42,602 58,921 20,210
Medium & long-term loans
1,025 2,045 635
(net)
Non-factor services (net) (8) (894) (277)
Disbursements 2,260 3,397 950
Receipts 5,100 6,030 1,850
Scheduled amortization 1,235 1,352 315
Payments 5,108 6,924 2,127
Short term capital (net) (30) 79 56
Disbursements 1,070 1,404 422
Investment income (net) (1,429) (2,168) (510)
Scheduled amortization 1,100 1,325 366
Receipts 668 1,093 320
Payments 2,097 3,261 830 Portfolio Investments 1,313 6,243 1,366
Scheduled interest payments 607 626 - Total money and deposits (1,535) 2,623 3,302
Errors and omissions 1,398 (350) 1,459
Transfers (net) 4,049 6,430 2,550 BALANCE OF PAYMENTS 4,322 10,198 2,993
Private 3,800 6,180 2,500 Financing (4,322) (10,198) (2,993)
Official 249 250 50
Change in net foreign assets (4,322) (10,198) (2,993)
Change in NFA (4,291) (10,174) (2,984)
CURRENT ACCOUNT (164) (6,992) (5,287) Use of IMF fund credit (31) (24) (9)
Excluding private transfers (3,964) (13,172) (7,787) Purchases - - -
Repurchases 31 24 9

Source: State Bank of Vietnam Source: State Bank of Vietnam

Capital inflows, mainly from multilaterals and FDI, support Vietnam’s external position

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