The Unintended Consequences of Successful Resource Mobilization: Financing Development in Vietnam

Abstract

The total amount of development finance generated by Vietnam has been exceptionally high from all significant sources using all standard measures of comparison. However, there are many potential unintended consequences of Vietnam’s successful resource mobilization, with significant implications for the future financing of development. There are several steps the government can take to mitigate these risks. The principal vulnerabilities created by Vietnam’s mobilization of substantial resources for development finance fall into two main categories: threats to macroeconomic stability caused by imbalances in the composition of funding; and risks for microeconomic management arising from imprudent financing structures. The most serious macroeconomic threats are: public sector funds crowding out both access to and utilization of private sector funds; overleveraging of insufficient equity for unsustainable levels of debt; financial exclusion of low-income households and family enterprises; and flight of hot capital. The most serious microeconomic risks are: maturity risk from over-reliance on short-term financing for long-term investments; foreign exchange risk from over-use of foreign capital for investments in non-tradable goods; credit risk from debt-financed speculation in asset bubbles; and fiscal gap risk from public sector dependence on unsustainable revenue sources. The suggested ways of mitigating these vulnerabilities include: further deregulation and liberalization of the banking sector, coupled with government disengagement from commercial financing; further development of equity markets and more rigorous enforcement of prudential norms; further development of microfinance institutions, products, and delivery systems; introduction of market-based instruments to manage FPI speculative outflows, together with more effective monitoring of the private sector’s external debt; further development of domestic long-term debt instruments; better coordination of monetary and fiscal policy; and continued implementation of comprehensive tax reform.