News Room - Business/Economics

Posted on 09 Jun 2008

Vietnam's economic woes will not result in contagion, says Aseambankers

Vietnam's current economic woes are unlikely to result in a contagion effect to the rest of the region in view of the improved and better fundamentals compared to the 1997/1998 Asian financial crisis, said Aseambankers Research.

"Unlike the 1997-98 East Asian financial crisis, regional economies are now stronger, with better economic, financial and corporate fundamentals (vs a decade ago) to provide the immunity," the research house said in a report yesterday.

Aseambankers said the worst-case scenario would be for Vietnam to suffer massive capital flight, triggering a balance of payment crisis, and forcing the country to go to the International Monetary Fund (IMF) for help, like Thailand, South Korea, Indonesia and the Philippines 10 years ago.

Aseambankers said the concerns were exacerbated by classic and basic signs of "overheating" -namely rapid economic growth, twin budget and fiscal deficits, and surging inflation rates.

It said not so long ago, the country was hailed as the new darling of emerging economies in our part of the world -particularly more so after its inclusion into the World Trade Organisation (WTO) last year -which led to the surge in foreign direct investments (FDI) and consequently, above-8% headline economic growth in the last three-years.

Aseambankers said the spotlight had now suddenly swivelled to the "negatives", following recent developments that included a slump in the stock market, where the benchmark index had fallen by 55% so far this year, after the 23% gain last year.

It said downgrade in the outlook of sovereign credit ratings, to "negative" from "stable" by Standard & Poors on May 2, followed by Fitch Ratings on May 29. It said while Fitch had reaffirmed Vietnam's "BB-" long-term foreign currency rating, it was still three notches below investment grade.

Aseambankers said the Vietnamese Dong fell 0.3% against the US dollar last week, 0.8% in the past one-month and 1.5% year-to-date.

"The exchange rate regime is a "managed float" whereby the central bank sets the daily reference rate for Vietnamese Dong exchange rate versus the US dollar with a plus or minus 1% band," it said.

Aseambankers said the negative developments came as the economy's macroeconomic trends resembled that of its Asian neighbours a decade ago, namely the uncomfortable mix of rapid economic growth, twin budget and fiscal deficits, and surging inflation rates.
 
"Vietnam stands out like a sore thumb among the region's economies due to the "twin deficits" (fiscal and current account). Meanwhile, its inflation rate, at 25.2% year-on-year last month, was the highest in the region.

"The widening trade deficit and surging inflation are also causing businesses and individuals to rush into buying the US dollar, further exacerbating the Dong's fall," it said.

The official economic growth target for the year had been trimmed to 7% from 8.5%-9% previously. The government has capped gasoline and oil prices this month to tame inflation.

Aseambankers said concerns over the health of the banking system on risks to equity and property loans were raised after credit grew in excess of 50% last year led by such loans.