News Room - Business/Economics

Posted on 08 Oct 2008

Vietnam economy back from brink – for now

        

Vietnam’s economy, which started overheating months ago, has begun to stabilize but experts warn the government must stay the course as the global financial system is plunged into crisis.

 

Vietnam, a World Trade Organization member since 2007, has battled galloping inflation and a ballooning trade deficit. But it has also managed to slow the macroeconomic imbalances and eased fears of a meltdown.

 

Inflation reached 27.9 percent year-on-year in September but the monthly increase in consumer prices had dropped to just 0.18 percent, the government’s General Statistics Office said.

 

The trade deficit over the first nine months grew to US$15.8 billion but the widening of the trade gap had also leveled off.

 

“Compared to two or three months ago, economic conditions have definitely improved,” said the International Monetary Fund’s (IMF) country representative Benedict Bingham. “The government is to be commended for stabilizing the situation and breaking the negative sentiment.”

 

Bingham also praised the central bank for restoring trust in the dong currency and fighting inflation and credit growth through tightening liquidity with higher interest rates and other measures.

 

Sin Foong Wong, country chief of the International Finance Corporation (IFC), an arm of the World Bank, also praised Vietnam’s recent efforts.

 

“Things have become better compared to the situation in the middle of the year when people were talking about a crisis, about a Vietnam that could become the next Thailand,” he said, referring to the nation that triggered the 1997 Asian crisis.

 

“Now inflation has trended down, Vietnam had its lowest month-to-month increase in September, and most important, food prices have also come down, especially rice,” Wong told AFP.

 

“If we look at the trade deficit, we begin to see the alarming trend to be mitigated on a monthly basis as the measures taken to cool the economy begin to have an impact on imports,” Wong said.

 

Other observers said Vietnam’s leaders had not gone far enough, especially in cutting the fiscal deficit and reducing the role of inefficient state-owned enterprises (SOEs) that still dominate major economic sectors.

 

“We need real cutting in expenditures,” said Nguyen Quang A, president of the Institute of Development Studies. “We are awaiting some very concrete measures from the government and the SOEs.”

 

Experts cautioned against a slackening of economic discipline, especially when inflation remains so high and while the financial crisis is sweeping through the United States and Europe, Vietnam’s main export markets.

 

Vietnam’s young and insulated financial sector is not directly exposed to the factors that drove the US banking meltdown, such as the subprime crisis, but the economy is sure to feel the wider effects of the turmoil, they said.

 

“The (Vietnam) trend seems to be positive but one issue is: what will be the local impact of the global turmoil?” said the IFC’s Wong.

 

“Things are hard to quantify. Exports might be impacted if there is a recession in the US and Europe, and FDI (foreign direct investment) could be pulled back, but you can make those comments on many other countries.”

 

Vietnam’s leaders, long focused on economic growth targets, have shifted to fighting inflation first and have prepared public opinion for a sharp drop in gross domestic product growth from last year’s 8.5 percent.

 

Experts warn the rising prices threaten to reverse some of Vietnam’s development successes, which have lifted millions out of dire poverty.

 

Last month the government reported that the number of households who have reported food shortages so far this year had shot up by 60 percent from the same period in 2007, to 3.6 million people.