Vietnam economic boom hits high-speed wobbles

HANOI (AFP) — Vietnam's economy, until recently a darling of foreign investors, has overheated and may be sliding into a boom-and-bust cycle that could require IMF-style assistance, analysts say.

The economy widely hailed last year as Asia's next tiger has been battered by double-digit inflation, a ballooning trade gap, a tanked stock market and worries about the currency and banking sector.

Credit rating agencies Standard & Poor's, Fitch and Moody's and several investment banks have revised downward their outlooks for Vietnam at a time when the spectre of a US recession could spell global trouble.

Aseambankers Research 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 for help."

Analyst Adam Le Mesurier wrote for consultancy DSG Asia that "an 'IMF programme' style policy response will be needed within six months," including monetary and fiscal tightening and a dong currency devaluation."

Many investors and donors in Vietnam remain upbeat about the market of 86 million, pointing to strong exports -- including of food and oil -- investment inflows, growing tourism, and the potential of its young workforce.

"It's too easy to get excited and claim that Vietnam has gone from poster child to problem child," said EU chief country representative Sean Doyle.

"But I'm not sure it's very wise and very balanced ... Vietnam, if it can keep steady, stick with the right policies, will be attractive."

Nonetheless, the turnaround in investor perception has been stunning.

Communist Vietnam's 2007 entry into the World Trade Organisation fuelled enthusiasm for the low-wage "mini-China," bringing an influx of foreign cash.

Domestic investors gambled on a sky-rocketing stock exchange, the government went on a spending spree, and banks lent freely, fuelling rapid credit growth.

The wheels started to come off about half a year ago, when inflation hit double digits as the economy tried to digest six billion dollars in foreign direct investment (FDI) disbursed last year, or 8.4 percent of GDP.

Since the start of the year prices have galloped, driven by global food and energy costs, to 25 percent year-on-year inflation in May. Wage demands sparked 300 labour strikes in the first quarter alone.

"The wage-price spiral that appears to be beginning, if it becomes embedded, could make matters much worse," said an HSBC report that predicted a rise to 30 percent inflation amid hoarding of commodities.

Another alarm bell sounded when surging imports drove the trade deficit to 14.4 billion dollars in May, compared to 12 billion dollars for all of 2007.

The stock market has tumbled amid tighter credit and falling investor confidence, turning from the world's best to worst performing bourse. Last week it crashed below 400 points, from its high of over 1,100 in March 2007.

Many investors have bought gold or offloaded their value-losing dong for greenbacks, briefly sending the black market rate in Vietnam to 18,500 to the dollar last week, against the official rate of around 16,000.

Standard Chartered Bank said recently that the "Vietnamese dong has come under downward pressure, and such pressure is likely to persist until solid improvement is seen in the trade balance."

Some observers now fear a banking crisis amid tighter liquidity, depositor-flight and non-performing loans.

"Urgent action is required in the financial sector," said Michael Pease, chairman of the Vietnam Business Forum. "Vulnerability of some financial institutions threatens not just the domestic financial sector but also the confidence of foreign investors."

Vietnam's government -- which has adopted a fight-inflation-first strategy and pledged other economic fixes -- has lowered its 2008 economic growth target to 7 percent from last year's blistering 8.5 percent.

IMF country chief Benedict Bingham has suggested Vietnam cool its "overheated" economy with higher interest rates and public spending cuts, freeing up of the exchange rate and accelerated reforms of its state-owned enterprises.

While Bingham said the IMF was "encouraged" by government plans to fix the economy, he called for "a concrete and convincing policy package that will bolster investor confidence and restore macroeconomic stability."

Inflation a drag on Vietnam's economy

An investor in Hanoi watches as inflation fears shoved share prices down nearly 400 points on June 2, 2008. (Hoang Dinh Nam/AFP/Getty Images)

Thursday, June 5, 2008
Marketplace
National Public Radio (USA)

Sky-high inflation and a slew of labor strikes have brought the Vietnamese economy to its knees. Host Bob Moon speaks with Marketplace's Scott Tong in Beijing about Vietnam's economic future.

TEXT OF INTERVIEW

Bob Moon: Vietnam has all the makings for a great investment -- good resources, lots of people, low labor costs -- but Vietnam's stock market has taken a huge tumble in the last year, falling below 400 points yesterday, its lowest level in two years.

And inflation is on the rise: from 7 percent to 25 percent in just one year.

Investors are paying attention.

Marketplace's man in Shanghai Scott Tong has been following the economic developments going on in China's neighbor to the south.

Hi Scott.

Scott Tong: Hello Bob.

Moon: Where is this inflation that we're hearing about in Vietnam coming from? I mean, I presume that there are food price problems and energy price problems, but 25 percent?

Tong: Well, that's right. All over Asia, there is a fair amount of imported inflation from elsewhere in the world, but in Vietnam, some of it is clearly seen as homemade. This is an economy that a lot of people say is overheating. It has been growing at an 8 percent clip for several years and the worry now is that perhaps the party's gotten out of control. A lot of economists are worried there's been too much lending, there's been too much government spending, basically, too much cash sloshing around in the system. And in my house, when there's too much cash sloshing around in the system, we buy stuff, and there's a sense in Vietnam that maybe there's been too much of that going on and when so many people are doing that, prices tend to go up.

Moon: Well, you speak of a party out of control. Let's kind of extend on that metaphor and borrow a little bit from Alan Greenspan. Is it time for the government over there take the punch bowl away?

Tong: The government has been trying, or it's been warning that it's going to do so. Just a couple days ago, some top officials said for the third or the fourth time that we're going to raise interest rates and we're going to have the banks try to calm this down, but there's a sense among a lot of people that they're hitting the breaks a little too late and they may not be doing enough. The World Bank and the Fitch Ratings agency and Morgan Stanley have already issued warnings about the Vietnam economy and we've seen investors starting to pull out a little bit. They're betting the currency is going to go down. The stock market has been down 50, 60 percent in the last year. So the arrows, for now anyway, are going in the wrong direction.

Moon: Let's make a comparison to China. It's labor and manufacturing costs have been on the rise and a lot of people have said that Vietnam is the next place to go. Is that still the case now?

Tong: There's a lot of excitement in a lot of sectors. One example is bedroom and dining room furniture. Bob, have you bought any lately?

Moon: Not recently.

Tong: Alright, well, just asking, because a lot of furniture makers, who almost all used to be in China, have moved in a hurry to Vietnam, or else set up their next factory in Vietnam and here's a picture of the labor costs: a Vietnamese worker in a furniture factory makes about $45 U.S. a month. That's less than half of what it is in China. The other excitement is the Vietnam retail market. Their research and consulting firm AT Kearney just ranked Vietnam their number one retail investment destination.

Moon: So dare we say that Vietnam could be the next China?

Tong: Well, a lot of self-proclaimed smart people are daring to go there, but most people aren't. Vietnam is cheap right now as far as labor, but for these giant manufacturing industries, it doesn't take long to go through a population of 80 million people or so and then they move on to the next cheaper place in the global economy. As far as the consumer market, well, China is 17 times the size of Vietnam, so that's the place where the big, big multinational companies who want to sell stuff to people... I mean, they're in China for 50 years or so. They don't exactly look at Vietnam the same way.

Moon: Marketplace's Scott Tong, joining us today from Beijing. Thank you Scott.

Tong: You're welcome Bob. Nice to talk to you.