[Vnbiz] "Hanoi shaken from economic complacency"

[Pham Thi Thanh An]

Dear CACC, 

I talked about the undesirable sense of complacency earlier in association
with the WB's Country Director "out-of-tune" praise for VN star performance
amid serious signals of economic (and, to different extents, social)
turbulences. 

FYI now on the latest coverage from the FT on Vietnam on the occasion of our
PM's visit to the UK.

Best, An 

 Hanoi shaken from economic complacency 

By Amy Kazmin in Hanoi 

Published: March 2 2008 22:18 | Last updated: March 2 2008 22:18

Communist-ruled Vietnam has been one of Asia's star economic performers in
recent years. 

Propelled by surging exports, foreign direct investment and domestic
consumption, its economy has grown by 7.5 per cent a year on average over
the past decade and its expanding stock market and plans to partially
privatise large state enterprises have grabbed the attention of foreign
direct and portfolio investors.

But times are getting tougher for Vietnamese policymakers as they pursue
their goal of 8-9 per cent growth this year against a backdrop of a US
economic slowdown, sharply rising global commodity prices and international
currency re-alignments.

Hanoi is now struggling to curb rapidly increasing inflation, which in
February hit 15.7 per cent, its highest level in more than a decade. Rising
prices, especially of foodstuffs, have fuelled a wave of labour unrest, with
factory workers striking to protest against wages that they say are
insufficient to make ends meet.

Standard & Poor's warned last week that "the government's creditworthiness
could be eroded if the inflation rate does not retreat from its current
level" over the next year or two.

"Vietnam for a number of years has done a really good job of maintaining
macro-stability and very high rates of economic growth," said Jonathan
Pincus, chief economist for the United Nations in Hanoi.

"They were lulled into complacency, thinking 'we can do this'. But the world
just got a lot more complicated in the last year, and they are having to
learn as they go to deal with those complications." It is turning into a
painful process, with Hanoi so far relying mainly on monetary solutions,
without imposing other restraints on state enterprise, many of which have
been engaged in investment sprees.

"Fiscal policy is not supporting monetary tightening," said Mr Pincus.
"There is a huge inconsistency here, which is not being resolved because
there is not sufficient co-ordination in economic policymaking."

Yet so far Hanoi shows no willingness to pare back its growth goals in the
effort to curb inflation. In an interview with the Financial Times, Nguyen
Tan Dung, the prime minister, said Hanoi planned to push for greater
domestic investment this year by all sectors, including state enterprises.
That is despite a 16.4 per cent year-on-year rise in prices for housing and
construction materials in February. "We will encourage strong investment
from all economic sectors," he said. "We will not let high inflation affect
our growth or development."

While Mr Dung said that many factors driving Vietnam's inflation were
external, he admitted that 2007 had seen "shortcomings" in monetary policy,
namely the rapid growth of credit in the system, which the government is
trying to restrain.

But he claimed the government could not directly curb borrowing by state
enterprises, which economists say have been speculating heavily in the
booming real estate market. "Banks in Vietnam operate in accordance with the
principles and rules of the market economy and there is no intervention from
the government in the loans or borrowings," the premier said.

So far, though, efforts by the State Bank of Vietnam, the central bank, to
curb inflation by reliance on monetary measures have created unexpected
difficulties. The SBV has been focusing primarily on sucking liquidity out
of the financial system through quantitative money supply targets, rather
than by allowing interest rates to rise or the dong, Vietnam's currency, to
appreciate.

However, these policies have created a shortage of dong, which has generated
headaches for foreign businesses that need cash to meet local expenses.
Aggressive moves to drain liquidity from the financial system have also
depressed the already gloomy stock market, which has been on a downward
spiral since March. The market has fallen 43 per cent since its all-time
high then, and amid the doldrums the planned sell-off of state company
shares is faltering.

"There was a time when if anything had Vietnam in it, everybody and their
mother wanted in," said Peter Ryder, chief executive of Indochina Capital.
"It is not that the bloom is off the rose, but people have taken a step back
and said, 'wait a minute, we did get a bit crazy and frothy, but are now
taking a more disciplined approach'."

Vietnam remains a popular choice for foreign investment, with many
multinationals, especially Japanese, eager to take advantage of the
country's young and famously diligent workforce.

But Mr Pincus warned that Hanoi's appeal as an investment destination could
be eroded without better co-ordinated economic policy that tackled inflation
and ensured long-term stability.

Without greater fiscal restraint by the state and its powerful companies, he
said, "what you will get is lots of pressure on the banks, lots of pressure
on households, and lots of pressure on businesses to meet working capital
needs, but you won't get the air out of the asset bubble".

 

 

 

Thanh An

email: thanhan2505 at gmail.com

 

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