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Vietnam economic boom hits high-speed wobbles

Vietnam economic boom hits high-speed wobbles

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 U.S. 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 program' 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 organization 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 US$6 billion in foreign direct investment 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 labor 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 US$14.4 billion in May, compared to US$12 billion 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.
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.