Vietnam’s dangerous economic downturn

Posted on November 28, 2012

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A little over a decade ago, Vietnam had a booming economy. An economic crisis and mismanagement on all levels have driven the country to the brink of ruin. It’s up to the government to save what’s left.

Nguyen Tan Dung has admitted to making “economic mistakes”

Tuan is a young, educated and ambitious Vietnamese from the city of Hanoi. The country’s economic golden days of recent allowed him to set aside a small fortune – at least enough for a house for his family. He had even considered buying a car. As an official working for the regional government, he had a decent income. In addition, he invested in real estate and in a television engineering company.

But his optimism has recently become overshadowed by fear and uncertainty. He has now given up the thought of purchasing an automobile. He is worried he will lose his savings and that the real estate market will collapse.

“I don’t know how things will turn out. The national debt is weighing heavy on our country’s shoulders. In the end, we all have to bear the brunt.”

Real estate prices have fallen by 30 percent. Inflation continues to grow; in October 2012, the inflation rate was seven percent. The Vietnamese stock exchange index HNX is at the lowest point it a year. Ratings agencies such as Moody’s and Standard & Poor’s have downgraded Vietnamese bonds as “highly speculative.”

Dangerous downturn

The country’s economic growth has slowed down to between four and five percent. That is not enough to create jobs for the rapidly growing population and the rising number of people entering the job market.

“The slowdown is significant for a regime which couples its legitimacy with economic growth,” according to Adam Fforde of Victoria University in Melbourne, Australia.

Fforde estimates that around one million people have lost their jobs within the past two years – a development expected to have implications in a country lacking a social welfare system.

Government rescue?

“I really hope the government finds a solution to the economic troubles,” Tuan said, showing cautious optimism.

Vietnam expert Fforde – along with many others – is skeptical about the government’s capabilities to find a solution, as it was the government itself who was responsible for a large part of the country’s economic trouble in the first place; the “Doi Moi” program, which was introduced in 1986 to politically and economically open up and reform the country, has proved to be not very sustainable.

“In 2007, the balance just fell apart,” according to Fforde. “In the end, the sad truth came to the fore: the government might not have as much control as it appears and that everything up until now might have just been good luck.”

Crisis management criticized

Vietnam – with a strong emphasis on its export market – was hit hard by the international economic crisis of 2007. Decision makers in Hanoi introduced expensive stimulus packages. But a large portion of that money got lost in corruption and mismanagement. All that’s left is a huge deficit. Credit institutes are now stuck with up to 15 percent of toxic debt.

Party leadership has closed ranks after months of internal power struggles – a symbol that government has “understood just how serious the situation is,” Vietnam expert Jörg Wischermann told DW. For the party leaders, it was first and foremost about securing their own power, then, about dealing with the country’s issues.

Fforde sees the solution to Vietnam’s current crisis in the development of a middle class. For that, investment would be necessary in the education and health sectors as well as in infrastructure. Reforms in the agrarian sector, which have not been updated since 1986, were also of vital necessity.

DW.DE

Vietnamese bonds drop after inflation accelerates; dong weakens

Vietnam’s three-year government on Monday bonds fell for the first time in three weeks on speculation that accelerating inflation makes it less likely the central bank will resume cutting interest rates to spur growth. The dong fell.

Consumer prices gained 7.08 percent in November from a year earlier, the most since May, official data showed Nov. 24. Vietnam will cut interest rates next year in line with inflation, Prime Minister Nguyen Tan Dung said Nov. 14. The government estimates the economy will expand by 5.2 percent this year, the slowest pace since 1999.

“Prudent policy should keep the economic environment stable,” Matt Hildebrandt, a Singapore-based economist at JPMorgan Chase & Co. wrote in a research note Monday. “This suggests that additional policy-rate cuts are unlikely and that monetary policy will remain modestly tight.”

The central bank has cut its refinancing rate by five percentage points this year to 10 percent, with the most recent reduction on July 1.

The yield on the three-year bonds rose three basis points, or 0.03 percentage point, to 9.43 percent, according to a daily fixing rate from banks compiled by Bloomberg. That’s the first increase since Nov. 1.

The dong fell 0.1 percent to 20,865 per dollar as of 2:27 p.m. Monday in Hanoi, according to data compiled by Bloomberg. The State Bank of Vietnam set its reference rate at 20,828, unchanged since Dec. 26, according to its website. The currency is allowed to trade as much as 1 percent on either side of the rate.

Thanh Nien