Unlike most other Asian economies,

[lynk2510]

Now that the congress is over, however, the technocrats are being given a much freer hand. The higher interest rates and government spending cutbacks announced soon after the congress appear to have had an almost immediate impact. The economy expanded by 5.4 per cent in the first quarter this year, down from 7.3 per cent in the fourth quarter of last year. But while interest rates in Vietnam are now among the highest in South-east Asia, they have yet to have much effect on inflation. Consumer prices increased 13.9 per cent last month, from a year earlier, stoked in part by higher fuel and electricity prices resulting from government efforts to reduce the fiscal deficit.



Inflation is not the only problem facing economic planners. Struggling with dwindling foreign reserves and a persistent trade deficit, the central bank devalued the dong for the fourth time in 15 months on Feb 11. According to the Asian Development Bank, Vietnam's foreign reserves dropped 12 per cent last year to US $12.4 billion (S $15.3 billion), enough to cover just 1.9 months of imports. Meanwhile, the trade deficit widened to US $1.15 billion in March, up from US $1.11 billion in February.



The economy also has to cope with a large foreign debt, which the government says is equal to 42.2 per cent of gross domestic product. Speaking to the media in Hanoi late last month, however, the International Monetary Fund's Cephas Lumina noted that this figure did not necessarily include all borrowings by state-owned enterprises. Troubled shipbuilding firm Vinsahin is of particular concern. Last July, the Vietnamese authorities announced that the company had racked up debts totalling US $4.4 billion.



Officials also say that they want to reduce the budget deficit from around 6 per cent of GDP last year to less than 5 per cent this year. Evidence of the determination with which this goal is being pursued is the fact that fuel prices were raised for the second consecutive month in March despite the risk of stoking inflation. The stability of the banking sector is yet another concern. According to a recent ADB report, the rapid increase in the domestic credit stock, about US $100 billion during 2007-10, has raised questions about the asset quality of local banks. Vietnamese banks are also heavily exposed to real estate and state-owned enterprises, many of which are believed to be in financial difficulty. In what appears to be a move to improve the management of local banks as well as shore up their financial positions, the Prime Minister recently instructed the central bank to consider increasing the cap on foreign bank ownership for a single strategic investor from 15 per cent to 20 per cent.



As a result of successive devaluations, private sector players may also be suffering. In February ratings agency Moody's warned that Vietnamese companies borrowing in US dollars but generating cash flow in dong would face a squeeze similar to that faced by their Thai and Indonesia peers during the 1997-98 Asian financial crisis.



In one sense, however, Vietnam has been lucky. This is because its economic problems have coincided with a period in which foreign investors are looking for alternative production bases as labour costs in China rise. Examples of companies that have recently announced their intention to set up factories in the country include Wintek Corp, a Taiwanese manufacturer of panels for Apple Inc.'s iPhones, and Finland-based Nokia, which plans to make low-end handphones.



Unlike most other Asian economies, Vietnam's economic problems are not the result of strong capital inflows. Rather, they arise from rapid credit growth in recent years and wasteful spending by state-owned companies. In other words, they are well within the ability of the government to control. The intrepid foreign investors who are placing their bets on the country overcoming its current difficulties are no doubt hoping that the determined efforts of government planners in recent weeks will continue.
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[mrk3nx]

The economy also has to cope with a large foreign debt, which the government says is equal to 42.2 per cent of gross domestic product. Speaking to the media in Hanoi late last month, however, the International Monetary Fund's Cephas Lumina noted that this figure did not necessarily include all borrowings by state-owned enterprises. Troubled shipbuilding firm Vinsahin is of particular concern. Last July, the Vietnamese authorities announced that the company had racked up debts totalling US $4.4 billion.



Officials also say that they want to reduce the budget deficit from around 6 per cent of GDP last year to less than 5 per cent this year. Evidence of the determination with which this goal is being pursued is the fact that fuel prices were raised for the second consecutive month in March despite the risk of stoking inflation. The stability of the banking sector is yet another concern. According to a recent ADB report, the rapid increase in the domestic credit stock, about US $100 billion during 2007-10, has raised questions about the asset quality of local banks. Vietnamese banks are also heavily exposed to real estate and state-owned enterprises, many of which are believed to be in financial difficulty. In what appears to be a move to improve the management of local banks as well as shore up their financial positions, the Prime Minister recently instructed the central bank to consider increasing the cap on foreign bank ownership for a single strategic investor from 15 per cent to 20 per cent.

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