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Vietnam, Southeast Asia's Rising Star, Still?

By Puay Yong Juay

Think of a Southeast-Asian rising economic star and Vietnam would definitely come to mind.

But with the current economic jitters plaguing the country, is the period of phenomenal growth that this Mekong Delta darling has been experiencing since it embarked on its 1986 Doi Moi Reforms, over?

Economy: Too Hot To Touch?

For the last seven years, Vietnam's economy has never failed to deliver an annual average of less than 7% growth. In 2007 it registered a spectacular 8.2% growth, the highest growth rate among all Southeast Asian economies.

But Vietnam's sterling economic performance is not likely to be repeated this year. Its economy is growing at the slowest pace since 2001. In the second quarter of 2008, it expanded by 5.6% (year-on year), the worst quarterly performance in eight years.

What is Causing the Economic Hiccup?

Runaway Inflation
Vietnam's rapid development, as shown by the following:

• robust credit growth of 54% in 2007;
• influx of foreign direct investment;
• loose monetary policy; and
• aggressive public spending;

has brought about inflationary pressures. As of July 2008, year-on-year inflation stands at 27%, and the recent 30% hike in petrol prices keeps the pressure high.

Large Trade Deficit
Vietnam has been experiencing a large trade deficit, fuelled by strong industrial activities, infrastructure development and heavy public project spending.

Global pressure on energy, commodity and food prices has also pushed Vietnam's trade deficit to a record high. In the first half of 2008, its deficit swelled to US$15 billion, exceeding its 2007 trade deficit by US$1.4 billion.

Government Intervention

The Vietnamese government has, over the past several months taken measures to curb the rising inflation. They include:

• Cutting down public expenditure. The government suspended various public projects to lower its spending. The June trade deficit of US$1.3 billion is down from US$2.85 billion in May. The July estimate is even lower at US$700 million.
• Increasing interest rate. The government raised interest rates thrice this year to 14% and increased the reserve requirements for banks. As a result, credit growth fell from 54% in 2007 to an annualised rate of 19.9% in April 2008. The government is aiming to reduce credit growth to 30% in 2008.

These measures has helped cool down Vietnam's overheated economy but has, at the same time, caused a slow-down in the Vietnam stock1 and property market².

Healthy Growth in Promising Sectors

Despite this year's turbulent performance, the long-term economic outlook for Vietnam remains positive. Business dynamics in Vietnam have not changed, so economic pundits remain optimistic about Vietnam's growth potential.³

Economic activities have remained robust, buoyed by healthy export growth and high commodity prices. The country registered a rise of 35.8% in exports to $30.6 billion, which helped reduce trade deficit to $14.2 billion⁴.

In addition, promising sectors such as transportation, communication and tourism continue to show strong growth in 2008.⁵ Expected telecommunications, retail, distribution sector liberalisation in 2009 will also pull FDI.

Strong Investor Confidence

Despite the heart-racing changes that are taking place in Vietnam, I believe it will continue to attract the attention of foreign investors.

Amid economic challenges, FDI continues to flow into the country, and foreign donors have continued to pledge aid to Vietnam.

This year, in fact, Vietnam hit a record of $45.3 billion in FDI, more than double the 2007 total⁶ and accounting for 65% of the country's GDP⁷.

Vietnam also topped 2008 A.T. Kearney Global Retail Development index as the most attractive destination for retailers, ahead of China and India.

For more information, please visit IE Singapore website.

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