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Vietnam's Economic Recovery Spurring Foreign Investment

Vietnam's Economic Recovery Spurring Foreign Investment

Vietnam's Economic Recovery Spurring Foreign Investment

Vietnam's economic recovery from the global financial downturn has been marked by large increases in government spending. Much of the expenditure has been directed towards infrastructure. But economists say the concern now lies in the government ensuring the recovery is sustained into 2010.

Vietnam's economy is expected to grow by more than six percent in 2010.

Ayumi Konishi, the Asia Development Bank's regional manager for Vietnam, says the government's success in steadying the economy has largely rested upon an $8.5 billion stimulus package.

"The good thing is the economic stimulus package of the government has worked reasonably well," said Konishi. "Many of the economic activities are coming back - some of the factories which laid people off earlier are getting people back. And because of the stimulus package consumption activities are reasonably active."

Economists have long considered government spending, especially on infrastructure, to be an effective tool for revitalizing a stagnating economy.

Even before the global financial crisis hit late in 2008, the Vietnamese government was already working to halt galloping inflation and investment due to an overheated real estate sector. In early 2008, Vietnam's inflation rate had risen to 25 per cent, while the country's trade deficit widened to more than $14 billion.

Clive Randall, president of the Australian Chamber of Commerce in Vietnam, says the government responded aggressively to take control of the economy.

"Vietnam got a bit of a head start on its economic crisis six months before the rest of the world," said Randall. "Vietnam was going into an inflationary cycle that was unsustainable and the government put the brakes on and said 'no' we've got to stop this, we've got to get a hold of inflation."

But then the financial crisis struck, freezing capital inflows as international credit dried up. In the first nine months of 2009, capital inflows stood at just $12 billion - one fifth the level of a year earlier.

Despite the slowdown, Vietnamese officials remain upbeat about the outlook for the economy. Randall agrees, saying many foreign investors now look favorably at Vietnam a year after the downturn.

But there are concerns that increasing budget deficits and a return to inflation could stall the economic recovery.

ADB's Konishi says the government will have to carefully manage the economy.

"The economic recovery has also accompanied the growing risk. What is important for the government is to strike the balance between the growth and the stability," he said. "So I should say six point five per cent growth projection would be a very comfortable sort of target that the government can have."

Konishi says that once stability is re-established, foreign investors will again view Vietnam as a desirable investment destination.