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Vietnam's Economy a Rising Star After Global Slump

Vietnam's economy is bustling, having bounced back from the global downturn due in large part to the government's stimulus package.

The Communist Party has set a target of 8 percent average growth a year over the next five years. The Ministry of Planning and Investment expects growth of 7.5 percent in 2011, up from 6.5 percent this year.

Vietnam's economy has weathered the worst of the global downturn, according to Danny Armstrong, Vietnam director for Australia's Commonwealth Bank.

"If you consider what we've just come through - the worst global financial circumstances in 80 years - the Vietnamese economy last year grew at 5.3 percent when most economies - most developed economies were in reverse - I would suggest the outlook for growth is pretty bright," said Armstrong.

Economic stimulus plan

The government introduced an $8.5 billion stimulus package to reduce the damage from the global financial crisis in 2008. And monetary authorities have depreciated the currency, the dong, which makes exports more competitive overseas.

The stimulus package played a key role in preventing a recession, said Ayumi Konishi, country director for the Asian Development Bank. But Konishi believes it is time to begin reducing the support.

"The government should be able to phase out the first round of this stimulus package," said Konishi. "That should really do what was intended to do. The important thing is the stimulus package also increasingly includes large portion of the infrastructure support or the infrastructure investment."

Weak infrastructure

Many in business say the government needs to focus on improving its infrastructure. Roads, ports and power plants can not keep up with rising demand.

And that problem is a big one for business, said the Commonwealth Bank's Danny Armstrong.

"I guess the key complaint has been a lack of reliability of electricity over the last year or two. There's been a lot of comment about that in the media; still requirements there to improve port facilities. Roads … certainly in Ho Chi Minh City, if you have a look at traffic on the roads, the road infrastructure is growing a bit so, [but] infrastructure still has some way to go," he said.

Vietnam is working on the problems. Thirty new coal-fired power plants are expected to start operating soon, and there are plans to build more.

Currency devaluation poses risks

But some of the government's actions lead to other worries, and economists say the country still faces economic challenges, including inflation and concerns over corruption and government controls. The decision to depreciate the dong has prompted worries about inflation. And while it was intended to boost exports, a weaker currency raises prices for imports.

And like other emerging economies, Vietnam has seen capital rapidly flowing into its markets from slower-growing countries.

Real estate prices, for instance, have risen rapidly in the past year, adding to concerns of bubble.

Nagesh Kumar, the chief economist at the United Nations Economic and Social Commission for Asia and the Pacific, says the inflows reflect rising real estate prices elsewhere in Asia including China, India and Indonesia.

"This is an issue which is affecting most of the Asian emerging economies. This is because of the crisis there were injections of liquidity all across the world and that is now finding its way to Asian economies because they are doing so well. Because of these capital flows the property prices and stock prices are going up," said Kumar.

Vietnam's Ministry of Construction says this year real estate accounted for almost 22 percent of all foreign direct investment in the country.

Foreign investment

Vietnam benefits from rising costs in China, a dynamic which forces some companies to shift their operations, analyst Armstrong points out.

"If you don't want to have all your eggs in the China basket, then think about Vietnam as an alternative, that has a cheap but young and trainable workforce in a relative sense, has political stability, has relatively favorable investment conditions and a welcome mat out for foreign investment," he said.

Overall foreign investment is recovering slowly after dropping during the global slowdown. For the first nine months of the year, foreign direct investment was 12 percent lower than it was a year ago, at $11 billion, well under the government's target for 2010 of $22 billion. Vietnam's main investors are from Taiwan, South Korea, Japan, Malaysia and Singapore, as well as the United States and Europe.

Some foreign investors are worried because the international credit ratings agency Fitch downgraded Vietnam's rating. Fitch blamed inconsistent state policies, external finances, and weak domestic banks for the downgrade.

Also foreign investors, in regional surveys, have expressed concern over corruption and intellectual property rights in Vietnam. In addition, they say that Vietnam's complex business laws undermine its attraction to investors.