News / Asia

Vietnam's Economic Problems Driven by Unchecked Growth

A mechanic sits working at a roadside motorcycle repair shop in downtown Hanoi, 28 Dec 2010
A mechanic sits working at a roadside motorcycle repair shop in downtown Hanoi, 28 Dec 2010
TEXT SIZE - +

The stability of Vietnam's economy is under scrutiny as the country confronts soaring inflation, a growing deficit, a weakening currency and falling foreign exchange reserves.  Financial and political analysts say the problems are symptomatic of Vietnam's rapid growth. 

Vietnam's economy is often cited as one of the most promising emerging economies in Asia. The economy expanded by about 6.5 percent in 2010, continuing a decade of strong growth.

But the country finds itself grappling with serious problems, including a trade deficit this year that topped $12 billion.  

The trade deficit and inflation fueled by the economic growth have put pressure on the country's currency, the dong. The government, which tightly control's the dong's movement, has devalued it three times in the past 13 months.

Yet inflation continues, with consumer prices jumping 11 percent this year.

Partly to prop up the currency, Vietnam has spent its foreign exchange reserves, dropping them from a peak of $24 billion in 2008 to $14 billion in September.

Tom Byrne is senior vice president of ratings agency Moodys Investors Service in Singapore.  He says there is increasing downward pressure on the dong and if reserves drop further, the risk of a debt repayment crisis will increase.

"If the exchange rate does weaken further, of course it leads to short-term ramifications on inflation, maybe even more capital flight," Byrne said. "But, over the long term it would help Vietnam's exports gain some competitiveness.  But, the key thing is that whatever the authorities do, what we think would support the rating would be greater macroeconomic stability.  Strong growth, yes, but probably not so strong that it leads to high inflation."

Byrne says government policies favor fast growth, which is good for employment and short-term economic development but not sustainability.  

Many people fear the dong could weaken further, and they are investing in gold and U.S. dollars - which also adds to the pressure on the dong.

Moodys and other rating agencies downgraded Vietnam's credit rating this month because of the unbalanced economic data and an announcement that a state-owned ship building company defaulted on a foreign loan.

Vinashin, one of Vietnam's largest employers, failed to make a payment on a $600 million loan. The Communist Party Politburo has told the company to restructure.  

The default raises concerns the government may now be less able to offer financial support to other state-owned enterprises with heavy debts.

But Carl Thayer, a professor of politics at the Australian Defense Force Academy, says the decision was likely a political rather than economic one.  He says senior leaders probably decided to restructure Vinashin as a show of displeasure with Prime Minister Nguyen Tan Dung's fast growth economic policies.

"Vinashin was a showcase of the prime minister. So, it's hard for me not to see this as being political. I don't really think the Vietnamese leadership has made a moral-hazard stance and said 'state-owned enterprises you've got to fend for yourselves'. I mean, there is that sentiment but it isn't dominant because that's shooting yourself in the foot because that's what the government depends on," Thayer said. "They want state enterprises to be effective and they've coddled them. But, Vinishin is just too big to be allowed to go."

Last month the prime minister accepted responsibility for Vinashin's problems - its debts are estimated at $4.5 billion.

Thayer says the Communist Party Congress in January is unlikely to make any major pronouncements on the economy.

And, he says, despite criticism over the economy, the prime minister is likely to retain his position as he has few eligible rivals.

"Even when they faced the donor's meeting this year, the prime minister, despite their criticism, and I'm mirroring some of that, was basically saying we can do growth, have macroeconomic stability, and maintain political stability all at the same time. So, he's juggling three balls and the odds are that it looks like one might be dropped. And, that could be the macroeconomic stability," Thayer stated.

Financial and regional analysts say that Vietnam's recent problems, including the Vinashin default, may scare off some foreign investors. But Byrne at Moody's says Vietnam's long-term economic outlook is still positive.

"Vietnam has made measures, has taken steps to welcome foreign direct investment, and therefore, I think, boost the long-term growth potential.  What really gave Vietnam a shot in the arm was the bilateral trade agreement with the U.S. that was signed some years ago, giving Vietnam access to the U.S. market," he said.

Byrne says aside from balancing payments, Vietnam needs to improve transparency on economic data and policies.  

For instance, he says updates on foreign exchange reserves are released much later than other countries at similar stages of development.  

More information on debt distress and support for state-owned companies, he says, would also improve the investment environment.

You May Like

Analysts Warn of Regional Proxy Conflict in Afghanistan

Analysts warn if Kabul’s neighbors do not start to cooperate, competing desires for influence could deteriorate into a bloody proxy war in the country More

Saudi Intelligence Chief Replaced

Bandar bin Sultan came under criticism for supporting al Qaida, prompting King Abdallah to wrest Syria operations away from him in February, handing them to Interior Minister Prince Mohammed bin Nayef More

Poetry Magazine editor Don Share talks what makes a good poem with VOA's David Byrd

What makes a good poem? And is poetry as viable an art form as it once was? To find out, VOA's David Byrd spoke to Don Share, the editor of Poetry Magazine. More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Google Buys Drone Companyi
|| 0:00:00
...
 
🔇
X
George Putic
April 15, 2014
In its latest purchase of high-tech companies, Google has acquired a manufacturer of solar-powered drones that can stay in the air almost indefinitely, relaying broadband Internet connection to remote areas. It is seen as yet another step in the U.S. based Web giant’s bid to bring Internet to the whole world. VOA’s George Putic reports.
Video

Video Google Buys Drone Company

In its latest purchase of high-tech companies, Google has acquired a manufacturer of solar-powered drones that can stay in the air almost indefinitely, relaying broadband Internet connection to remote areas. It is seen as yet another step in the U.S. based Web giant’s bid to bring Internet to the whole world. VOA’s George Putic reports.
Video

Video Ray Bonneville Sings the Blues and More on New CD

Singer/songwriter Ray Bonneville has released a new CD called “Easy Gone” with music that reflects his musical and personal journey from French-speaking Canada to his current home in Austin,Texas. The eclectic artist’s fan base extends from Texas to various parts of North America and Europe. VOA’s Greg Flakus reports from Austin.
Video

Video Millions Labor in Pakistan's Informal Economy

The World Bank says that in Pakistan, roughly 70 percent work in the so-called informal sector, a part of the economy that is unregulated and untaxed. VOA's Sharon Behn reports from Islamabad on how the informal sector impact's the Pakistani economy.
Video

Video Passover Celebrates Liberation from Bondage

Jewish people around the world are celebrating Passover, a commemoration of their liberation from slavery in Egypt more than 3,300 years ago. According to scripture, God helped the Jews, led by Moses, escape bondage in Egypt and cross the Red Sea into the desert. Zlatica Hoke reports that the story of the Jewish Exodus resonates with other people trying to escape slave-like conditions.
Video

Video Police Pursue Hate Crime Charges Against Kansas Shooting Suspect

Prosecutors are sifting through the evidence in the wake of Sunday’s shootings in a suburb of Kansas City, Missouri that left three people dead. A suspect in the shootings taken into custody is a white supremacist. As VOA’s Kane Farabaugh reports, he was well-known to law enforcement agencies and human rights groups alike.
Video

Video In Eastern Ukraine, Pro-unity Activists Emerge from Shadows

Amid the pro-Russian uprisings in eastern Ukraine, there is a large body of activists who support Ukrainian unity and reject Russian intervention. Their activities have remained largely underground, but they are preparing to take on their pro-Moscow opponents, as Henry Ridgwell reports from the eastern city of Donetsk.
Video

Video Basket Maker’s Skills Have World Reach

A prestigious craft show in the U.S. capital offers one-of-a-kind creations by more than 120 artists working in a variety of media. As VOA’s Julie Taboh reports from Washington, one artist lucky enough to be selected says sharing her skills with women overseas is just as significant.
Video

Video UN Report Urges Speedier Action to Avoid Climate Disaster

A new United Nations report says the world must switch from fossil fuels to cleaner energy sources to control the effects of climate change. The Intergovernmental Panel on Climate Change released the report (Sunday) following a meeting of scientists and government representatives in Berlin. The comprehensive review follows two recent IPCC reports that detail the certainty of climate change, its impacts and in this most recent report what to do about it. VOA’s Rosanne Skirble has the details.
AppleAndroid