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(27-06-2008)
Is Viet Nam in dire financial straits?
by Dr Phan Van Thanh
Having emerged from the last 15 years as a success story in terms of development, Viet Nam now finds itself in economic troubled waters caused by a deterioration in macro-economic fundamentals: inflation of 25 per cent year-on-year in May, a widening trade deficit, a liquidity crunch in the banking sector, falling bond prices, a jittery stock market and a looming real estate crisis?
Do all these factors point towards an economic recession on a par with that experienced by Thailand 10 years ago?
To answer this question we need to look at a number of factors such as the country’s development status, the regulatory and supervisory framework, as well as other local and global factors.
The Thai crises started with the bursting of the real estate bubble. That was followed by a 50 per cent depreciation in the baht and the fleeing of foreign direct and portfolio investors who were playing a significant role in the local stock exchange. The whole process was accelerated by the ease with which it was possible to carry out current account and capital account transactions and the baht’s convertibility.
Compared to Viet Nam, the Thai stock exchange was at an advanced stage of development.
Viet Nam’s current negative development is a home-made phenomenon that has been amplified by the international commodity price shocks – which themselves have been mitigated by the fact that Viet Nam is a net oil and rice exporter.
Despite full WTO-membership, the country is not fully integrated into the world economy. The money flowing into Viet Nam so far has been in the form of FDI (foreign direct investment), ODA (official development assistance) and other long-term investments, against a limited short-tern fund entry. At the end of 2007, the country’s external debt was worth 29 per cent of its GDP – at the end of 1996 Thailand external debt stood at 59 per cent of its GDP.
The Viet Nam dong is not yet convertible and the foreign exchange market is controlled. The stock exchanges are still small and in an early stage of development. From the end of 2007 to now, total market capitalisation has dropped by 60 per cent. A large part of the stock portfolio involves property and securities held by non-residents, which have lost a large part of their value. However, that figure is far less that the cumulative inflow of US$9 billion since 2006.
The widening trade deficit, around $14.4 billion in the first months of this year, is threatening the country’s balance of payments and putting significant pressure on the dong. However, national reserves, excluding gold, are worth $20.7 billion – worth more than three months of imports – plus net FDI and FII, which have helped to buffer the risks.
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On the policy and regulatory fronts, the Government has declared that it will keep the exchange rates running flexibly, curb speculation on the grey market and not devalue the dong.
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Current account transactions were liberalised some time ago but capital account transactions are still subject to controls, which will keep outflows at a manageable level and ease pressure on the exchange rate.
Facing the toughest challenge yet, the Government has worked out a package of measures designed to restore macro-economic stability, which has come at the cost of some growth (down 9 per cent to 7 per cent in 2008). As well as monetary and fiscal policies, the package includes strict administrative and punitive measures to curb market speculation.
The fight against inflation began with the central bank hiking prime rates, raising reserve requirements, issuing compulsory bonds and ceiling credit growth of 30 per cent in 2008, together with flexible foreign exchange rates that are supported by the price controls on some strategic goods. This has demonstrated to some extent the central bank’s policy-making and regulatory ability.
In supporting (rather than burdening) monetary policy, the fiscal measures are designed to cut government spending, which includes spending on inefficient State-owned enterprises.
The Government’s recent moves to consult international organisations on how to deal with its economic problems have been welcomed by the media, the business world and investors, who still demonstrate confidence in Viet Nam’s medium – and long-term outlook – as evidenced by record high registered FDI of $ 31.6 billion in the first half of 2008, compared to $21.3 billion in 2007.
Positive signs that the Government’s actions were working were shown in market movements in June. Credits in the first half 2008 slowed to 20 per cent compared to 54 per cent in 2007; domestic consumption is slowing; imports show signs of dropping; the consumer price index in major cities is slowing down and property prices have fallen by 20 per cent to 60 per cent.
While helping to deflate the looming real estate bubble, monetary tightening has resulted in a liquidity crunch that is also hitting sound enterprises and projects – including much needed infrastructure ones that are essential for sustainable economic growth. This in turn creates funding problems and fuels borrowing costs, leading to a slowing down in the economy.
Overall, I do not see an imminent crisis but I do see Viet Nam facing major challenges ahead.
The Government’s fiscal policy must be decisive and consistent in order to support the effectiveness and efficiency of its monetary measures. —VNS
