As economists and policymakers look back a decade to the financial disaster that tamed the East Asian tiger economies, questions linger whether another major crisis could ever ensnare the region and what the lessons of 1997 mean for newly emerging markets such as Vietnam.
For the most part, Vietnamese businesses are not overly concerned about a possible downturn in the economy, according to a recent confidence report on small- to medium-sized enterprises (SMEs) by HSBC. And, on the surface, there is little indication they should be.
The government last week reported that gross domestic product (GDP) during the first half of the year grew at a four-year high of 7.9%, with exports surging more than 19% to $22.46 billion. Though economic growth was below the government’s 8.2% target and there was an overall trade deficit, the figures were still very positive for many executives and public officials. In addition, imports in the first six months of the year were dominated by heavy machinery and raw materials, both of which will help boost output and exports down the line.
In statements at the World Economic Forum this past week in Singapore, Deputy Prime Minister Nguyen Sinh Hung added that the government also plans to weaken the dong this year by another 0.5-1%, which should allow Vietnamese exports to be even more price-competitive in the region. The Vietnamese dong has already fallen 0.4% against the greenback this year. A weaker dong also makes foreign direct investments and key production factors, such as labor and transport, even cheaper for overseas businesses. The State Bank of Vietnam maintains a managed exchange rate, and for the past few years has kept close tabs on the dong in relation to the US dollar. This week, the dong-dollar rate was fluctuating around 16,120 dong.
The economy has been driven for the past five years by aggressive expansion in output and exports, and foreign investments. These factors, though, cannot be sustained forever. “The economy continues to grow well, but the CPI [a key measure of inflation] is something to watch,” said Katie Dean, a senior economist at ANZ Bank, “particularly when it comes to capital flows and consumer spending.”
Over the past few months, inflation has increased. This week the General Statistics Office reported that the consumer price index (CPI) grew 7.8% year-on-year in June, up from 7.31% in May. The June figure is above the government’s accepted range of 7-7.5%, and threatens the State Bank of Vietnam’s (SBV’s) long term policy of keeping inflation below economic growth.
Economists have commented that prices should actually be hitting a seasonal downtrend, but instead have accelerated due to higher food, energy and construction prices. Viet Nam News, the state news agency, quoted an unnamed source at the Price Management Board questioning whether the government will be able to control inflation in the months ahead. A major stumbling block in controlling price fluctuations will actually be any attempt to depreciate the dong further - it cuts both ways. While making exports more price competitive, the policy also makes imports more expensive for Vietnamese companies that do not have access to foreign capital or have taken out foreign loans to fuel growth.
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