Economic problems driven by unchecked growth

Dec 29, 2010. 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 and inflation fueled by the economic growth that 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.

“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.”

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.

Carl Thayer, a professor of politics at the Australian Defense Force Academy, says the decision was likely a political rather than economic one. “Vinashin was a showcase. I don’t really think the 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,” 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.”

State-owned enterprises account for about 22% of Vietnam’s industrial production in 2010. Private sector Vietnamese businesses accounted for 36%, while the FDI sector accounted for 42%

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Vietnam’s industrial output grows 14% in 2010, led by the FDI sector