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Vietnam: back from the brink?

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In Brief

The economic policy authorities in Vietnam seem to have had some success in pulling the economy back from the brink. The latest month-on-month inflation rate has begun to slow down and the economy may have passed the point of macroeconomic danger, though it is too soon to declare victory yet.

Vietnam’s problems are different from those of the rest of Southeast Asia in the Asian financial crisis. They are more like those of Southeast Asia in the early 1980s or China in the early 1990s: the darling of international investors and an ill-disciplined policy response to all the attention. The tough policy choices required have been nowhere to be seen until the last few months.

The turnabout now seems in train.

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Since May the Vietnamese policy authorities have sharply tightened monetary and fiscal policy while the Vietnamese dong has been allowed to adjust down, and recent measures on the part of the State Bank of Vietnam may have eased the otherwise continuously downward trend. There is still a looming bad loan problem in the banking sector about which there is a national state of denial. And, with the first signs of economic slowdown, there is a danger that the authorities will back off before inflationary expectations have been tamed. But the battle has been joined and it feels as if the point of maximum danger has been passed.

However, the recent macroeconomic turbulence (in addition to continued problems of corruption) has taken its toll both on growth forecasts for 2008 and 2009 as well as on the credibility of reform-minded fractions of the Vietnamese Communist Party, including Prime Minister Nguyen Tan Dung. The implementation of scheduled cuts to electricity supply in August highlights the grave weaknesses in infrastructure, although raising the necessary funds for new plants would not be easy if electricity prices were continued to be subsidized. At the same time, localized protests (albeit small scale) against escalating food and fuel prices emphasize the important link between economic and social stability. The margins of error for economic policy-makers from hereon could have been narrowed considerably.

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