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Vietnam's crisis within the crisis

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In Brief

Economic reforms, international economic integration and Vietnam's accession to the WTO by the end of 2006 all resulted in a boom of investment, trade and financial and banking activities in Vietnam.

Just one year later, the focus has moved from high expectations about Vietnam's development to pessimistic assessments of Vietnam's macroeconomic instability.

The period from March to July 2008, in particular, saw a worsening of the macroeconomic situation, the extent of which is a topic of much debate.

There are two main camps. The first believes that Vietnam was in currency or financial crisis, even before the globe went under.

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The symptoms included lack of liquidity in the banking system, a sharp depreciation of VND in the early part of May and June 2008, and expectations of further VND depreciation in face of high inflation and unstable balance of payments. Some even suggested that the crisis facing Vietnam is quite similar to the case of Thailand in the Asian crisis in 1997-98.

The second reckons that Vietnam is not yet in crisis, but nevertheless faces very serious macroeconomic problems.

All agree that Vietnam’s macroeconomic situation has deteriorated, largely due to high inflation, a fragile financial system, and an emerging balance of payments deficit, although there are different assessments of the risks magnitudes and problems.

Vietnam’s potential for medium and long term growth, despite ‘bottlenecks’ such as low institutional quality, poor infrastructure and weak human resources is real.

Stabilising Vietnam’s economy will be a difficult, multi-faceted task, and it’s hard the get the perfect policy strategy. In the short term, there is a trade-off between growth and stability targets, and macroeconomic policy aimed at stabilizing the economy is likely to have unwanted side-effects.

An important question is how can we minimize the social cost of stabilization, given a lower rate of economic growth? Getting the choice right, in terms of its scope, is critical. There also needs to be effective and timely policy implementation,. The processes of policy review and co-ordination across the policy agencies and institutions needs to be strengthened.

Since August 2008 the macroeconomy has revealed some positive signs (monthly inflation has tended to decline, the trade deficit has narrowed, the balance of payments has improved, and liquidity problem has been eased). However, macroeconomic instability is still rather severe with high yearly inflation, a huge trade deficit and low public confidence. The social issues (unemployment, business difficulty) and the NPLs of the banking system became more serious. Obviously, Vietnam needs to continue to fix the instability problems, while having more flexible macro policy responses. This is particularly the case as the global economy goes into recession and commodity price decline.

The positives of instability in Vietnam ought not be ignored. This is the opportunity to deepen reform of the State Bank of Vietnam, financial supervision and safeguards, and policy review institutions. Firms are gaining experience competing in an increasingly open market and now face the task of internal restructuring and long-term goal setting.

Vo Tri Thanh is speaking at the Vietnam Update at the Australian National University, 6-7 of November.

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