25% inflation sets alarm bells ringing in Vietnam
 

By Roger Mitton, Vietnam Correspondent
 

HANOI - Vietnam's economic troubles have just got worse.

Inflation has soared to 25 per cent - the highest since 1992 - and there is now concern that draconian rescue measures similar to those enforced by the International Monetary Fund in Thailand and Indonesia during the 1997-1998 Asian financial crisis may be necessary.

Such measures would include a sharp tightening of monetary and fiscal policy, drastic cuts in government spending, import curbs as well as a hefty devaluation of the Vietnamese currency, the dong.

Morgan Stanley on Wednesday said Vietnam was heading for a 'currency crisis', similar to that of Thailand's baht in 1997 because the current-account deficit, projected to widen to 7.5 per cent this year, was 'unsustainably large'.

The banking system and inflation rate were 'additional complicating factors', it said.

Fitch Ratings has also cut Vietnam's outlook from stable to negative following the release of the inflation figure.

The official May figure - the worst for any Asian country - is widely viewed as understated.

But it does reflect the communist regime's failure to act cohesively to curb the half-year-long surge in prices, economists say.

Mr Jonathan Pincus, senior country economist for the United Nations Development Programme, said: 'Vietnam's policy- making institutions, characterised by ambiguous lines of authority and consensus decision-making, are fragmented to the point of paralysis.'

The seventh consecutive month of double-digit inflation in Vietnam was marked by massive increases in the prices of food, fuel and construction materials.

Hotel and restaurant prices also shot up, threatening the country's lucrative tourism industry.

Room prices in quality hotels in Ho Chi Minh City and Hanoi are now comparable to, and sometimes higher than, those in Hong Kong and Singapore.

Low-income workers and farmers have been devastated, and tens of thousands of factory workers have been staging strikes across the country.

The government has abandoned its growth target of 9 per cent this year and is aiming for 7 per cent, but few expect it will be achieved, given the country's soaring trade gap.

Vietnam's imports have already exceeded the value of its exports by US$11.1 billion (S$15 billion) this year.

For the whole of last year, the figure was US$12.4 billion.

Dr Vu Quang Viet, head of the accounts section of the government's National Statistics Division, said: 'At the current rate, the trade deficit could reach US$30 billion this year.'

The stock market has also continued to plummet and the formerly buoyant real estate sector has tanked badly, with prices dipping by as much as 40 per cent.

Last month, embattled Prime Minister Nguyen Tan Dung issued a plan to restore stability to the economy, mandating restrictions on money supply and reduced government spending.

But it appears to have had no impact.

A top Finance Ministry official, however, has insisted that assessments of Vietnam's economic outlook were 'too pessimistic'.

'It's true that our economy has some issues that need to be addressed quickly and the government is focusing on measures to solve them,' Mr Nguyen Thanh Do, director of external financing at the Ministry of Finance, told Bloomberg News.

'We will accept a slower economic growth rate to concentrate on fighting inflation, which is our top priority now,' he added.