Vietnam may be heading towards financial crisis
Inflation, trade deficit, banking blow-up threaten what was recently hailed the darling of investors
 

By Bryan Lee, Economics Correspondent & Roger Mitton, Vietnam Correspondent
 

Fears are rising that Vietnam may be headed for a financial meltdown after a rapid reversal of its economic fortunes.

A heady mix of runaway inflation, a ballooning trade deficit and a possible banking sector blow-up is sparking a growing cacophony of warnings by economists.

They say Vietnam, recently the darling of international investors as an emerging 'tiger' economy, is at risk of a severe crisis, as overheating symptoms emerge similar to those seen before Thailand's 1997 crash.

Many predict a steep fall in the country's currency - the dong - is all but inevitable. Some say external help, possibly from the International Monetary Fund (IMF), may be needed to restore economic confidence.

Until recent gravely worrying economic data began to emerge, Vietnam had enjoyed a dream run of a decade of sizzling economic growth of about 8 per cent a year.

As the ostensibly communist state turned well and truly capitalist, Vietnam's young consumers embraced a 'spend now, pay later' philosophy and clambered for the latest Piaggio motorbike, Nokia cellphone and designer clothes. It was hard to blame them, since the government set an example by spending as if there were no tomorrow.

Naturally, inflation started to rise, and last November it moved into double digits.

At the time, the government insisted that everything was under control, and that it would soon tame inflation while still achieving a high growth rate of around 8 per cent to 9 per cent.

But recent data has confirmed the worst.

Sentiment over Vietnam soured dramatically last week when official data showed inflation last month hit 25 per cent. Data also showed the trade deficit for the first five months of this year hit US$11.1 billion (S$15.14 billion), close to the US$12.4 billion for all of last year. This triggered worries that the country could run out of foreign reserves to defend its own currency's value.

'The situation is desperate and not sustainable. It will break, and we are warning investors to be cautious,' said Dr Chua Hak Bin, the chief Asian strategist for Deutsche Bank's private banking arm. 'A sharp devaluation in the Vietnamese dong looks imminent in the coming months, possibly in the magnitude of 20 per cent to 30 per cent,' he said.

Critics blame government failures.

Dr Nguyen Quang A, the director of Hanoi's Institute of Development Studies said last month: 'The main reason for the economic downturn is the government's poor and uncoordinated economic policies.'

Other experts say, however, the economy can avert a hard landing if the authorities make the right decisions soon.

The good news is Vietnam's woes are likely to have limited spillover to the region as its problems are unique, economists say.

Singapore companies with big investments in Vietnam are stoical. A spokesman for Sembcorp Industries, which has invested in a power plant and several industrial parks, said its businesses were 'underpinned by long-term contracts, which give us sustainable earnings in US dollars'.

Still, confidence has largely evaporated from the domestic business sector. No one wants to buy shares in the nation's blue-chip companies, even at giveaway prices.

Credit rating agencies have cut their credit outlook for Vietnam to negative. And foreign investors are now taking their money elsewhere, depriving Vietnam of a key support for its growth and import appetite.

All of this points to a dong depreciation, say experts, which will correct the currency's overvaluation and help rebuild investor confidence in the country.

Fortis Bank economist Joseph Tan believes the banking sector, which faces a potential onslaught of bad loans made during exuberant times. needs attention. 'To fix this, the state bank needs to borrow money, maybe from the IMF, to back up the local banks and instill confidence in the sector.'

What's going wrong

• uge foreign investments over the past few years have fuelled asset bubbles in Vietnam that are helping to send inflation through the roof.

• The trade deficit is widening as a result of soaring imports. This suggests that the local currency - the dong - is overvalued, which would prompt investors to pull out of the currency - and the economy.

• Vietnam depends largely on foreign inflows to finance its trade deficit. Its foreign reserves are relatively small, so any disruption to foreign inflows will hinder its ability to import materials for its economic development.

• The banking sector is under pressure as overlending in the past may have hurt smaller lenders. Interest rate hikes that will hurt consumers and companies may ultimately hurt the industry. Some banks may be nationalised.

• Investments in Vietnam will suffer from a sharp dong depreciation, at least in the short term. Singapore companies with substantial investments there include Keppel Land and Sembcorp Industries.