Vietnam hit hard by global slowdown
Thousands laid off as exports decline; a splurging middle class stops spending

Ben Bland in Hanoi and Ho Chi Minh City

Despite having one of the world's fastest-growing economies over the past decade, communist Vietnam is continuing to discover that opening up its markets to the outside world means taking the rough with the smooth.

Having beaten off one crisis last year when the economy overheated and inflation soared to 28 per cent, Vietnam is now faced with an even bigger challenge as the global slowdown hits the export-dependent country.

A wide range of exporters - from Japanese electronics giant Panasonic to Vietnamese textile and shoe manufacturers - have laid off thousands of workers between them since the start of the year.

With demand for consumer goods slipping around the world, exports are expected to fall further in the second and third quarters of this year and job losses are expected to increase. Labour Ministry officials have estimated that 300,000 jobs could go this year, on top of 500,000 redundancies last year.

'The economy was overheating in 2007 but the government was quite successful in cooling it down,' says Pham Do Chi, chief economist at Vinacapital, an investment bank based in Ho Chi Minh City. 'But now we have been hit by the tsunami of the global economic crisis and the game has changed completely.'

While more developed economies can fall back on homegrown demand for goods and services, Vietnam, like China to the north, has a very small domestic market and is reliant on exports. To make matters worse, Vietnam's emerging middle class, which happily splurged on new cars, motorbikes and TVs as the economy boomed, has stopped spending.

Even big discounts after the Tet lunar new year holiday have failed to lure buyers, and Ho Chi Minh City's gleaming car showrooms and consumer electronics stores look more like museums than retail outlets.

Hotel and restaurant operators have also reported a drop in takings as tourists, expatriates and locals spend less.

'We're thankful for the gambling addicts because many casual gamblers have stopped coming to the casino,' said a senior dealer at the popular casino in the New World Hotel in Ho Chi Minh City, who asked not be named.

Anna Craven, a British entrepreneur who owns several up-market restaurants, a hotel and a furniture export company in Vietnam, agrees that business is starting to suffer. 'Tourism is definitely down and hotels are feeling the pinch,' the long-time Vietnam resident says. 'Expats are also more careful about spending.'

The Vietnamese government, which acted decisively to bring inflation under control last year, has not sat idly by. Although it has only a small war chest, with foreign currency reserves of US $22 billion, according to the State Bank of Vietnam, the government has launched a US $1 billion stimulus package designed to support ailing exporters by subsidising interest on bank loans.

But economists believe the government should be trying to boost demand, not supply. 'A loan subsidy to encourage production is fine but you need to inflate the demand side and put cash in people's pockets,' notes Vinacapital's Mr Chi. 'We want to see roads and bridges repaired and more schools and hospitals built. There are a lot of unemployed people right now and these projects would create employment for them.'

As the vast majority of the workers who have lost their jobs are low-income earners, they are likely to spend what they earn, injecting much-needed cash into the economy. 'If we can generate income and employment at the bottom, they will spend and the multiplier effect will kick in,' says Mr Chi.

Vietnam's economy grew by an average of 7.4 per cent a year between 2000 and 2007, but growth fell to 6.25 per cent last year. The government still hopes to hit 6.5 per cent this year but most economists are not so optimistic. They say the International Monetary Fund's 5 per cent prediction is more realistic.

With little government support for retrenched workers, the slowdown will put a lot of pressure on Vietnam's traditional family support networks. However, most observers believe that Vietnam's simple and under-leveraged economy - only around 10 per cent of people have a bank account and even fewer have ever taken out a bank loan - will protect it from the sort of shocks that have rattled debt-ridden nations such as the United States and Britain.

'There are fewer mortgages and credit cards here, so fewer debt problems than in the West,' says Adam McCarty, who runs Mekong Economics, a consultancy based in Hanoi. 'Vietnam is still a basic economy, where most people produce rice or other commodities like coffee and shrimps - and that's an advantage in this crisis.'

He adds: 'Those who lose their jobs in factories will just return to their villages and fall back on their extended family social services network. It's a very different story from the West, where people who lose their jobs in the cities will get little family support and are more likely to cause social problems.'