Since April 2009, however, there have been signs of over-valuation of the Vietnamese currency, the dong. Along with rapid credit growth throughout the year, this has caused concern about overheating and macroeconomic instability akin to the 2008 episode when inflation reached 28 per cent. Fears of large and disruptive devaluations, manifested in large informal private capital outflows, have put pressure on the balance of payments. In November 2009 a reassessment of the stimulus package became necessary.

Since then authorities have devalued the dong by a further 3.4 per cent and raised official interest rates from 7 to 8 per cent. The government has also announced that its program of subsidising interest rates for working capital will be terminated, as scheduled, by the end of 2009. The subsidy element of the scheme for medium and longer-term investments will also be cut from 4 to 2 per cent and phased out completely by the end of 2010. International donors showed support for these measures in early December by pledging a further $8 billion of assistance to Vietnam in 2010.

As a relatively small, open economy, with a population of around 86 million, Vietnam has little choice but to embrace increased globalisation as a longer term development strategy. Its immediate challenge is to improve its international competitiveness in trade and investment.

In recent years Vietnam has fallen consistently in the Global Competitiveness Index, from a ranking of 68^th in 2007 to 70^th in 2008, and to 75^th in 2009. Concerns over Vietnam’s macroeconomic management seem to be a major factor in this fall. Its ranking for macroeconomic stability fell from 51^st in 2007 to 112^th in 2009.

The recent pullback in the stimulus package, together with strong show of support from the donors, is a promising start. Continued skilful management of the macroeconomy on the part of the Vietnamese authorities will be crucial in 2010.

Related to this is the need for professional strengthening of public institutions, especially macroeconomic institutions. In addition to formulating and implementing monetary policy, the State Bank of Vietnam also needs to supervise the banking system effectively. The initiation of large-scale onsite supervision of banks and the coalescing of all supervision activities into a single department of the State Bank is a good start, but more must be done. The Ministry of Finance needs to focus on fiscal sustainability. In order to better target government spending they should utilise technical assessments of large infrastructure projects and other areas of public expenditure. The program of reforming state-owned enterprises, including reform of state-owned banks, also needs to be revitalised.

In short, the strengthening of public institutions in order to manage the macroeconomy and to pursue microeconomic reforms needs to be high on the agenda in 2010 as Vietnam prepares for its next five year development plan. Success in these areas will enable Vietnam to attain its goal of becoming a middle-income country in the coming decade.

This is part of the special feature: 2009 in review and the year ahead.