Relative to its Asian peers, Vietnam has performed poorly on the key macroeconomic indicators in recent years, especially over the past three years, during which the 2008-2009 global financial crisis posed a serious test to the soundness of macroeconomic fundamentals in each country. The Vietnamese inflation rate was 15 per cent averaged for 2008-2009 and estimated to be 8.6 per cent for 2010, while these two respective figures are 2.6 per cent and 3 per cent for China, 2.3 per cent and 3.3  per cent for Thailand; 6.3 per cent and 4.2 per cent for the Philippines, and 7.3 per cent and 5.2 per cent for Indonesia.

On the government budget balance (as a share of GDP), the averages for 2008-2009 and estimates for 2010, are -7.4 per cent and -7 per cent for Vietnam, -1.3 per cent and -2 per cent for China, -2.8 per cent and -2 per cent for Thailand; -2.4 per cent and -4 per cent for the Philippines, and -1.1 per cent and -2 per cent for Indonesia. On the trade balance (as a share of GDP), the average for 2008-2009 and estimate for 2010, are -11.5 per cent and -11 per cent for Vietnam, +6.6 per cent and +4 per cent for China, +9.4 per cent and +11 per cent for Thailand; -6.6 per cent and -6 per cent for the Philippines, and +5.5 per cent and +5 per cent for Indonesia. Furthermore, Vietnam’s currency relative to US dollar has been sharply weakening in both 2008-2009 and 2010, while the currencies of its peers are expected to appreciate notably. The deterioration in macroeconomic conditions has resulted in the downgrading of Vietnam’s sovereign rating recently by all the three major credit rating agencies – S&P, Moody’s, and Fitch; while most of the comparison countries have improved their sovereign rating over the period.

The negative effect of Vietnam’s weak macroeconomic conditions on its economic performance has become more and more apparent. According to the Asian Development Bank’s recent report (“Outlook 2010 Update”), Vietnam is no longer a star performer on economic growth in the region. The country’s projected GDP growth rate for 2010 is 6.7per cent, while this figure is 9.6 per cent for China, 8.5 per cent for India, 14 per cent for Singapore, 7.4 per cent for Laos, 7.0 per cent for Thailand, 6.8 per cent for Malaysia, 6.2 per cent for the Philippines, and 6.1 per cent for Indonesia.

In order to enhance the soundness of its macroeconomic conditions, it is imperative for Vietnam to urgently and effectively address to the root the deficiency in its fundamental development concepts and efforts to build good governance. The government’s current large and unjustified subsidies to the state-own sector in its political ambition to build this sector to become the foundation and a driving force of the economy has not only caused resources misallocation but also damaged the vibrancy and competitiveness of the private sector. The country’s increasing and heavy dependence on foreign aid, workers’ remittances, and natural resources for creating prosperity have severely undermined the frugality and human capital formation in the nation. The lack of strategic and strenuous efforts to build good government has kept Vietnam in the group of countries with most corrupt and ineffective governments among the East Asian nations. Macroeconomic instability characterised by high inflation, large budget and trade deficits, and unreliable local currency, in fact, are unavoidable consequences of the problems related to   resources misallocation, weak competitiveness, heavy dependence on external and natural resources, pervasive corruption, and government ineffectiveness.

The case of Vinashin – the state-owned shipbuilding economic group – is illustrative. The company has received billions of US dollars from government guaranteed loans to invest in numerous non-viable projects because the Vietnamese government is ambitious to make this state-owned conglomerate a leading driver of the economy. At the same time, corporate governance in Vietnam is weak and corruption is severe. Consequently, in 2010, the chairman and his successor (after the chairman was arrested) as well as a number of the key members of the company were arrested for mismanagement and dishonest practices. The government then had to hastily intervene to rescue the company from bankruptcy caused by a debt amounting to US$4-5 billion. The serious consequence of this problem has undoubtedly contributed to Vietnam’s current macroeconomic instability.

Vu Minh Khuong is an assistant professor at the Lee Kwan Yeuw School of Public Policy, National University of Singapore.