Whether the new leadership is reformist or conservative, it will be confronted with the issue of balancing short-term growth with macroeconomic stability.

Vietnam survived the GFC in better shape than most other countries of its size in the region, with a growth rate of 5.3 per cent in 2009. Throughout much of 2010, pro-growth policies resulted in estimated growth rates of around 6.7 per cent. However, with credit growth exceeding the (already high) official target of 25 per cent for the year, and Vietnam’s headline inflation rate looking to be in double-digits year-on-year, the State Bank of Vietnam had to reverse gear and raised official interest rates from 8 to 9 percent in November 2010.

More needs to be done, however, in order to ease the pressure on the dong, which has been devalued three times since November 2009. The official exchange rate is again about 10 per cent above the current ‘black market’ rate.

The 2010 current account deficit (excluding gold) is projected to be just under 7 per cent of GDP which is relatively high for an emerging Asian economy. International reserves, although stabilised, are at an uncomfortably low level, covering about 1.8 months of imports.

A more comprehensive package of macroeconomic policies, including fiscal consolidation, is needed to convince the market that the government is aware of the risks to macroeconomic stability and is managing those risks appropriately. In the medium-term, greater flexibility in the exchange rate regime is also needed to enable the private sector to manage exchange rate risks more effectively. Once confidence is re-established, households and enterprises are likely to cease hoarding US dollars and gold as a hedge against inflation and devaluations of the dong, and the so-called ‘dollar shortage’ (in reality, unwillingness to hold dong assets) should disappear.

The likelihood, however, of such a comprehensive package being adopted in 2011 is slim. Even with most stimulus measures having expired by end-2009, a reduction in the budget deficit to substantially below the level in 2009 of 9 per cent of GDP is unlikely, due to (often inefficient) spending on infrastructure and social welfare programs.

Without significant fiscal consolidation, Vietnam’s public debt to GDP ratio could well exceed 50 per cent, making it more costly for the government to borrow internationally, and further limiting the fiscal space. Furthermore, perhaps not surprisingly, the transition from direct to indirect monetary policy instruments is not unproblematic, and recently announced price controls to fight inflation, if implemented, could further undermine confidence amongst domestic and foreign investors.

It is in this context that the forthcoming Party Congress in January is important. Two decades of economic reforms and globalisation have made Vietnam a middle-income country with a rapidly growing domestic private sector. A return to a more dirigiste style of economic management on the part of the conservative elements in the Party is likely to dampen the domestic private sector, with negative consequences for economic growth in the medium term. Whilst there is perhaps no serious chance of a return to central planning, a ‘stop-go’ approach to economic policy-making could prevail.

If the reformist elements of the Party continue their ascendancy, fairly rapid reforms in key macroeconomic institutions could take place in the next 2 to 3 years. This could improve Vietnam’s macroeconomic policy-making and the government’s ability to communicate its policy stance to the market. In time, reforms could spread to other public institutions, assisting in the development of a dynamic and innovative private sector, and enabling Vietnam to achieve its long-term growth potential.

Suiwah Leung is an Adjunct Associate Professor of Economics at the Crawford School, ANU.