Author: Suiwah Leung, Crawford School, ANU

Vietnam weathered the global financial crisis surprisingly well. Real GDP growth of 4.6 per cent year-on-year for the period January-September 2009 is below that of China, but well above growth rates in most East Asian economies.

One factor behind this unexpected result is the still early stages of integration into the global economy. This has cushioned Vietnam from the immediate impact of the US financial crisis and from the more devastating effect of reduced manufacturing exports. The turnaround in monetary policy (from monetary tightening in mid-2008 to halving the official interest rate from 14 to 7 per cent per annum by November the same year) and the large program of fiscal stimulus (announced at around US$8 billion) also contributed to maintaining growth. Read the rest of this entry »

Author: Suiwah Leung

So far, Vietnam has weathered the global financial crisis surprisingly well. The following chart from the latest IMF World Economic Outlook indicates that Vietnam is likely to outperform most of its Southeast Asian neighbours in terms of growth rates for 2009.

A number of factors contributed to this pleasant surprise. First, Vietnam was not sufficiently integrated with the world financial system for the crisis in the United States to have had significant impact on its banking sector. Read the rest of this entry »

Author: Suiwah Leung

The year 2008 was testing for Vietnam. Between March and August of 2008, with inflation running at some 28 per cent p.a., fuelled by significant capital inflows the year before, the Government had to implement strong stabilisation policies in order to cool the overheated economy (see my analyses from last year).

By November 2008, these policies had to be reversed in order to support economic growth in the face of deteriorating global conditions. And yet, Vietnam still posted real growth of 6.25 per cent for the year, albeit at the slowest pace since 1999. Perhaps more encouragingly, the authorities showed a degree of flexibility in policymaking that needs to be maintained, and enhanced, for Vietnam to face the near-term challenges posed by the global recession.

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Author: Suiwah Leung

After Pakistan and Sri Lanka, Vietnam is reported to be the third country in Asia at risk of a credit-rating downgrade by Standard & Poor as global recession deepens, and the country’s banking system is cited as being the major concern. In May this year, Standard & Poor lowered Vietnam’s BB long-term foreign currency ratings outlook to negative as macroeconomic turbulence intensified. Since then, tight monetary and fiscal policies, as well as administrative measures and falling world demand, have managed to cool the overheating of the economy, but now, the country’s banking system is coming under scrutiny.

From a situation where the banking system was overwhelmingly dominated by a few state-owned commercial banks, Vietnam’s banking sector has diversified quite rapidly. Currently, Vietnam has four major state-owned commercial banks (plus a fifth, smaller one) which control around 55 per cent of banking sector assets; 37 joint stock banks occupying another 30 per cent of the market share, with the remaining 15 per cent spread amongst 37 foreign bank branches and five joint-venture banks. Whilst credit growth last year amongst the state-owned commercial banks was relatively modest (a little over 20 per cent), credit growth amongst the joint stock banks reached almost 100 per cent, raising concerns about credit quality.

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Author: Suiwah Leung

The economic policy authorities in Vietnam seem to have had some success in pulling the economy back from the brink. The latest month-on-month inflation rate has begun to slow down and the economy may have passed the point of macroeconomic danger, though it is too soon to declare victory yet.

Vietnam’s problems are different from those of the rest of Southeast Asia in the Asian financial crisis. They are more like those of Southeast Asia in the early 1980s or China in the early 1990s: the darling of international investors and an ill-disciplined policy response to all the attention. The tough policy choices required have been nowhere to be seen until the last few months.

The turnabout now seems in train. Read the rest of this entry »

Author: Suiwah Leung

With an inflation rate running at 27% pa, current account deficit forecast at 9.2% of GDP, and a widening of the dong/dollar exchange rate between the official and informal markets (at times in excess of 7-8 percent), the Vietnamese government, whose emphasis had traditionally been on stability, is facing its first significant macroeconomic turbulence since opening the economy to international trade and investment almost 20 years ago.

Paradoxically, Vietnam’s success in attracting capital inflows over the last couple of years is behind the current problems. This has revealed some of the limitations of its reform process over the past five years.

The origins of the current macroeconomic problems stem principally from the failure of the State Bank of Vietnam (SBV) to sterilize the surge of capital inflows (which took the form mainly of foreign direct investment and remittances from Vietnamese living abroad) whilst keeping a rigid exchange rate peg in 2007. This left the banking system awash with liquidity, fuelling credit growth of over 50% by the end of last year. Macroeconomic management has been complicated on the one hand, by a ‘young’ banking system inexperienced in pricing risks and, on the other hand, easy access to bank credit on the part of state-owned enterprises (SOEs) eager to expand investments into real estate, financial services, and other non-core activities. Easy credit, coupled with a nascent and poorly regulated stock market, also fuelled a spectacular boom and then bust which is currently dampening investor sentiments.

To make matters worse, 10 days ago, the SBV banned third currency trading by banks (the so-called ‘grey market’) in an effort to curb arbitrage and enforce the official exchange rate. Read the rest of this entry »