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Fears of a crisis in the Vietnamese economy triggered by high inflation and trade deficit are growing. Japan's Daiwa Securities warns the country may need an International Monetary Fund bailout, while Morgan Stanley predicts a plunge in the value of the Vietnamese dong. Global credit rating agencies Standard & Poor's and Fitch Ratings have also downgraded Hanoi's sovereign rating.
The biggest problem is inflation. Consumer prices rose 15 percent this year as of May from late last year. An explosion of up to 40 percent in the price of food including rice directly hit the living conditions, and workers are clamoring for a wage hike. Kieu Oanh, whom the Chosun Ilbo met at the Thu Duc export processing zone in Ho Chi Minh City, says half of the factory workers went home this year as wages did not keep pace with inflation. Korean companies operating in Vietnam raised pay by an average 20-30 percent but are still short of workers. But prices are unlikely to stabilize for the time being. Vietnamese Prime Minister Nguyen Tan Dung admitted Saturday that inflation is expected to reach 22 percent this year and unlikely to fall to single digits for two to three years.
The country's trade deficit was $14.4 billion in the first five months, already over the $12.4 billion for the whole of last year. The figure is four times that of the same period last year. This is because despite export growth in the 20 percent range, imports are rising by 60 percent. The growing trade deficit is also affecting foreign exchange. Under the official exchange rate, the dollar trades at 16,200 dong. But the rate spikes to 17,000-18,000 in the black market and has topped 22,250 in the non-deliverable forward (NDF) market.
Stewart Newnham, a Hong Kong-based currency analyst for Morgan Stanley, says macroeconomic indices such as the current account deficit and inflation are not reflected in the dongĄ¯s value and warned of a sharp depreciation like the 1997 plunge of the Thai baht.
The biggest concern is a possible financial meltdown. Daiwa Securities forecasts that Hanoi will inevitably ask for IMF help in a matter of months due to inflation and the trade deficit. Morgan Stanely, S&P and Fitch are pessimistic on similar grounds. But the overwhelming view does not predict a meltdown in the short term. Vietnam's trade deficit is an estimated $25 billion this year. Adding the $2 billion short-term foreign debt, the total cannot be fully replenished by the $20 billion foreign reserves, but annual dollar inflows from abroad are complementing the shortage.
The Central Institute for Economic Management in Vietnam says $12.4 billion came into the country last year, including foreign direct investment ($6.7 billion) and official development assistance ($2.2 billion). Chief of the State Bank of Vietnam's Banking Development Strategy Agency Le Xuan Nghia predicts $16 billion will flow in this year, up 15 percent. Also, many expect inflation to stabilize from the third quarter. Matthew Hildebrandt, an economist at JPMorgan Chase Bank, says a better summer harvest of rice, the main culprit behind inflation, will soon rein in the price rise.
Hanoi has implemented short term belt-tightening measures including a key rate hike from 8.7 percent to 12 percent, a 10 percent cut in spending and a reduction in excess real estate loans taken out by public firms. Samsung Electronics Vietnam CEO Park Je-hyung says multinationals like Samsung, Intel and Taiwan's Foxconn who have planned to invest several trillion won in Vietnam are by no means having second thoughts yet. He said the country's growth potential is abundant with industrial output to grow over 20 percent this year.
(englishnews@chosun.com )
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