Vn outlook takes a dive

 Thai policy-makers watched Vietnam's spectacular growth with awe as HSBC Holdings snapped up a local bank and property developers rushed in to invest in Hanoi and Ho Chi Minh City.

Foreign direct investment (FDI) flowed in as Vietnam was seen as an alternative production hub to China. For an economy of US$70 billion (Bt2.33 trillion), it sucked in FDI of $6 billion last year and clocked investment commitments worth $18 billion.

This rosy picture has taken a dive lately. Its stock market has lost some 60 per cent from its peak last year. Property prices have fallen 20-50 per cent.

The catalyst of this sharp turn of events is inflation. From 7.2 per cent in April 2007, it shot to 25 per cent this past April, the highest in Southeast Asia.

Food inflation alone rose 34 per cent. This has sparked social unrest, with workers staging strikes to demand higher wages.

"Its central bank has done quite a lousy job in containing inflation," said one investment analyst from Singapore.

With rising inflation, Vietnamese authorities embarked on a massive effort to curtail credit extension and mop liquidity out of the system, Merrill Lynch said last week.

Those measures included:

lRaising the base rate this week from 8.75 per cent to 12 per cent and refinance rate from 9 per cent to 13 per cent. The discount rate went from 7.5 per cent to 11 per cent.

lRequired commercial banks to increase deposit-reserve requirements from 5 per cent to 10 per cent a year ago and then to 11 per cent in January.

lRequired commercial banks in March to buy a total of $1.3 billion in treasury bills with low yields.

lInitially capped interest rates on deposits (in an attempt to protect the banking sector, which was heading for a deposit war) but have now reset this so that deposits and lending cannot exceed 150 per cent of the base rate. While higher deposit rates are necessary, capping the rate at which banks can lend denies potential borrowers access to capital.

lRequested all commercial banks to limit credit growth to 30 per cent year on year. However, this is not an official decree, and many are ignoring it.

lIntroducing eight solutions to "curb inflation, stabilise the macroeconomy and ensure social welfare and sustainable development".

lPut in place price controls on such items as water, electricity, steel, cement and fuel. For now, the price controls are only this month, but the government will reconsider and adjust them in line with the fight on inflation.

But these measures are too little, too late. Merrill Lynch said the dong was considered artificially undervalued. The consensus is it will eventually move higher.

"However, to foster exports, the central bank kept printing notes to keep the dong low," it said. "Finally, the dong did begin to rise in August/September last year, a policy move perhaps in response to Vietnam's adherence to the World Trade Organisation.

"It continued to rise as inflation rose. But when inflation rose past 10 per cent in November, it became clear the authorities had lost control, and inflation became a negative factor for the currency.