Investors anxious on Vietnam despite vows to tame inflation

Jun 3, 2008, 7:57 GMT

Hanoi - A report released Wednesday by investment bank Goldman Sachs says Vietnam's rising inflation and trade deficits have 'aggravated international investors' fears' and 'raised systematic risk in the short term,' but argued the country's economy will remain healthy if the government takes needed measures.

The report came a day after businesses at the semi-annual Vietnam Business Forum raised concerns that inflation, which hit 25 per cent year-on-year in May, and related macroeconomic and social problems could destabilize the country's economy.

In its statement to the forum, the American Chamber of Commerce of Vietnam (AmCham) said the country's business environment faced threats from a speculative real-estate bubble, wage inflation, labor unrest, and corruption.

AmCham's statement singled out the arrests last month of two anti-corruption reporters, Nguyen Viet Chien and Nguyen Van Hai, who had aggressively investigated the 2006 corruption scandal in the transportation ministry.

'It is critical that members of the public and officials who are responsibly acting to remove corruption are not penalized,' the statement said.

In his speech at the forum on Tuesday, Minister of Planning and Investment Vo Hong Phuc responded that the two journalists had been arrested for breaking the law and that AmCham was misinformed.

Phuc said the government had taken appropriate anti-inflationary measures. The government said measures including restrictions on credit growth, price controls on key goods, and lifting of caps on interest rates will hold inflation under 20 percent for the year.

Other industry groups at the forum urged the government to move faster. Private business groups pushed the government to prevent state-owned businesses from making wasteful investments outside their core areas of competency, such as government shipbuilding monopoly Vinashin's ventures into hotels and tourism.

Western manufacturers asked for faster action on improving ports and transportation infrastructure, which have seen long delays as Vietnam's container ports have become stacked up in recent months.

Banking groups asked the central bank to allow the Vietnamese dong to float more freely against foreign currencies in order to fight inflation and reduce pressure on the country's foreign exchange reserves, which have reportedly fallen from 24 billion to 20 billion dollars since the start of the year.

Bankers also warned that small Vietnamese banks which have been extending irresponsible loans should be closed down or absorbed into larger banks. And manufacturers and exporters complained of rising numbers of wildcat strikes as workers demand wages keep up with prices.

Foreign business' concerns over macroeconomic problems appeared to be tempering the enthusiasm investors had for Vietnam in late 2006 and 2007.

After joining the World Trade Organization at the start of 2007, Vietnam saw its economy grow at a red-hot 8.5 per cent for the year, and it became a darling of investors. The country attracted over 20 billion dollars in foreign direct investment in 2007 and has pulled in over 14 billion dollars so far this year.

But the inflows have produced rising inflation and a trade deficit that hit 14 billion dollars in the first five months of 2008, exacerbated by worldwide hikes in food and energy prices. Last week a report by an analyst at Merrill Lynch warned of the possibility of a catastrophic devaluation of the dong that could produce a currency and banking crisis.

Wednesday's Goldman Sachs report said such a replay of 1997's Asian financial crisis was unlikely. The report pointed out that Vietnam's short-term foreign debt is only 8.6 per cent of GDP, as opposed to Thailand's 26.3 per cent in 1996, just before the Asian financial crisis hit.