×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Vietnam’s problems spring from success

Vietnam’s problems spring from success
Comment E-mail Print Share
First Published: Tue, Jul 22 2008. 07 53 PM IST

Updated: Thu, Jul 24 2008. 11 32 AM IST
Economic success stories are often accompanied by substantial pain. Vietnam is a good example. Its government has hiked fuel prices by 36%. That will worsen its raging inflation, currently 27%. And, in the first half of 2008, the country ran a trade deficit of 30% of its gross domestic product, or GDP, although that was more than counterbalanced by foreign investment inflows of 65% of the GDP.
But, even as the Vietnamese government applies the brakes, there’s more reason for optimism than worry.
Vietnam’s problems resemble those of eastern Europe. The surge in foreign investment has pushed up the currency and fuelled inflation further stoked by rising commodity prices. The government, by reining in spending, and the central bank, by raising interest rates, are fighting inflation. But even at 14%, real interest rates remain heavily negative.
In eastern Europe, these problems would be worrying; in Vietnam, they’re less so. Vietnam has 85 million people, and in modern sectors, has productivity close to international levels, but its market-rate GDP per capita is under $1,000 (Rs42,300). Vietnam’s primary need is thus to increase living standards rapidly, which is causing a massive urban boom and increasing inequality, since rural areas are less responsive to new work patterns and lifestyles.
However, mobile phones hugely facilitate the transmission of new opportunities to the countryside, while the tsunami of foreign direct investment should provide plenty of employment and minimize balance of payments problems.
Vietnam’s government spending is low, most of its inflation is imported, and its central bank is preventing negative interest rates from unduly stimulating construction. Its foreign investment bonanza comes largely from those seeking low-cost production, where it has a big advantage, so it is less exposed to economic crises elsewhere.
As projects funded with foreign direct investment come on stream, the economy and payments position should stabilize, while a slowdown in global inflation should eventually cool price rises. A liquidity crisis is possible, but the odds favour Vietnam growing its way out of trouble.
The Vietnamese stock market is down 61% from its high, and is trading on 13 times earnings. Investors look to be underestimating the country’s advantages.
Comment E-mail Print Share
First Published: Tue, Jul 22 2008. 07 53 PM IST