Vietnam’s Quick Economic Recovery Spells Trouble

12.02.2009 – In the early months after the financial crisis, Vietnam’s economy looks like it was in for huge trouble.  Exports fell by 14% the first 8 months of 2009 and foreign direct investments (FDI) value dropped by 82%, reported the Economist.  There were fears of wide spread job loss.

However, as with many other governments, the Vietnamese government alleviated the impact of the financial crisis by pumping cashing into the financial system, making it much cheaper to borrow money and increasing government spending.  The government provided nearly $1 billion in interest subsidies (e.g If $20 interest is charged on a loan of $100, the government offer programs to pay for part of that $20).  Cheap availability of cash allows factories and business to keep running despite decreased export demands.  The strategy seems to have worked.  Credit Suisse forecasts growth of 5.3% this year and 8.5% the next year.

The excess cash pumped into the system by the stimulus creates fears of an unsustainable recovery.  The fear is that when the government reigns in spending and interest rates, the factories and businesses that rely on those programs will not be able to sustain themselves.  Also, excess cash and cheap credit that are not matched by real production will lead to inflation.  It is a reminder that only a little more than a year ago, in August 2008, inflation in Vietnam reached a rate of 28%.  Fears are that those days could return if credit and spending are not kept in control.

Secondly, the Economist also report concerns that short-term focus on economic recovery will side track long-term reforms, such as opening up “telecom and retail industries to foreign competition,” privatizing certain state-owned enterprises, and reducing red tape and corruption.

Source Article: V Not Yet for Victory

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Upcoming Article: Vietnam and the US More Alike Than We Think?

The discussion of reigning in spending and credit in Vietnam draws a comparison to the current US economy.  Similar to Vietnam, the US is operating in a budget deficit, pursuing an aggressive fiscal policy to stimulate the economy, and leaving interest rates at all time lows.  Similarly, the US is seeing the value of the dollar weakened against the Yen and Euro and the value of commodities rising to all time highs.  Many conservatives are calling for reduced spending in fears of “hyperinflation,” which happened in Vietnam a year ago and is feared to happen again.

However, despite similar economic policies, is Vietnam and US a proper comparison given the nature of each economy?