World Bank: Worst is over for Vietnam

Annual inflation has hit 20 per cent and rising, the trade deficit is widening and the first signs of financial distress are appearing in the real estate sector. But the worst of Vietnam’s latest bout of macro-economic instability is behind it, according to the World Bank.

At a briefing in Hanoi on Thursday, Deepak Mishra, the World Bank’s lead economist in Vietnam, argued that the country was now “on a declining path of instability”.

The World Bank, which has around $8bn of outstanding loans in Vietnam, argued that confidence was returning thanks to the successful (thus far) implementation of the government’s crisis-busting package of monetary and fiscal tightening and anti-dollarisation measures, known as Resolution 11.

For the first time in 37 months, US dollars are being sold by banks for less dong (Vietnam’s currency) than the official exchange rate set by the central bank, Mishra noted. And spreads on Vietnam’s sovereign bonds have narrowed to below emerging market averages.

So far, so good. But, given Vietnam’s reputation for what one analyst previously called “whack-a-mole” economic policy, the key question about Resolution 11, which was introduced in February, has always been whether the government will stay the course.

Like every good financial institution, the World Bank is hedging its bets on this front. With the government already coming under pressure from some companies to reduce interest rates, which it has hiked to as much as 14 percent, Mishra warned that it must not “prematurely declare victory” in the battle for macro-economic stability.

He also urged the government to do more to rein in the state investment budget, to show concrete progress on the reform of state-owned enterprises and improve communications with the market.

Few analysts would disagree that these measures are vital if Vietnam is finally to tame inflation and restore medium-term confidence in the sickly dong. But cutting spending and reining in the powerful SOEs are political challenges rather than economic ones.

And progress on many key reforms has been held up while Communist-ruled Vietnam has been going through its protracted process of political renewal. The new government will not be confirmed until late July/early August, when the recently-elected National Assembly approves it, over a year after the jockeying for position began in earnest.

A number of investors have told beyondbrics that, once the new team of ministers is finally in place, they expect to see action on a range of important issues from improvements to the illiquid stock market to the debt default at Vinashin, a troubled state-owned shipbuilder. Critics say this is little more than wishful thinking.

Even if the government, led by Nguyen Tan Dung, the prime minister, can muster the political will to force through key reforms, Vietnam is unlikely to return to the 7 per cent plus levels of annual GDP growth it experienced before the global financial crisis, Mishra warned.

He expects GDP growth to come in at the bottom end of the government’s 6 percent-6.5 percent range this year and to improve slightly in 2012.

But, after moving from boom to bust to boom to bust in less than five years, most investors and citizens would doubtless appreciate some boring, old stability.