Economic troubles in Vietnam show the dangers of slow policy responses, but the risk of the country’s problems spreading to the rest of the region is low, an International Monetary Fund official told Reuters on Tuesday.
Vietnam’s market reforms have boosted growth and trade in the last decade, but the developing economy is showing signs of overheating after rapid credit growth in 2007.
The Southeast Asian economy and the dong currency are coming under increasing pressure from inflation running at more than 25% and ballooning trade and current account deficits.
“The case of Vietnam is a very good illustration of the dangers of getting behind the curve on policies,” Jerald Schiff, assistant director of the International Monetary Fund’s Asia and Pacific Department, said on the sidelines of a news conference.
“Now clearly Vietnam is at an overheating stage and needs to adjust its policies more sharply than would have been before,” Schiff said.
Vietnam’s weakening fiscal position and limited foreign exchange reserves have prompted some analysts to warn of a potential currency crisis, but Schiff played down the likelihood of a near-term crisis.
“I am not necessarily predicting any particular crisis in Vietnam, but even if there are problems, we don’t really see it necessarily having any major implications for the rest of the region.”
Schiff, who is not directly in charge of VietNam but oversees part of the Asia-Pacific region, said the risks of contagion was much lower than during the 1997-98 Asian crisis because many economies’ fundamentals have improved compared with a decade ago.
Financial markets, however, have turned sharply bearish. Vietnam’s stock market, the world’s worst performer, has tumbled 60% this year and offshore forwards markets are pricing in a nearly 30% fall in the dong in a year.
Earlier this month, Moody’s Investors Services downgraded its ratings outlook on Vietnam to negative from positive after an outlook cut by Fitch Ratings to negative from stable.
Moody’s said the swing in ratings outlook reflected its view that Vietnam’s economic imbalances were greater than anticipated.
Inflation in Vietnam hit 25.2% in May, sapping domestic investor confidence as imports soared and the trade gap more than trebled in the first half of 2008, according to state media.
Fitch said policies had not dealt quickly or strongly enough with inflation, potentially posing risks to the banking sector.
Two Vietnam-based economists said in a commentary published this week that the task of Vietnamese policy makers was more complicated now because state conglomerates had branched out into areas such as banking and residential property.
“Instead of sanctioning this kind of behaviour, the authorities need to regulate it,” Jonathan Pincus of the UN Development Programme and Vu Thanh Tu Anh of the Harvard University’s Vietnam Programme said in an article published by the American Chamber of Commerce in Hanoi.
“Imposing discipline on these groups, most of which emanate from within the state, is the central challenge facing the Vietnamese leadership not only this year but in all likelihood for years to come.”