beyondbrics

Emerging market investors tend to gravitate toward countries that have accelerating economic growth prospects.

Vietnam, which has been battling regular bouts of economic instability, is one of the few fast-growing countries in the world where investors want to see growth slow down.

On Wednesday, the Asian Development Bank became the latest financial institution to downgrade the Southeast Asian nation’s growth prospects for this year following the government’s unveiling of a package of measures designed to combat surging inflation and a lack of confidence in the financial system.

The ADB cut its forecast for GDP growth this year to 6.1 per cent from 7 per cent, arguing that if the government successfully implements its fiscal and monetary tightening policies, growth will slow but inflation will be brought under control eventually.

The package of measures – known as Resolution 11 – certainly looks the part, with the government vowing to keep borrowing rates high until inflation has stabilised, curb credit growth and cut non-recurring, non-salary spending by 10 per cent.

But, as Ayumi Konishi, the ADB’s country director, told beyondbrics: “the real test will come in the implementation.”

While inflation is a growing challenge across the region, the causes and the scale of the problem are very different in Vietnam. Across Asia, capital inflows have been driving prices higher while in Vietnam, rapid credit growth and wasteful spending by state-owned companies lies at the root of the problem.

Investors and government officials in China are spooked out by annual inflation of 4.9 per cent.

But in Vietnam, consumer prices rose by 13.9 per cent year-on-year in March.

The extent of the credit expansion in Vietnam over recent years has raised fears about financial contagion, especially in light of the problems at Vinashin, the state-owned shipbuilder that is unable to pay its foreign debt at present.

The ADB noted in its latest update on the Vietnamese economy, which was released on Wednesday, that:

The large increase in the domestic credit stock, about $100 billion during 2007–2010, raises concerns over banking asset quality, as does bank exposure to real estate and state-owned enterprises.

Most investors believe that the government allowed economic problems to build up because it was reluctant to see growth slow in the run up to the Communist party’s key five-yearly congress, which was held in January.

Politics and economics don’t always mix.

Related reading:
Vietnam: debt woes, beyondbrics
Vietnam: inflation still looms, beyondbrics