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  July- Sep 2008         
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• PM Tan Dung: we've taken measures to bring down inflation.

Challenging times for Vietnam

A popular saying among Western investors is that Vietnam is the next great investment opportunity. A long list of concerns about China, such as inflation, shortages of skilled workers and energy, a strengthening currency, changing government policies, and even the possibility of widespread civil unrest have caused investors to seek other options outside of China.

Most importantly, the wages in China are rising close to 25 percent a year in many industries(in dollar terms) and China is no longer such a bargain. But even as investors seek options outside of China, many Southeast Asian countries are becoming overheated.

Eager investors saw Vietnam as the next investment opportunity and began pouring in investment. However, the large amounts of capital inflows actually began to hurt the economy. “We're in a situation now, and have been, where we have very big capital inflows financing a big trade deficit,” said Jonathon Pincus of the United Nations Development Program.

The inflow of foreign currency puts pressure on the Vietnamese dong to appreciate, but that would make Vietnamese exports more expensive, hurting local industries. Thus, the Vietnamese government held down the exchange rate by buying dollars with dong, which inflated the supply of dong, thereby contributing to inflation.

Like many other countries in the region, Vietnam's economy is export-driven, energy dependent and labor intensive. Vietnam's economy had been working very well as long as energy remained cheap and American consumption was high.

But as the credit crisis hit the US and consumers spent less, and rising oil and food prices led to double-digit inflation throughout the region, Vietnam's economy took a downturn. Imported oil surpassed export earnings and  created a trade deficit which ballooned to $14 billion in the first five months of 2008, from $11 billion for all of last year.

The global rise in oil and food prices has worsened inflation, which has also increased due to an explosion of credit from banks looking to profit from the boom. Many smaller and newer joint-stock banks that were opened up in the last few years, got heavily involved in real estate and the stock exchange, and expanded their credit by over 100 percent in 2007, which also has contributed to inflation.

Vietnam's economy has become overheated and its government is dealing with a plethora of problems.  Inflation topped 25 percent in May, the highest level since at least 1992, while the trade deficit more than tripled over the first five months of the year.

“Faced with surging inflation, the Vietnamese government
has yet to embrace proven macroeconomic-policy response: aggressive monetary tightening.”
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