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August 19, 2008

Speculative capital adds to Vietnamese woes

Global speculative capital inflow pushed up inflation in Vietnam, added to economic difficulties and put pressure on Vietnam's macro-economic policy, Chinese news agency Xinhua reported, quoting economists in Hanoi.

Vietnamese economy has experienced great difficulties since the beginning of this year, with the VN-Index falling sharply, a record high inflation, an expanding trade deficit and a depreciating Vietnamese currency.

There are many factors behind the economic difficulties, and global speculative capital, or hot money, is seen as a contributing factor as well.

Over the past years, the Vietnamese government has been enthusiastic in attracting foreign capital. The foreign investment on fixed assets went up each year by impressive figures, contributing greatly to the country's annual average 7.5 percent economic growth in the past decade. However, the speculative investment fund also sneaked in.

Incentive for speculative fund was the chance to profit from Vietnam's stock and real estate markets. The VN-Index rose by about 144 percent in 2007, with the peak hitting above 1,100 points.

The problem with speculative fund is, said experts, their projects either do not generate goods for the economy, or will not do so for many years. Meanwhile, the foreign speculative capital expanded the money supply in Vietnam and the government has to put more Vietnamese Dong in circulation, pushing up the inflation.

The Consumer Price Index (CPI), a major inflation gauge, went up by 19.1 percent year-on-year in the first five months of 2008.

"Expanding credit and foreign investment over the past few years has expanded the money supply and led to the high inflation," said Tran Dinh Thien, vice director of the Vietnam Economic Institute of the Vietnamese Academy of Social Science.

This year, with the worsening economic situation in Vietnam and a depreciating local currency, the global speculative capital started to flow out of Vietnam. The stock market fell even sharply.

To deal with the economic difficulties, the Vietnamese government adopted a package of measures, including tightening the credit by raising the benchmark interest rate, reducing the economic target for 2008 to lessen the pressure on inflation and cutting down on public expenses.

The measures have started to pay off as Vietnam entered the second half of the year. CPI in July went up a modest 1.13 percent month-on-month over June, the lowest level since the begging of this year.

Vietnamese Prime Minister Nguyen Tan Dung said recently that the Vietnamese government vowed to keep the inflation below 10 percent by the end of next year and realize the economic growth of between seven and eight percent for 2009.

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