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NEWS UPDATES Asean Affairs     31 October  2011

Vietnam faces economic crisis
As Vietnam battles galloping inflation and a plummeting currency, a new challenge has emerged - a general collapse of confidence in the state's ability to heal the ailing economy.

On the brash success of neighboring China, Vietnam's obsessive pursuit of growth lasted for two decades until economic threats forced it to shift attention to stability this year.

The ruling communist party, which has total control in the one-party nation, announced an overhaul of its economic model during a five-yearly congress in January and a slew of monetary and tax austerity measures have followed.

But as pressure on the economy continues to mount, the political system itself has come into question from businesses and the Vietnamese people.

"What is happening in Vietnam is a crisis of confidence," a foreign investor in the southern business hub Ho Chi Minh City said.

In 2008, as financial turmoil swept the globe, Vietnamese authorities responded by injecting massive liquidity into the economy, and speculative bubbles multiplied.

State-owned shipbuilder Vinashin embarked on a flurry of investments, racking up debts of $US4.4 billion ($A4.12 billion) that eventually saw it plunge into quasi-bankruptcy.

Now Vietnam is trying to bring down Asia's highest rate of inflation - nearly 22 percent year-on-year in October - trim its trade deficit and strengthen the dong, which has seen four devaluations in 15 months.

The authorities have upped interest rates to try to cool the economy and choke off speculation, piling intense pressure on small- and medium-sized firms with lenders now charging upwards of 20 percent.

Experts predict the pain will continue for at least another 18 months.

"The price to be paid is enormous. There are already a certain number of corpses on the pavement," said the investor.

But while he said the measures were "necessary", others are wondering if they will be enough.

Dominic Scriven, general manager at Dragon Capital, said the last five years had seen Vietnam's economic model "go out of balance".

"The question is, does everybody realise that and are the measures put in place sufficient to restore the balance?"

Recent signs are that foreign and local businesses have yet to be convinced.

Pledged foreign direct investment into Vietnam slumped by almost a quarter in the first 10 months of the year, to $11.3 billion, according to official figures.

Business confidence has fallen for three consecutive quarters in 2011, according to a survey by the European Chamber of Commerce published earlier this month.

"The measures taken to stabilise the economy have so far failed to ease the concern of the business community about the macroeconomic outlook," the group said.

In a country still marked by a culture of opacity inherited from years of war, the true situation is difficult to determine.

And when even the official picture is far from rosy - with barely eight weeks worth of foreign exchange reserves and fears over the level of bad debts held by public banks - the lack of visibility is worrying.

The benchmark VN-Index at the Ho Chi Minh City stock exchange, opened with great fanfare in 2000, slumped to just 383 points in August this year, barely a third of its peak in 2007 after Vietnam joined the World Trade Organisation.

It is a far cry from the 1990s when Vietnam, then described as the next Asian 'tiger economy', bounded onto the world stage with a seemingly unstoppable roadmap to success - opening up vast swathes of unexploited land and mobilising a young and cheap labor force.

But the economy has struggled to build on that promise.

Jonathan Pincus, an economist and dean of the Fulbright School in Ho Chi Minh City, said the country's large trade deficit - $12.4 billion in 2010 - is a sign that the previous growth strategy was past its sell-by date.

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