inflation has hit 20 per cent and rising, the trade deficit is widening and the first signs of financial distress are appearing in the real estate sector. But the worst of Vietnam’s latest bout of macro-economic instability is behind it, according to the World Bank.
At a briefing in Hanoi on Thursday, Deepak Mishra, the World Bank’s lead economist in Vietnam, argued that the country was now “on a declining path of instability”.
The World Bank, which has around $8bn of outstanding loans in Vietnam, argued that confidence was returning thanks to the successful (thus far) implementation of the government’s crisis-busting package of monetary and fiscal tightening and anti-dollarisation measures, known as Resolution 11.
For the first time in 37 months, US dollars are being sold by banks for less dong (Vietnam’s currency) than the official exchange rate set by the central bank, Mishra noted. And spreads on Vietnam’s sovereign bonds have narrowed to below emerging market averages.
So far, so good. But, given Vietnam’s reputation for what one analyst previously called “whack-a-mole” economic policy, the key question about Resolution 11, which was introduced in February, has always been whether the government will stay the course.
With prices soaring, Vietnamese householders are unwilling to give up their extensive personal holdings of dollars, which they see as a safe-haven. This has forced authorities to turn to the extensive reserves held by some government-controlled firms in a bid to boost the State Bank of Vietnam's coffers, Long said.
"This is really a serious issue in Vietnam now," he said.
Central bank reserves can be used to support a weak currency.
Vietnam has been spending more on imports than it earns from exports, with the trade deficit reaching about $6.6 billion in the first five months of the year, up 23 percent from the same period of 2010.
In February Vietnam announced a 9.3 percent devaluation of the dong, which is good for exports but has also driven up imports costs.
Economists say the central bank wants to avoid further devaluation.
Long said the exact amount of Vietnam's foreign exchange reserves is a secret but it could be as low as about $10-15 billion, which is below the ideal range of about $20 billion to $25 billion.
State firms typically buy and sell foreign exchange at the official rate, which on Thursday was 20,638 dong to the dollar, against up to 20,650 on the black market.
World Bank officials said Thursday the official and unofficial rate gap has narrowed, in one sign that government measures are helping to restore economic stability.
But the Hanoi Young Business Association said in a report last week that workers, consumers and companies are "losing confidence in the home currency and existing monetary, foreign exchange and banking policies."
Some state firms have already been selling their dollars so it was unclear what additional benefit would accrue from the central bank's directive, said Deepak Mishra, the World Bank's lead economist in Vietnam.
Similar efforts in the past were not strictly implemented and led to only short-term results, he said.
There has been a "biased allocation of funds to inefficient state-owned conglomerates," the Hanoi Young Business Association said.
Problems at state-owned firms were dramatically illustrated at shipbuilder Vinashin, which government inspectors accused of "rampant and inefficient investment" that left debts of about $4 billion at the end of 2009.
Lao Dong newspaper reported the inspectors' findings on Thursday.
It said that since 2006 Vinashin had signed 85 contracts worth 58,224 billion dong ($2.8 billion) but fulfilled only 15 of them.