Vietnam's Economic Challenge
Image Credit: Wikicommons

Vietnam's Economic Challenge


These are tough times for Vietnam.  After more than a decade of impressive growth, the economy is slowing.  The dramatic events of recent weeks show that challenges continue to mount up.

Vietnam’s economy has become increasingly difficult to manage. Hanoi has had to struggle with high price increases for years.  Since 2008, the country has suffered two bouts of Consumer Price Index (CPI) inflation. The year the global financial crisis officially broke out prices soared by more than 20%. In 2011 monthly CPI readings came in above 15% for most of the year.

The main stock market index has been falling since early May, and is well below its post-crisis 2009 peak.  The currency has depreciated considerably since 2008, partly due to official attempts at devaluation, but also because of some serious concerns about the structure and state of the economy.

In fact Vietnam runs a very similar economic model to its large northern neighbor, China.  Widely seen as an alternative to China for foreign firms wishing to take advantage of cheaper production costs, the country is now suffering some of the same problems confronting Beijing.  These include: a distorted credit allocation system in which state-owned companies get preferential access to credit – and don’t use it so efficiently, a recent large credit expansion that has inflated a property bubble, social unrest over land seizures, a widening wealth gap, and growing criticisms against government officials and the business elite for corruption and “cronyism”.

These latter problems have been particularly prominent recently. In late August, powerful Tycoon Nguyen DucKien was arrested for economic crimes, causing a brief run on the Asia Commercial Bank (ACB) that he had founded. On September 4th, Duong Chi Dung, former Chairman of Vinalines, the troubled state shipping firm, was arrested outside of Vietnam. Six other Vinalines executives have been arrested this year. In the same week, Pham ThanhBinh, the former Chairman of Vinashin, lost his appeal against a twenty year prison sentence related to irregularities at the company.  (Vinashin is another state shipping company which nearly collapsed in late 2010 under a massive pile of debt and serious management concerns.)

Whilst some of these arrests seem related to a power struggle in the government, they also illustrate the growing economic malaise and urgent structural issues that must be tackled.  State owned enterprises (SOEs) with their privileged access to credit have built up a huge U.S.$ 50bn pile of debt which is now dragging on performance.  Bad loans (those where borrowers are unable to repay) are rising.

In July the State Bank of Vietnam – the country’s central bank – said that 8.6% of loans in the banking system were bad. This is the highest ratio amongst any of the ASEAN states, even if the reliability of such data is considered suspect by some.

The central bank acted effectively to halt the run on ACB, but it faces much more difficult problems in the country’s financial system. Debt is piling up too fast, but tighter credit controls this year have resulted in a large fall in GDP growth rates.  Reforms to the financial system and more importantly to the position and status of SOEs are increasingly urgent. The same problems which damaged Vinashin and Vinalines are believed to be present in other large SOEs, not least the huge Vietnam Electricity Group (EVN) conglomerate.

Reforms are never easy, especially when powerful elites have vested interests in the status quo.  The arrest of Nguyen DucKien however, shows that action is underway. It may also show that in Vietnam, as elsewhere, politics and economics are never far apart.

September 19, 2012 at 06:41

"Vietnam runs a very similar model to China" is indeed inaccurate John Chan. The author should really say "vietnam runs a very similary model the pre 1991 Japan model….which has also been used by China and various other nations since".
Japan had a much stronger R&D base when it hit the problems which this unbalanced development model always hits……DEBT!  Thank god the Chinese leaders seem to be aware of this and are not pouring credit on the problem as they did in 2008. Let's hope they don't give in to the stimulus pressure and kick the can down the road again (the can keeps getting bigger!)

September 19, 2012 at 06:28

I don't think the fact that China has grown well for 30 years is incompatible with saying that there are now serious problems in the economic model.  As for the last 10 years, i suspect that China's supercharged growth has been bought at the expense of strong growth in the next 10 years (ie borrowing too much and creating too much debt). The debt build up is now beginning to drag on performance. Rebalancing is going to be hard without strong external demand and without an almost impossible short term boost in domestic demand

September 19, 2012 at 06:21

@John Chan,
I can't speak for the author, but China has been responsible for 45% of world M2 creation in the top 20 economies since 2007. Since 2008  it is even higher. BTW I am getting this from Chinese government statistics (from the PBOC).   Your suggestion that Vietnam has somehow been different from China on this front is ridiculous.
Do you ever think that making no comment at all might be less damaging than making inaccurate ones? Maybe pass that up the chain of command and see what they say?

Jackie Chan
September 17, 2012 at 14:27

Mr. John Chan is being disenguous. China's comparative advantage is very similar to Vietnam. It has an enormous supply of laborers who are willing or forced by economic circumstance to work for long hours in slave-like conditions. And, yes, China copies the intellectual property of the foreign companies which have set up shop there. So much for its co-called R & D advantage.

September 15, 2012 at 05:25

China had the same comparative advantages as SE Asia namely cheap labour, with two fundamental differences, namely higher personal saving rates and larger population. The large population represents a huge potential customer base and is used as a bargaining chip for technology transfer. The high saving rates allow for infrastructure investment which acts as a mulitplier for ecomomic growth. It is these two factors that enables China it to attract global industrial manufacturing activities allowing it to leap frog the SE Asia development.
It is a misrepresentation to attribute the development lead China has over SE Asia to a cargo-cult. In fact I would suggest that it is insulting to SE Asian to claim that they have an inferiority complex with the West. In a similar way to how some homosexual people are the loudest advocate of homophobia, I would also suggests that by your comment that it is you and people like you in China are the one who has an inferiority complex with the West.
As for you advice for Vietnam to adopt the RMB as its currency, what is the point? Vietnam or any other country would be insane to adopt a non-convertible currency that has no liquid finacial/capital market such as the RMB. Furthermore if for currency stability reasons Vietnam need to adopt a foreign currency why not adopt the US$ directly? It is absurd to go through the RMB peg to the US$!

Be Way
September 15, 2012 at 03:23

If China Model is lacking, how does China continous growth from nothing to the 2nd economic power of the world means to you then..   In this particular case it's the Vietnamese themselves who are not capable of managing their own economic growth.   From cultures to political system, from food to confuciusm philosophy, Vietnam copied everything wholesale from the Chinese.     Except for their talent of possessing the rebellion genes, the Vietnamese ain't competent enough to develop and prosper on their own.

Tu Duy
September 14, 2012 at 04:02

As Vietnam's economy relied a lot on the government control, therefore without the good and strong leadership it would be difficult for the country to have a sustainability of developement

John Chan
September 13, 2012 at 14:28

SE Asia nations has cheap labour advantage all the time, the West and Japan have been exploiting that source for decades, yet none of those nations can rise above cheap labour source to challenge the economic dominance of those exploiters like China, because those nations have cargo-cult culture, challenging their ex-colonial masters is beyond their forte, Vietnam is just one of them. Saying “Vietnam runs a very similar economic model to its large northern neighbor, China.” is laughable, the author seems fail to understand that China’s solid industrial and R&D bases is the source supporting China competing on the world stage, the SE Asia nations just do not have such capacity.
In term of financial maturity, Vietnam is similar to Greece; it needs outside help to reform its financial system. Vietnam should take a page from EU nations if it really wants to change to the better; the first step Vietnam can take is to adopt RMB as its currency, so that it can stop printing money irresponsibly for a starter.

September 13, 2012 at 10:26

China model is a bad one. Vietnam has been copying China for decades. Vietnam should not hide this truth.

Share your thoughts

Your Name
Your Email
required, but not published
Your Comment

Sign up for our weekly newsletter
The Diplomat Brief