On January 11, 2007, Vietnam marked a major step in its economic journey when it became the 150th member of the World Trade Organization (WTO). At the time, the Vietnamese economy was flying high. The country had just wrapped up a year in which it registered gross domestic product (GDP) growth of 8.2 percent and was commonly cited as one of emerging Asia's shining examples. But the honeymoon that followed Vietnam's WTO accession was short-lived. After peaking in March 2007, Vietnam's main stock index plunged; by November 2008, it had lost over 70 percent of its value. The country's GDP growth was projected to drop below 7 percent for the year. Vietnam's cycle of boom and bust and its underlying financial vulnerabilities highlight the challenges that may lie ahead for emerging markets as the global financial crisis spreads.
A Reliance on Exports
Vietnam's downturn comes as a result of the interplay of several economic factors, some specific to Vietnam and others that are unfolding more broadly. In 2007, more than $6 billion in foreign direct investment (FDI) poured into Vietnam, according to statistics from the World Bank and the Economist Intelligence Unit. James Riedel, who teaches international economics at Johns Hopkins' School of Advanced International Studies, says the economic turbulence in late 2007 and 2008 was due to the inability of the country's fledgling financial framework to accommodate rapid growth. "Because Vietnam's financial system is weak--the banks are weak, the bond market is very small and not liquid, there's no secondary market, the stock market is very thin and dominated by state enterprises--massive inflows of foreign capital have the potential to destabilize the Vietnamese economy," he says. This instability took the form of runaway inflation and a short-term currency crisis, prompted by rumors that Vietnam's currency, the dong, was about to depreciate dramatically. When the public rushed to buy dollars and "the hot money tried to flee the country" in May and June 2008, Riedel says, people caused the very crisis they had feared: With dollars in short supply, the value of the dong dropped from 16,319 on the dollar on May 1 to 17,100 by July 1. When the State Bank responded to the mini crisis by limiting banks' supplies of dollars, investors were stuck paying black-market exchange rates (Bloomberg) as high as 19,000 on the dollar.
Now Vietnam is bracing for simultaneous sharp contractions in foreign investment, aid, and export markets. The Economist posits that emerging markets may face hardship during the financial downturn as capital inflows dwindle, "forcing countries that live beyond their means to cut spending. And even some countries that live roughly within their means have gross liabilities to the rest of the world that are difficult to roll over." Vietnam falls in the second category and has been financing its $16.9 billion trade deficit (AP) with FDI and loans from abroad.
Vietnam's dependence on exports leaves it especially susceptible to the global downturn, CFR International Affairs Fellow Brian P. Klein writes in the Far Eastern Economic Review. With growing economic problems in the United States, Japan, Australia, and China--which together account for nearly 40 percent of Vietnamese exports--Vietnam may see a significant decline in export revenues, perhaps most pointedly in seafood, shoes, and garments. According to data from the U.S. International Trade Commission, the growth rate of exports from Vietnam to the United States has already slowed somewhat, from 24.1 percent in 2007 to 21.7 percent in the first three quarters of 2008 over the same period in 2007.
Belt-Tightening Requires Curbing Demand for Imports
Riedel says Vietnam's $23 billion in foreign currency reserves provide "a cushion but not an inexhaustible one." The country will have to reduce its demand for foreign exchange proportional to its earnings, he says, otherwise "the excess demand will force the government to let the currency depreciate or use foreign reserves." This, he says, would put the country "into a vulnerable situation where you could have a balance of payments crisis," much like Thailand before its 1997 financial crisis. In its World Economic Outlook report for October 2008, the International Monetary Fund estimates that Vietnam's current accounts deficit, or the difference between its exports and imports, will increase (PDF) from 9.9 percent of GDP in 2007 to 11.7 percent in 2008, then bounce back to 10.4 percent in 2009. (In comparison, Thailand's current accounts deficit reached 8.1 percent before the 1997 crisis.) The State Bank of Vietnam in November 2008 widened the foreign exchange trading band for the dong from 2 percent to 3 percent of the fixed exchange rate to protect export revenues, a move that has led some financial experts to believe that depreciation may be in the cards by the year's end.
To keep the current accounts deficit under control, the Vietnamese government also has attempted to curb import demand by applying automatic import licensing regimes and introducing taxes on some imports, says Vu Quoc Huy, a professor at the economics college of Vietnam National University. But Huy fears these measures may backfire and hurt export profits, given that many imports like steel billet and textiles are used in the production of exports like steel and garments.
These controls are part of the government's eight-part plan to counter inflation, which eased to 26.7 percent (AP) in October 2008 as global fuel and commodity prices dropped. While experts say fighting inflation is necessary to stabilize the economy, Huy asserts that aspects of the plan could exacerbate the potential effects of the global financial crisis. Tighter monetary policy, for example, blocks the flow of credit that export companies need. But real estate developers will be the most credit hungry, Huy says. Citing statistics from Vietnam's Ministry of Planning and Investment, Huy says real estate developers were counting on FDI commitments for 48 percent of their funding in 2007, but the actual total foreign investment fell short of the amount promised: While $20 billion in overall FDI was pledged (VOA), only about $6 billion was delivered. This is normal, says Raymond Burghardt, former U.S. ambassador to Vietnam and a member of Indochina Capital's board of directors, but it could become a bigger problem now that many investors' cash supplies have dwindled. "With financing tight everywhere, I would expect that the gap between promises and action would be even bigger now," he tells CFR.org. That would leave many real estate projects like apartment and office buildings, shopping malls, and hotels at a standstill if credit is unavailable from domestic banks. During an October 2008 visit to Ho Chi Minh City, Burghardt encountered numerous idle construction projects, he says. Still, there is reason for optimism: According to Vietnam's General Statistics Office, pledged FDI totaled $58.3 billion from January to October 2008, almost six times more (AP) than the amount pledged over the same period in 2007.
Small- and medium-sized enterprises--and the farmers and factory workers supplying them with goods and labor--will take the brunt of the domestic and global economic downturn, Huy says. Unlike major corporations, they lack safety nets to stay afloat during tough times. Even after the Vietnamese government lowered interest rates three times between late October and late November 2008, from 14 percent to 11 percent, credit remained in short supply, and small companies were less attractive loan candidates than their larger counterparts. In November 2008, the president of the Vietnam Association for Small- and Medium-Sized Enterprises, Cao Sy Kiem, speculated that one-tenth of the country's 350,000 small- and medium-sized enterprises could go under (Bloomberg) in the first quarter of 2009 as a result of unaffordable lending rates.
Reappraising the Liberal Economic Model
According to Huy, many Vietnamese who don't recognize the nuances of Vietnam's financial situation have begun to question the merits of the liberal economic model their country pushed to develop by joining the WTO. "What they see is a coincidence," Huy says. "We became a member and then everything started happening badly." He says that while inflation is a "worldwide phenomenon this year," Vietnam's inflation is considerably higher than average, which suggests that internal factors have played a significant role. "The WTO is not the real culprit for the current situation, although it may expose Vietnam to more vulnerability," he says.
If there is a silver lining to the present crisis, Huy says, it might be that Vietnam is gaining valuable experience in managing a globally integrated economy. WTO membership expanded Vietnam's trade market and introduced new sources of foreign capital exchange, and with those opportunities come necessary growing pains. Other experts agree that Vietnam's financial problems have allowed opportunities for needed economic reforms. Klein says that Asian countries should take advantage of the economic downturn "to focus on enhancing key infrastructure and stimulating domestic demand," which are necessary for long-term growth. Tom Nguyen, head of global markets at Deutsche Bank in Vietnam, told BusinessWeek in May 2008 that the current "developmental challenges" are unsurprising given the country's growth rates, which hit 8.5 percent in 2007. Nguyen supports the government's move to reduce GDP growth to temper inflation. "It will take some time but over the long term the compelling fundamentals that attracted investors--at even much higher valuations--will play out," he says.