Macroeconomic risks are intensifying

The Economist Intelligence Unit's economic growth forecast is subject to downside risks. On the domestic front, if the government fails to adopt a clear macroeconomic policy agenda that gives sufficient attention to economic stabilisation, there are concerns that inflation will remain in double digits and that the downward pressure on the dong will intensify. The authorities have recently taken steps to tighten both monetary and fiscal policy, but there are concerns that this is a case of too little, too late. Owing to the fact that inflation has accelerated in recent months and that the currency has been devalued sharply over the past few years, confidence in the dong has diminished, and there is increased demand for safe havens for US dollars and gold. Part of the problem is that the authorities have failed to damp down inflationary expectations, and as a result drastic measures, such as direct controls on prices, may yet be needed to bring down inflation rather than indirect measures, for example increases in policy interest rates. However, in a move that suggests that the government's fiscal position is too weak to support mechanisms to keep prices artificially low, the authorities have recently been forced to raise prices for electricity and fuel at a time when several Asian economies are increasing or expanding their subsidy programmes in response to rising global commodity prices.

On the international front, there is a risk that the global economic recovery will be weaker than we currently expect. Not only would this damage exports, but it would also have a knock-on effect on consumer and business spending in Vietnam, thereby inhibiting economic growth. Given the precarious nature of the country's international reserves-as indicated by the difficulty that the State Bank of Vietnam (the central bank) has had in managing the level of the dong:US dollar exchange rate-there is cause for concern over the country's ability to finance a widening trade deficit. Vietnam has already had its international credit ratings downgraded. Citing concerns over an external payments crisis, partly owing to the sharp fall in Vietnam's foreign-exchange reserves in the past year or so, an international credit-ratings agency, Moody's Investors Service, downgraded Vietnam's sovereign debt rating in mid-December 2010 to BB- from BB. This was followed shortly after by a downgrade by another credit-ratings agency, Standard & Poor's, which lowered Vietnam's long-term foreign-currency sovereign credit rating to B1 from Ba3, stating that it was concerned that the Vietnamese banking sector had become more vulnerable to shocks. In July 2010 a US-based credit-rating agency, Fitch, downgraded Vietnam's sovereign debt rating, citing concerns over contradictory economic policymaking. Such downgrades and growing concerns over economic stability and the country's diminished international reserves has raised speculation that a support package from the IMF may be needed.

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