Vietnam has been touted as one of the remarkable examples of market economy reform in Asia over the last two decades. It has enjoyed an annual average growth of 7.5 percent over the past 10 years. This success story is the result of the ``Doi Moi'' policy of reform and openness. The socialist country introduced the policy in 1986 to put a market economy in place.
But the Vietnamese economy is now faltering due to runway inflation and a snowballing trade deficit. Consumer prices surged 25.2 percent last month, the highest since 1992. The country's trade deficit reached $14.4 billion in the first five months of this year, a threefold increase from a year before. It is predicted that the shortfall will account for as high as 30 percent of the nation's gross domestic product (GDP) this year.
No doubt investors have made jittery reactions to those gloomy factors. Hanoi's stock market tumbled about 60 percent this year. Analysts point out that the Vietnamese government has failed to bring mounting inflationary pressure under control. They recommend investors avoid holding Vietnamese currency-based assets. The dong lost 2.7 percent in the past three months.
The currency slid from 16,120 dong to the U.S. dollar to 18,500 dong on the black market last week. Market watchers warn of a 30-percent fall in the value of the dong against the greenback. It goes without saying that the weaker currency will apply more pressure on inflation. Against this backdrop, the Vietnamese central bank raised the benchmark interest rate to 14 percent from 12 percent to check the spiraling inflation rate.
Pessimists even warned that Vietnam faces a currency crisis, although optimists claimed that foreign capital inflows are still strong, propped up by fresh foreign direct investment. The worst-case scenario is that Vietnam might turn to the International Monetary Fund (IMF) for a rescue package in about six months. Although the IMF said it is not currently working on an assistance package for the country, Vietnam is likely to be haunted by the specter of the 1997-98 Asian financial crisis.
The epicenter of the turmoil was then Thailand. Now, concerns are growing that Vietnam may become the first victim of a global slowdown stemming from soaring oil prices and higher inflation. If the country is thrown into economic turbulence, the fallout could reverberate not only throughout Asia, but also around the globe. South Korea, the largest investor in Vietnam, might suffer from huge losses arising from the possible turmoil.
Korean investors range from labor-intensive industries such as textile and footwear to capital-intensive infrastructure projects. A total of 1,115 businesses have so far invested a combined sum of $13.5 billion in the Southeast Asian country. Besides, Korean banks, brokerages and asset management firms have invested in Vietnamese stocks and real estate. Therefore, local investors are required to closely watch the developments in Vietnam and take timely and appropriate steps to minimize potential losses.