Vietnam's inflation rate soared to 25 per cent in May, the highest since 1992. The Hanoi government cut its growth forecast for this year from 7 per cent to 9 per cent, and said curbing inflation was its top priority.
The trade deficit in the first five months of the year tripled to US$14.42 billion (Bt474 billion) from $4.25 billion in the same period a year earlier. Slowing economic growth and a widening trade deficit have caused a shortage of dollars in the market.
The Vietnamese currency, the Dong, has been losing value. The State Bank of Vietnam set a rate of 16,117 dong to the dollar yesterday, compared with 16,107 on Wednesday, according to its website. The currency is allowed to trade up to one per cent on either side of that rate and has been losing value for five weeks in a row. Rating agencies have lowered their outlook on the nation's debt to negative, citing a slow government response to inflation.
There are rising concerns that this may result in a financial crisis and a hefty devaluation of the currency like Thailand experienced in 1997. Some believe this may parallel the crisis that Thailand faced in 1997. If Vietnam devalues its currency as a way out of economic distress, some fear it might lead to competitive devaluation among other regional currencies, including the baht. (see The Nation June 6, 2008)
Other Southeast Asian countries are also battling high inflation. Indonesia and the Philippines have already raised interest rates as surging food and energy prices prompt policymakers across Asia to tackle inflation even as growth slows.
In an advisory note to SIIA corporate members in Mar 2008, SIIA Chairman Simon Tay had identified and given an early warning of the emerging problems in Vietnam. He had observed that Vietnam’s trade imbalance rose to US$4.2billion for the two months of Jan and Feb 2008, more than four times higher than in the corresponding period of 2007. He advised that unless the Vietnamese currency was allowed to appreciate, the financial system would face considerable pressures, and might have the experience to cope. The SIIA issues notes to its corporate members on regional developments.