Optimism turns to anxiety as Vietnam’s boom economy goes bust
Tuesday, June 17, 2008

HANOI: How quickly Asia’s newest “Tiger Economy” has stopped roaring.

A year ago, the Vietnamese stock market was one of the hottest on earth, the real estate market was soaring and economic growth blazed at 8.5 percent a year. Exports were booming and foreign investment was flooding in, helped by the country’s admission to the World Trade Organization.

Millions across the Communist country celebrated the marvels of capitalism.

Today, inflation has hit 25 percent, pinching incomes, and workers have been striking for higher wages. Property prices are falling and the stock market has plummeted to a two-year low, dashing the hopes of many people who expected to strike it rich.

Like thousands of other first-time investors in China and India, where shares also have plunged, Vietnamese are getting brutal lessons in the down sides of capital markets.

“My son and my husband are so angry at me,” said Doan Kim, a retired nurse who lost 70 percent of her $20,000 nest egg in the stock market. “My life is not the same.”

Many of the strengths that lured a record $20 billion in foreign investment to Vietnam last year remain in place. The nation has a rapidly emerging middle class and has adopted many economic changes in recent years. Half of its 84 million citizens are under the age of 30.

Economically isolated by years of war, the nation has a pent-up demand for consumer goods, making it an attractive destination for retailers.

Leading Vietnamese growth were the telecommunications, manufacturing and construction industries, as well as exports of clothing, shoes, rice and coffee.

For now, foreign investment pledges are still rising, reaching $5.1 billion in the first quarter, up 36 percent from the period a year ago.

But the government has lowered its growth target to 7 percent from as much as 9 percent, and the prevailing mood has soured drastically.

Like economies around the world, Vietnam has been buffeted by soaring food and oil prices, and the authorities are trying to rein in surging inflation. The jump in food prices is hitting the poor especially hard.

The Vietnamese government, eager to modernize the country, has also been spending freely on big infrastructure projects, incurring a large fiscal deficit.

State-owned banks in Vietnam have been extending easy credit to the massive state-owned companies that still dominate the economy. Credit growth last year exceeded 50 percent, according to Jonathan Pincus, chief economist at the United Nations Development Program.

The central bank has raised interest rates and the authorities have taken other steps to slow inflation. But it has not been moving quickly enough, hindered by a collective decision-making style and well-connected pressure groups with an interest in the status quo, Pincus said.

Pervasive corruption has also undermined economic efficiency.

The Vietnamese economy has been among the world’s fastest growing since it began accelerating free-market changes a decade ago. But like many developing countries, it has found it difficult to restrain inflation while capital has flowed into the country.

“All of us gathered here today are only too aware of spiraling costs and the negative effect that inflation is having on the business environment in Vietnam,” Michael Pease, chairman of the American Chamber of Commerce in Hanoi, said at a forum last week.

At the same meeting, Benedict Bingham, the Vietnam country chief for the International Monetary Fund, called on the government to curtail spending, raise interest rates and tighten credit to state-owned companies.

Despite its short-term difficulties, Vietnam is likely to continue making significant economic progress, Bingham said.

He added: “The longer-term economic reform story that made Vietnam such an attractive destination for foreign direct investment in recent years remains a compelling one.”

The plunge in the country’s stock market has been as stunning as its ascent. The benchmark VNindex surged 144 percent in 2006 and an additional 56 percent last year. Giddy new investors flocked to securities companies that sprung up in Hanoi and Ho Chi Minh City, Vietnam’s two biggest cities. People swapped stories about freshly minted millionaires.

“Everybody made money,” said Nguyen Tra Lan, an analyst with Thang Long Securities.

But many new investors had little, if any, knowledge about stocks. People engaged in “word of mouth” investing, often acting on rumors and tips from family and friends, Lan said.

And as they did, the market quickly became overvalued, said Dominic Scriven, director of Dragon Capital Group in Ho Chi Minh City. “Share prices were much higher than they should have been.”

Since hitting a high of 1,179 in March 2007, the key index has sunk by more than 60 percent, sinking to a two-year low of 370.45 last week.

Kim had a friend who quickly tripled her $6,200 investment in stocks in 2006. So Kim tried to cash in as well, investing her entire $20,000 in savings and another $20,000 she borrowed from friends.

But she got in too late, just as the stocks of major state-owned companies started to plummet, including such giants as Refrigeration Electrical Engineering, Vinamilk and Sacombank.

“If everything had worked out they way it did for my friend,” Kim said, “I would have been a billionaire.”

Instead, she lost $28,000 and has no idea how she will pay off her debts. She spends her days at a Hanoi securities firm, where she watches the ticker and waits to see if stock prices will rise.