Features | Economy | Southeast Asia

Vietnam Facing Economic Crisis?

With inflation soaring, Vietnam’s factories are feeling the pinch. Are a raft of government reforms too little too late to prevent an economic crisis?

By Simon Roughneen for

With the streetlights warming to a low glow outside as dusk turns to dark, Trang Hoang Yen is still running t-shirts through a sewing machine as most of her staff leave for home.

“Normally we have a lot more workers, but the past year has been very hard for our sector,” she says, stopping work for a few minutes to talk.

Trang Hoang Yen's small factory, on a side street in Ho Chi Minh City, has seen better days. Down from 30 to 14 staff year-on-year, she says the company’s input costs “have gone up, and production costs have doubled.”

Inflation in Vietnam hit 23 percent in August, although it has since dropped off a little to just under 20 percent. The Vietnamese government has responded with a number of countermeasures in an attempt to cool an economy in danger of overheating, although some analysts say the lid is already bubbling off the pot. Vietnam's foreign exchange reserves are on the slide, and the country faces a trade deficit of $10 billion in 2012, according to the government.

So, will the reforms, including credit restrictions and interest rate hikes, be enough to cool things? Some analysts think not.

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In comments delivered at a donor conference in Hanoi on December 6, International Monetary Fund resident representative Sanjay Kalra was clear on the issue, saying, “The authorities need to move rapidly and decisively to ensure financial sector soundness while re-establishing macroeconomic stability.”

Other remarks delivered at the forum focused on the need for reform of the banking sector, privatization of state-owned enterprises and the curbing of corruption. Vietnam was ranked 112 out of 182 countries surveyed in the latest Transparency International global graft index, published last month.

Some donors spoke about Vietnam’s poor record on human rights and freedom of expression, with lawyers, writers, bloggers, activists, journalists and protesting civilians regularly being arrested and jailed. Norwegian Ambassador Stale Torstein Risa told Vietnamese Prime Minister Nguyen Tan Dung that loosening political restrictions in the one-party state could contribute to a sounder economy.

Vietnam now seems to be at an economic watershed, perhaps reminiscent of the 1980s, when it introduced its much remarked upon doi moi ‘opening-up' of the country's economy to foreign investment, following China down the authoritarian-liberalization political economy path. Normalization of relations with the United States in 1995 brightened Vietnam’s “rising star” status, culminating in Hanoi joining the World Trade Organization in 2007.

Speaking at a November 28 Hanoi business lunch for Irish investors in Vietnam, Deputy Minister for Planning and Investment Cao Viet Sinh said there are 13,450 investment projects in Vietnam, adding that the government hoped to attract more in the coming years.

Brands such as Intel, Honda and Nike have all opened large plants in Vietnam, whose attractiveness for investing companies is partly rooted in its cheap labor force, estimated to be the second-lowest in Asia after Cambodia by the European Chamber of Commerce in Vietnam, and thus a major pull for investors in labor intensive sectors such as clothing and footwear.

These are low-cost, low value-added sectors, however, and it remains to be seen whether an economy possibly approaching a crisis can continue to pull in investment and transition to more sophisticated products.

Tourism is another potential growth sector for Vietnam, given that visitor numbers for 2010 show just over five million arrivals, compared with 14.15 million and 23.65 million for neighboring Thailand and Malaysia respectively. Tourism accounts for about 4 percent of Vietnam's economy. However, Thailand and Malaysia allow tourists to remain for a month without a visa, unlike Vietnam, which requires a visa in advance or queuing for a visa on arrival.

Duong Sinh Son runs a “homestay” in Hin Village on the edge of a national park in Thanh Hoa Province, about a three hour drive from Hanoi. Impressive vistas of green hillsides and rice paddy valleys make for a spectacular and affordable hiking location away from the well-worn Halong Bay and Sapi tracks.

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Sitting cross-legged on his bamboo floor-on-stilts, Duoung Dinh Son says he gets between 200 and 300 guests each year since he opened. Charging $7 per night, he says he hopes to attract more visitors, but that is contingent on Vietnam attracting more tourists amid intense and increasing regional competition, with reform inclined Burma likely to emerge a growing destination in coming years.

Recent problems and looming challenges aside, Vietnam’s economy is still growing, by 6.5 percent in 2010; the World Bank forecasts only a percentage point drop for 2012. Still, growth figures are an abstraction for small business owners and ordinary Vietnamese trying to make ends meet, especially with inflation pushing people beneath the poverty line. For Trang Hoang Yen, the tough times look set to continue. But as she nods toward a Sacred Heart hanging above her shop door, she adds: “Thank God, sometimes good things can come.”

A recent order from Norway for 5,000 plain t-shirts for the Christmas market has kept her busy – and kept business ticking over despite inflation-related difficulties. “I want to expand this business,” she says. “But that will have to wait until things pick up.”

Simon Roughneen is a Southeast Asia-based journalist.