Hanoi
11 March 2008
Vietnam's financial markets have had a tumultuous year. The once high-flying stock market has fallen more than 30 percent, since January 1, and inflation has ballooned. A major investors' conference was scheduled to start Tuesday in Hanoi ,but last week, the government called it off. Matt Steinglass has more from Hanoi.
The Euromoney Vietnam Investment Forum was supposed to bring hundreds of the world's top money managers to Hanoi. The scheduled keynote speaker was Sandy Flockhart, head of Asia operations for HSBC - one of the world's top-five banks.
But, HSBC spokeswoman To Quynh says, last Thursday, HSBC got a call saying Flockhart would have to reschedule.
Quynh says the government asked Euromoney, the conference's organizer, to postpone it until September.
The government said it was worried about "a combination of pressing macro and micro-economic concerns." Vietnam's stock market is the worst performer in Asia this year.
But investors criticized the decision, saying the government had missed an opportunity to reassure investors and ask for advice. Le Dang Doanh is an outspoken Vietnamese economist and a former advisor to the prime minister.
Doanh says the more difficult the situation is, the more important it is to have an open dialogue with investors, to calm their suspicions and concerns.
Vietnamese officials have gotten used to reporting good news. The country's economy has grown more than seven percent a year since 2001.
After Vietnam joined the World Trade Organization last year, foreign investment flooded in - topping $20 billion last year.
But the influx of dollars created upward pressure on the exchange rate of the Vietnamese dong, which could have hurt exports. To keep the dong from rising, Vietnam's State Bank bought dollars and that contributed to inflation. Benedict Bingham, the International Monetary Fund's representative in Hanoi, explains.
"That left the banking system with an excess of dong. And, it was that surplus of dong liquidity in the first half of last year that generated the rise in bank credit, and that rise in bank credit contributed to the increase in inflationary pressure," said Bingham.
Meanwhile, the dollar was falling, making it even harder to keep the dong from rising. Prices for the commodities Vietnam imports were rising, too.
Then, Vietnam had its coldest winter in 40 years, driving up food prices. In February, inflation was nearly 16 percent.
To fight inflation, the government raised interest rates and ordered banks to reduce loans and increase their reserves.
But that hurt the stock market, as investors sold shares to repay loans. The Vietnam index has lost about a third of its value this year.
Some investors criticized the government for acting too late and too harshly. Peter Ryder, chief executive office of Indochina Capital, says Vietnam is still in a learning phase as its capital markets develop.
"I would kind of give them about a C-plus at this point in time. The fact that they are trying to do something about it instead of ignoring the situation is definitely a plus," said Ryder. "The fact that they have struck as dramatically as they have as late in the game is a bit of a minus."
Ryder and other foreign investors still have long-term confidence in Vietnam's markets. The economy still is expected to grow by more seven percent this year.
But on Monday, the IMF's Bingham pressed the government to fight inflation by allowing the dong to rise against the dollar, rather than by setting targets for the amount of credit banks can extend.
"I think the government is fully aware of the problems posed by the rise in inflation, and also of the widening of the trade deficit. I think what we are also seeing now, however, is a broader debate on the instruments to address the rise in inflation in this economy. And I think that debate isn't settled yet," said Bingham.
Last week, Vietnam said it would allow the dong's exchange rate to float a bit more freely - just half a percentage point around the official target. The question is whether this will be enough to keep the economy from overheating and to reassure jumpy investors.
Peter Ryder is not sure.
"I still think we have not see the end of the volatility and perhaps even downward pressures," he said. "So, you know, buckle up!"
With rising inflation, the falling dollar and volatile stock markets, investors and government economic officials expect to have their hands full.