Vietnam's new Challenges amid Overheating
| Author | Shogo Ishii |
| Position | IMF Asia and Pacific Department |
| Pages | 83 |
Page 83
Vietnam has emerged in recent years as one of the world's most attractive new investment destinations.
The country's 2007 accession to the World Trade Organization and a surge of new foreign direct investment and portfolio inflows highlight an impressive course of economic reform, particularly in trade and investment liberalization.
These reforms have led to strong economic performance-an average annual growth rate over the past decade of 7.5 percent, one of the fastest rates in Asia. The number of people living below the poverty line fell from 58 percent of the population in 1993 to about 16 percent in 2006. Growing access to international markets and greater opening of the domestic economy will likely bring further benefits in the future.
However, increased global integration has posed significant challenges to Vietnam. The government needs to maintain sound macroeconomic policy, increase policy flexibility to deal with new risks, and press ahead with its broader reform agenda.
Although Vietnam's recent economic performance has rightly drawn much praise, the economy is overheating, threatening sustained economic growth over the medium term.
Increasing domestic and external imbalances are a major concern. Credit growth rose to about 63 percent in March 2008, contributing to a rise in inflation, which reached 21 percent in April 2008.
Property prices in large cities have risen sharply. While exports have continued to grow strongly, strong demand pressures have fueled rapid import growth, resulting in a sharp widening of the current account deficit to an estimated $5.3 billion in the first quarter of 2008, compared with $7 billion for the whole of 2007, with the deficit increasingly financed by short-term capital flows.
A slowdown in the United States and Europe, which are Vietnam's largest export markets, will confront Vietnam with two challenges: first, it will lower economic growth in 2008; second, it will further widen the current account deficit and thus increase Vietnam's vulnerability to external shocks-a vulnerability heightened by the relatively rigid exchange rate regime.
An immediate challenge for Vietnam is to take a number of steps to reduce domestic and external imbalances:
* Rein in rapid credit growth. The recent increase in interest rates and the decision to raise the reserve requirement in June 2007 and February 2008...
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