Inflation a drag on Vietnam's economy

An investor in Hanoi watches as inflation fears shoved share prices down nearly 400 points on June 2, 2008.

TEXT OF INTERVIEW

Bob Moon: Vietnam has all the makings for a great investment -- good resources, lots of people, low labor costs -- but Vietnam's stock market has taken a huge tumble in the last year, falling below 400 points yesterday, its lowest level in two years.

And inflation is on the rise: from 7 percent to 25 percent in just one year.

Investors are paying attention.

Marketplace's man in Shanghai Scott Tong has been following the economic developments going on in China's neighbor to the south.

Hi Scott.

Scott Tong: Hello Bob.

Moon: Where is this inflation that we're hearing about in Vietnam coming from? I mean, I presume that there are food price problems and energy price problems, but 25 percent?

Tong: Well, that's right. All over Asia, there is a fair amount of imported inflation from elsewhere in the world, but in Vietnam, some of it is clearly seen as homemade. This is an economy that a lot of people say is overheating. It has been growing at an 8 percent clip for several years and the worry now is that perhaps the party's gotten out of control. A lot of economists are worried there's been too much lending, there's been too much government spending, basically, too much cash sloshing around in the system. And in my house, when there's too much cash sloshing around in the system, we buy stuff, and there's a sense in Vietnam that maybe there's been too much of that going on and when so many people are doing that, prices tend to go up.

Moon: Well, you speak of a party out of control. Let's kind of extend on that metaphor and borrow a little bit from Alan Greenspan. Is it time for the government over there take the punch bowl away?

Tong: The government has been trying, or it's been warning that it's going to do so. Just a couple days ago, some top officials said for the third or the fourth time that we're going to raise interest rates and we're going to have the banks try to calm this down, but there's a sense among a lot of people that they're hitting the breaks a little too late and they may not be doing enough. The World Bank and the Fitch Ratings agency and Morgan Stanley have already issued warnings about the Vietnam economy and we've seen investors starting to pull out a little bit. They're betting the currency is going to go down. The stock market has been down 50, 60 percent in the last year. So the arrows, for now anyway, are going in the wrong direction.

Moon: Let's make a comparison to China. It's labor and manufacturing costs have been on the rise and a lot of people have said that Vietnam is the next place to go. Is that still the case now?

Tong: There's a lot of excitement in a lot of sectors. One example is bedroom and dining room furniture. Bob, have you bought any lately?

Moon: Not recently.

Tong: Alright, well, just asking, because a lot of furniture makers, who almost all used to be in China, have moved in a hurry to Vietnam, or else set up their next factory in Vietnam and here's a picture of the labor costs: a Vietnamese worker in a furniture factory makes about $45 U.S. a month. That's less than half of what it is in China. The other excitement is the Vietnam retail market. Their research and consulting firm AT Kearney just ranked Vietnam their number one retail investment destination.

Moon: So dare we say that Vietnam could be the next China?

Tong: Well, a lot of self-proclaimed smart people are daring to go there, but most people aren't. Vietnam is cheap right now as far as labor, but for these giant manufacturing industries, it doesn't take long to go through a population of 80 million people or so and then they move on to the next cheaper place in the global economy. As far as the consumer market, well, China is 17 times the size of Vietnam, so that's the place where the big, big multinational companies who want to sell stuff to people... I mean, they're in China for 50 years or so. They don't exactly look at Vietnam the same way.

Moon: Marketplace's Scott Tong, joining us today from Beijing. Thank you Scott.

Tong: You're welcome Bob. Nice to talk to you.

About the author

Scott Tong is a correspondent for Marketplace’s sustainability desk, with a focus on energy, environment, resources, climate, supply chain and the global economy.

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