July 1 (Bloomberg) -- Vietnam's economy expanded at the slowest pace in at least seven years, as slumps in the stock and property markets prompted builders to halt projects amid the fastest inflation in a decade and a half.

Gross domestic product grew 6.5 percent in the first half from a year earlier, down from 7.9 percent in the same period in 2007, according to the General Statistics Office in Hanoi. Construction growth eased to 0.9 percent in the first six months of 2008 from 9.5 percent reported for the same period a year ago.

``Throughout 2006 and 2007 Vietnam was a darling of the investment community, but things overheated more quickly than was anticipated,'' said Spencer White, a director of Thien Viet Securities in Ho Chi Minh City. ``This is a very healthy slowdown which should over the next year bring down the inflation rate, the primary symptom of the overheating.''

Ho Chi Minh City's stock exchange index has tumbled 56 percent this year, pummeled by investors' lack of access to credit and by worsened sentiment as accelerating inflation caused builders to curtail property projects no longer viewed as economically viable. Authorities responded to the climb in prices by lifting interest rates three times and cutting the 2008 growth target to 7 percent from as much as 9 percent.

`Two Bubbles'

``Growth has been affected by the bursting of two bubbles: the stock market and the property market,'' said Raymond Mallon, an economist based in Hanoi since 1991. ``Once stocks fell, the property market also went down and that caused problems with some of the banks making loans for the property market, so you now see some construction companies having problems.''

Vietnam's pace of expansion in the first half was the weakest since 2001, based on available quarterly breakdowns of year-on-year growth provided by the Statistics Office. In the second quarter alone, GDP grew 5.8 percent from a year earlier, according to a research note sent today by JPMorgan Chase & Co.

``Slower economic growth should restrain import demand and inflation, which will help to calm market nerves about their rapid deterioration over the last year,'' wrote Matt Hildebrandt, an economist at JPMorgan Chase in Singapore.

Industry and construction, which accounted for 39 percent of Vietnam's economy, grew 7 percent. Sales of domestically- produced steel in Vietnam fell 19 percent in June to 250,000 tons from May's 310,000 tons, hampered by a reduction in bank loans and by government tightening of planned funding of state investment projects, the Vietnam News Agency reported yesterday.

Credit Growth

``The lack of credit is hurting the construction market,'' said Alan Young, chief operating officer of Vietnam Industrial Investments Ltd., an Australian-listed company which controls steel units including Vinausteel Ltd. and SSE Steel Ltd.

``The banks just don't have the money to lend, so anyone looking at new projects isn't looking anymore, and the government is putting a halt to certain state-owned projects that had already started,'' Young said in a telephone interview from the northern city of Haiphong.

Vietnam's government is targeting a reduction in credit growth this year to 30 percent from 54 percent in 2007, to fight an inflation rate that reached 26.8 percent in June.

``Bank credit growth has come to a standstill, as many state-owned commercial banks have hit their 30 percent annual lending target,'' HSBC Holdings Plc said in a June 27 report. Residential property prices in Ho Chi Minh City declined as much as 40 percent between December 2007 and May of this year, according to Morgan Stanley.

Oil Output Falls

The subcategory including oil production contracted 6.6 percent in the first half, according to the General Statistics Office. Oil exports from Vietnam, the third-biggest producer in Southeast Asia, fell 12 percent in the first six months of the year, based on figures from the office.

Services, which like industry and construction also account for 39 percent of gross domestic product, grew 7.6 percent, the fastest of the three categories into which the General Statistics Office divides Vietnam's economy.

``Major foreign companies still want to get into the Vietnamese market, including the financial-services industry,'' said Raymond Burghardt, director of seminars at the East-West Center in Honolulu and a former U.S. ambassador to Vietnam. The Ho Chi Minh City Stock Exchange VN Index has gained seven straight days, and today had the biggest gain since March 10.

Coffee Exports

Fishing, forestry and agriculture, which account for 22 percent of the economy, grew 3 percent. Exports of coffee, of which Vietnam is the world's second-biggest producer, fell 32 percent by volume to 571,000 tons and 4 percent by value to $1.18 billion, according to estimates from the Statistics Office.

The reduction in coffee shipments reflects ``the increased financial ability of coffee traders within Vietnam to hold back coffee until they are able to sell at prices they have found too enticing to resist,'' Fortis Bank SA/NV and VM Group said in a report sent last week.

``Vietnamese farmers, now very well capitalized thanks to record prices, have had ample spare cash to buy fertilizer,'' Fortis and VM said. ``At the same time the surging cost of fertilizer may have deterred some farmers from using optimum quantities.''

To contact the reporter on this story: Jason Folkmanis in Ho Chi Minh City at folkmanis@bloomberg.net

Last Updated: July 1, 2008 05:01 EDT