Vietnam Growth Quickens, Adding Overheating Pressure

Vietnam Growth Quickens, Adding Overheating Pressure
The dong has been devalued three times in the past 13 months. Photographer Kevin German/Bloomberg

Vietnam’s economic expansion accelerated in the fourth quarter, adding pressure on the central bank to curb credit growth to prevent overheating.

Gross domestic product grew 7.34 percent in the three months through December from a year earlier, quickening from a revised 7.18 percent in the third quarter, according to figures released by the General Statistics Office in Hanoi today. GDP rose 6.78 percent in 2010, up from 5.32 percent last year.

A 27.7 percent jump in lending this year helped drive inflation close to a two-year high and fueled concern a credit bubble may trigger loan defaults. The dong has been devalued three times in the past 13 months, Moody’s Investors Service and Standard & Poor’s cut the nation’s credit ratings in December, and the country’s biggest shipbuilder is struggling to pay debts.

“If they keep pushing growth, inflation will continue to be a problem,” said Lawrence Wolfe, director of business development at DongA Securities Co. in Ho Chi Minh City. Vietnam should aim for a lower, sustainable rate of expansion, he said.

Moody’s on Dec. 15 cut Vietnam’s long-term foreign-currency rating one step to B1, four levels below investment-grade, citing balance-of-payments risks and “debt distress” at Vietnam Shipbuilding Industry Group, or Vinashin. The state-owned firm has declined to comment on whether it has made loan payments on time, and Moody’s said the nation and its companies will face greater difficulties borrowing money in future.

‘Overheating’ Economy

The economy’s 2010 growth, the fastest since 2007, spurred imports and contributed to a full-year trade deficit of $12.4 billion. The dong was devalued in August to try to curb the gap.

The currency’s official exchange rate was 19,490 per dollar as of 10:54 a.m. in Hanoi, compared with 19,099 before the most recent devaluation. On the so-called black market, the dong traded today as weak as 21,090 in Ho Chi Minh City, according to a telephone information service run by the state-owned Vietnam Posts & Telecommunications Group.

“The country is faced with an overheating economy,” the U.K.-listed Vietnam Property Fund Ltd. said this month. A report on Dec. 24 showed inflation accelerated to 11.8 percent in December, the fastest pace since February 2009, fanned by the weaker dong and higher food costs.

S&P said strong lending growth and macroeconomic volatility have weakened the balance sheet of the country’s banks. It lowered its rating by one notch to BB-, three levels below investment grade, putting Vietnam on par with Bangladesh and Mongolia.

Contingent Liabilities

Contingent liabilities to the government stemming from the banking system potentially amount to as much as 60 percent of GDP, S&P said.

Vinashin had accumulated total debt of about 86 trillion dong ($4.4 billion) as of June, the government said in August. The company will receive interest-free loans to pay its workers, Prime Minister Nguyen Tan Dung said in a statement this month.

Bank credit has expanded more this year than a 25 percent government target that the International Monetary Fund said “in itself is too high.” The State Bank of Vietnam said yesterday that it expects a 23 percent increase in 2011.

“Credit growth needs to be brought down to about 20 percent,” Jim Walker, an economist at Asianomics Ltd. in Hong Kong, said before the release. Policy makers “don’t have things under control” and the central bank’s interest rates need to rise another 3 percentage points to 5 percentage points, he said.

The monetary authority raised its so-called base rate on Nov. 5 to 9 percent from 8 percent, the first increase in almost a year, after the government said curbing inflation was a challenge.

‘Controlling Inflation’

“Interest rates need to rise to prioritize controlling inflation and provide some support for the currency,” said Kevin Snowball, the chief executive of PXP Vietnam Asset Management in Ho Chi Minh City.

Dung’s government is targeting economic growth of about 7 percent next year and doesn’t expect inflation to exceed 7 percent.

“We suspect that the government fairly soon will compromise on its growth target,” Kevin Grice, a London-based economist for Capital Economics, said in a note on Dec. 27.

Industry and construction, which accounted for 41 percent of the economy in 2010, expanded 7.7 percent, today’s report showed.

Services, which made up 38 percent of the economy, grew 7.52 percent. Agriculture, forestry and fisheries, which accounted for 21 percent of gross domestic product, expanded at a 2.78 percent clip.

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