High inflation and recent devaluation of Vietnamese dong in the local free market have raised worldwide concern about Vietnamese economy: is a financial crisis on the way?

Hanoi-based international research institute, Vietnamese government and companies doing business in Vietnam have different feeling and opinions towards the complicated economic picture.

High inflation

Vietnam's inflation hit a record of 25.2 percent in May over the same period last year. CPI in May rose 3.19 percent over April, highest month-on-month increase since 1995, according to the General Statistics Office of Vietnam.

Do Van Lanh, a 35-year-old technician working in a Ho Chi Minh City-based company, has a lot to complain. "Late last year, the price of a gas tank for household use was eight US.dollars. Now it has gone up to 14 dollars," he said. Life is much more difficult.

Less shopping, hard working, be wise in spending, which is the idea shared by many Vietnamese in the time of high inflation.

The inflation acceleration in Vietnam, to some extent, is related to the rapid increase of international prices, especially for food, oil and construction materials, according to a recent report of the World Bank.

The loosened monetary policy adopted by the Vietnamese government in the past three years, geared at speeding up economic growth, has also led to the high inflation, said economists.

Though complaining a lot, Vietnamese people does not seem to be panic at the overall price hike.

When night falls, cafes in Hanoi are as packed as before. Local residents, who have been confined indoors during the hot summer daytime, get out of their house and enjoy the cool breeze.

Wei, a Chinese running a travel agency in Hanoi said she is receiving many customers signing for tours to China these days, as summer vacation is coming. "Vietnamese government is poor, but its people are rich. Life quality in major cities like Hanoi has not changed much."

To curb the inflation, the Vietnamese government has adopted a tightened monetary policy. The State Bank of Vietnam raised the benchmark interest rate of dong twice within the past month from 8.75 percent to 14 percent per year. The new interest rate takes effect Wednesday.

It is widely believed by Vietnamese domestic media that high inflation will be curbed in the second half of the year as the government measures take effect.

Dong devaluation?

On the free market, or trading outside banks, dollar started to gain significant value against dong on the second day that the Vietnamese government announced May's inflation figures.

One dollar was equivalent to about 16,500 Vietnamese dong (VND)mid May in Vietnamese free market, which is often based in gold shops where people could change dong to a variety of foreign currencies. But it went up as high as 18,500 dong early June.

The inflation was attributed to be one of the reasons driving local residents to turn to one foreign currency to preserve the value of their wealth. Speculators, who trade back and forth between dollar and dong, are believed to be the real force pushing dollar value higher and higher.

To stabilize the dong value, Vietnamese government issued a policy on June 6 that these gold shops could buy in dollars. Then they can only sell dollars to banks but not individuals.

The policy effectively pushed the speculators out of the market and dong regained its value to 16,630 per dollar Wednesday in the free market.

Vietnamese Prime Minister Nguyen Tan Dung said the country has no plan to devalue the dong and is capable of interfering in the foreign exchange market to stabilize the dong when needed.

World Bank forecasts

In a report released last week from World Bank Hanoi Office titled "An update on Vietnam's Recent Economic Developments", message was conveyed that Vietnamese economy is indeed facing great difficulties, but not yet a crisis.

"The outlook is decidedly less favorable than it was a year ago. However, the economic fundamentals of Vietnam remain strong and GDP growth could be more resilient than the official target suggests – would be still around 7.5 percent in 2008," the report said.

In the first five months this year, Vietnam attracted 15.3 billion US dollars, more than doubled the same period last year, demonstrating strong confidence of foreign companies in Vietnamese market.

Wang, manager of a Chinese company selling TV in Vietnam said the sales in the past two months were going up in Ho Chi Minh City. The purchasing power of Vietnamese people did not seem to change much.

"We are following closely the economic uncertainty in Vietnamese economy. So far, it is too early to say the economy is facing crisis," he said, "Every economy has its ups and downs. We believe we can get through this difficult time."

(Xinhua News Agency June 12, 2008)