Economic headaches for leaders in Vietnam
On the streets of Hanoi, gold shops are running out of the precious metal and kerbside money traders are running out of dollars. Ordinary Vietnamese have embarked on a great flight to safety amid ongoing fears about inflation (up 25 per cent year on year in May) and the future of the currency, the dong. In related moves, Vietnam's overcooked stock markets and property sectors have both plummeted.
Once, the unease would have largely been limited to Vietnam. Now, as the country steadily integrates, the region is awash with rumours. One, particularly hot in Hong Kong and South Korea this week, suggests that the dong may be set for an overnight devaluation of 30 per cent.
Another claims any such drop will spark a 1997-style contagion across the region, just as the collapse of the Thai baht sent neighbouring currencies tumbling.
Amid the clamour, however, more sober voices are urging caution. One is the UN Development Programme's senior economist in Vietnam, Jonathan Pincus. While noting that the situation poses economic, political and social questions for Vietnam's Communist Party, Mr Pincus is wary of the rumours.
First, Hanoi's habitually cautious leaders are unlikely to spring such a devaluation shock on their own system. Second, the fundamentals in Vietnam and across East Asia are a long way from the credit-fuelled excesses of the late Asian boom period.
Vietnam, for example, has little short-term foreign debt and the fact that the dong is not convertible still largely insulates it from large-scale speculative attack. Then there is the fact that the world is awash with money looking for new places to settle - and Vietnam still retains long-term lustre as an emerging market.
'It must always be remembered that this is a stabilisation issue, not a crisis,' Mr Pincus said.
'Vietnam will get through this ... whether the leadership will emerge simply chastened or whether they learn some useful lessons and make some important changes is entirely up to them. But they will come through it.'
Mr Pincus also noted the 'hangover' from decades of central planning in some of the government responses. Blunt administrative tools have been used to bring prices down, including failed attempts to fix prices on key commodities, which only created a black market.
Instead, lifting interest rates over time to renew faith in the dong will be vital, as will broader structural reforms to ease distortions in Vietnam's evolving market.
The ambitious but still inefficient state sector is a key target, he says. Tough decisions lie ahead to curb the sector's rush into domestic expansion, including the dangerous shift by some state conglomerates into property and banking.
'There certainly are political tensions clouding the effort to find solutions ... heightening the realisation that national interests are not necessarily aligned with the big state-owned enterprises,' Mr Pincus said.
'The [state-owned enterprises] still get access to cheap land and cheap capital, they are highly leveraged, invest hugely but often in a very inefficient way. For the most part, they don't export, so they don't earn foreign exchange. They are one of the factors in the inflation problem, but precisely how to rein them in is a tricky question for a leadership that is committed to ensuring the state sector dominates large and strategic industries.'
Other tough decisions include what government spending can be cut to ease fiscal deficits, a tricky move for a party leadership determined to modernise and pull people out of poverty.
Sources in Hanoi confirm heated internal debates are still under way. 'We still believe we can fix this,' one official said. 'It is not a crisis yet, but that doesn't mean we aren't working behind the scenes to sort things out. In times of trouble, we do like to settle things our own way.'