Inflation rate in Vietnam has surged in the last few months, and it once accelerated to 25.2 percent in May, the fastest ever since 1992, highlighting the challenge facing the country's economic development.
Meanwhile, the stock market has continued its downward trend and the exchange rate of the Vietnamese Dong against the U.S. dollar drops drastically despite the government's ongoing efforts to revive its economy. (A rate of 17750 Dong to one US dollars has been reported in recent days.) So, the short-term economic trend gives rise to people's fear for the recurrence of another financial crisis in Southeast Asia.
Will the financial upheaval in Vietnam spread to other Asian economies? A recent forecast of the New York-based Citigroup Inc. is quite optimistic. It will not spread to other economies in Asia as the Vietnamese economy has a small scale with a limited outbound impact, Citigroup Inc. says in its June 17 report. One of the causes, the report notes, is that the economic bases of Asian economies have improved immensely as compared to that during the period of the 1997 financial crisis, and it is unlikely for Vietnam's financial upheaval to touch off another round of Asian financial crisis.
Meanwhile, the Citigroup Inc alerts however that some overseas capital has begun to withdraw from Asia to the detriment of its regional economic growth due to Vietnam's financial upheaval and added pressures upon the economic inflation in the course of Asia's development. The report also predicts that it will possibly take several years to eradicate the Vietnamese financial unrest.
The drastic upheavals in Vietnam's currency and capital market have multi-factors, comprising chiefly the overheating domestic economy. At the spur of a sound economic growth and currency appreciation expectancy in 2007, the supplies of currency and credit rose sharply, property estate price and shares prices shot up, domestic investment surged by a big margin, and the (foreign) trade deficit expanded rapidly in Vietnam. Moreover, the inflows of speculative capital made the matter even worse, so it is pretty hard for the country to regulate its economic development.
What is fortunate, however, is that there has been a marked improvement as compared with what the situation was like over a decade ago in the Vietnamese economy as well as in the economies of its adjacent nations, including Indonesia, Malaysia, Thailand, India, Philippines and the Republic of South Korea (ROC) for they all have learned lessons from the previous Asian financial crisis. Most of these nations have a relatively low ratio of external loans to their GDP with a limited proportion of their short-term loans along with their fairly robust and reliable banking sectors.
Furthermore, regional banking cooperation represented by the the Agreement on the Bilaeral Swap Arrangement under the Chiang Mai (a famous scenic resort city in northwestern Thailand) Initiative, which was sponsored as part of the Chiang Mai Agreement to head off a repeat of Asia's 1997/98 financil crisis, has raised the capacity to curb another financial crisis, so that there is a much less probability for a large-scale regional financial crisis to recur in Southeast Asia.
Financial market upheaval in Vietnam and few other countries, nevertheless, admonishes people in Asian region to guard against the sustained overheating economy and grave inflation. Form an perspective of the monetary policy formulation, it poses a matter of prime importance to match the currency and credit growth to the proper economic growth rate plus a low-inflation rate. Once the “valve" of money supply is eased, the property price and stock assets price bubbles will occur, and the next will come a thwarted investment confidence and vibrant adjustments of the financial market. And, on top of all this, a prudent approach has to be adopted in the process of opening the capital account.
At the same time, inflows of speculative capital resultant from the anticipation of currency appreciation will make the currency authority difficult to cope with the "valve" of money supply, and it in turn would lead to the excessive money supply on the market. Hence, in order to tackle the issue, it is vital to establish step by step the exchange rate system based on the market supply and demand with an aim to thoroughly resolve the unilateral market anticipation and large-scale speculative capital inflows. Besides, precaution and preventive measures should also be taken in the formulation of the financial policy and other related policies in this regard. Only in this way, can a solid foundation be laid not only to facilitate sustaining a robust macro-economy, but to help correct the twisted economic setup and imbalanced consumption investment deriving from the exchange rate. All these matters constitute the very issues not to be neglected or belittled in the economic development of some Asia countries.
By People Daily Online and its author is Zhang Bin, a deputy researcher of the Institute of World Economics & Politics under the Chinese Academy of Social Sciences
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