Vietnam Business Forecast Report Q4 2007

Rising Inflation A Threat To Growth

With Q207 GDP growth of 7.87%, Vietnam looks set to continue growing at 8.0-8.5% this year and next year. BMI believes this rapid expansion will be maintained during our forecast period as the ruling Communist Party of Vietnam (CPV) continues its programme of economic and social reform. Rising inflation, mainly driven by rising food and steel prices globally, has emerged as a threat to growth in the medium term. We see a risk that Vietnamese authorities will lose focus on economic reform in favour of suppressing inflation. Nevertheless, BMI remains upbeat about Vietnam's growth prospects going forward. With the National Assembly elections out of the way and the next Communist Party Congress not scheduled until 2011, we see no major political risks going forward.

Elections in May this year brought in a considerably younger National Assembly and we believe the parliament will be given greater leeway in scrutinising proposed legislation and potential wrongdoings in the state bureaucracy. The new government formed in August was indicative of economic and social reform being maintained as Prime Minister Nguyen Tan Dung consolidated his position by bringing in associates from southern Vietnam. We see this as the continuation towards a more reform-orientated governing elite and the gradual phasing-out of command-economy style policies.

The rapid rise of inflation in 2007 has emerged as the primary threat to the continuation of the Vietnamese growth story. The underlying reasons for the sharp rise in consumer price inflation can be found in rising food and steel prices globally, but have been exacerbated by Vietnam's loose monetary policy. We believe the government and the State Bank of Vietnam will tighten monetary policy in H207, but we fear that this effort might not be undertaken optimally and that growth could suffer in the short and medium term. We also see a risk that the government could lose its focus on economic reform, with effects on long-term growth.

The government is showing its commitment to gradually modernising the economy by launching several large infrastructure projects and continuing the process of converting state-owned companies into shareholder-owned firms. In addition, we believe that the government's stated intent to develop stock market regulation over 2007 carries the potential to raise long-term growth by improving the functionality of the domestic financial markets. Finally, the conviction of state officials, like former Vice Trade Minister Mai Van Dau, is likely to be a deterrent against corruption and reduce its negative impact on the overall efficiency of the economy.