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2 Jun 2008

International Economy

Vietnam Facing Risks: Record-Breaking Inflation Affecting Competitiveness (Business Brief No.2185)

Vietnam is among the many nations facing challenges from surging inflation in 2008. Inflation in May 2008 surged to 25.2 percent, beating the 21.4 percent in April 2008. Therefore, wage costs in Vietnam are expected to adjust upward accordingly. This might dampen the investment climate and foreign direct investment (FDI) into Vietnam. Meanwhile, the Vietnamese Dong weakened to a record low of VDN 16,255/USD on June 2, 2008. If this 1.5 percent depreciation is compared to the rate recorded at the end of 2007, it is then not huge as relevant Vietnamese authorities have set a narrow daily bandwidth of their exchange rate. Therefore, the current value of the Dong does not reflect the real value of Vietnam's currency, especially when Vietnam is suffering from a huge current account deficit. As a result, it is expected that the Vietnamese Dong will continue to depreciate against the greenback.
This would urge both Thai and other international investors to delay investments into Vietnam in anticipation of depreciation of the Dong in order to gain higher value of investment in Vietnamese currency. This would possibly lead to a slowdown in FDI into Vietnam this year.

In light of spiraling inflation, it is expected that the Vietnamese authorities will introduce stringent monetary controls to tame the effects of inflation. Due to several negative factors, it is expected that the Vietnamese economy will decline to 7.0 percent growth in 2008, thus lower than the 8.5 percent growth in 2007, representing the first contraction below 8.0 percent in three years (2005-2008). Thai investors eager to invest in Vietnam should wait until inflation and wages rate there stabilize, and until Dong exchange rates become more favorable.

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International Economy