The WSJ also acknowledges that analysts express concern about U.S. and Chinese stimulus policies, too.  But, it says, “the fears are especially pronounced in Vietnam, one of the most-closely watched emerging economies and an increasingly important magnet for foreign direct investment. Much of its economy is dominated by state enterprises that have a history of making ill-advised investments outside their core businesses, which have contributed to past speculative behavior and bouts of overheating.”

The American newspaper remarks that since the financial crisis began, state banks have poured at least $19 billion in loans into the Vietnamese economy, equal to one-fifth of the nation’s GDP.  “The measures appear to be paying off in the short term,” the Journal said, with the International Monetary Fund forecasting growth of 3.3% this year, while Thailand and Malaysia face steep contractions.

The WSJ relates several paragraphs of good news: Vietnam’s first half of 2009 GDP up 3.9%, stock prices sharply higher, real estate doing well in Hanoi and HCMC, and quotes Le Xuan Nghia of the Financial Supervisory Commission that “our stimulus measures force banks to lend productively."

However, the story continues, “with so much money being funneled into the economy, many people ‘on the street’ fear a return of inflation. . . .

“Many Vietnamese are responding by investing whatever cash they can scrape together. . . .”

The WSJ report moves on to observe investors crowding to buy houses in Van Khe New Town, east of Hanoi.   It quotes a real estate agent: ‘Some units have changed hands five times or more and prices have risen six-fold since the project was launched at the peak of Vietnam’s boom in 2007. . . . 

Buyers are "worrying about inflation and want to invest their money somewhere safe."

“Some economists in Vietnam,” the WSJ continues, “fear the country’s politicians are so enmeshed in their growth-oriented five-year economic plans that they won’t be willing to turn off the stimulus tap until inflation has already reared its head again. In April, the government extended by two years a lending-stimulus program that pays four percentage points of interest on any loans by Vietnamese banks to the business sector, encouraging banks to lend more aggressively.

“‘They are trying to turn back the clock to 2006 and 2007, when the name of the game was exporting as much as possible to [the] Americans. But Americans might not resume spending again in the same way, and we could end up with a serious inflation problem again,’ says an economist with close knowledge of government thinking.”

The WSJ quotes a Vietnamese fund manager that “While the ‘government’s been successful at stabilizing the economy’ in recent months, officials ‘also need to consider the longer-term risks, such as excess liquidity in the banking system and its potential to spark inflation.’”

Wrapping up, the WSJ reporters note a World Bank’s warning in June that state-directed lending could be hampering overhauls at state enterprises, and Vietnam might instead want to focus on helping people who have lost their jobs in the downturn.  It quoted the Bank: "It might be good to pause and reflect whether sustaining economic activity should remain the single priority."

Then at last, the Journal explains what is worrying the Fitch raters: “other analysts worry the lending spree could escalate bad debt problems in the banking sector. Officially, nonperforming loans stand at 2.6%, up from 2.2% at the end of last year. But Vietnam doesn’t calculate bad-debt rates according to international standards. Fitch estimated the real figure may have been as high as 13% of total loans at the end of 2008. On June 30, downgrading the outlook for Vietnam’s currency, Fitch said the country’s loan-subsidy program "is almost certain to make matters worse."

Source: Wall Street Journal, Vietnamnet