- Johanna Chua: The policy actions of the Vietnamese Government and the central State Bank of Vietnam announcements are encouraging: public investments cut and interest rates increased. The economy needs to slow down.

The big question is what is going to happen to the big debt that was built up in the last years as Vietnam goes through a period of more financing constraints. The State Bank of Vietnam has to watch out for vulnerabilities arising from tighter credit.

Vietnam used to have a relatively low government debt; fiscal deficit was never really an issue. But in the last several years the public debt has climbed, and you have now a very large fiscal deficit. So the future depends on how aggressive the government is going to be in consolidating its fiscal position in order to ensure sustainability. Right now the debt is still manageable.

Just look what happened in other countries: if there are problems in the banking sector because of the credit bust, there is a risk that the government has to step in and recapitalize the banks. I’m not saying that this is going to happen in Vietnam but the risk exists.

Many Vietnamese state enterprises have to come back to the core businesses. And there are still big sectors of the economy which are monopolized by the State owned enterprises and questions have risen how efficient these SOEs are in the absence of competition. 

But is Vietnam still an attractive destination for foreign investment?

- In the long term Vietnam can attract more investments. Your country has several positive aspects – geography (close to China), demography (young population), but for the near term you still have a lot of issues to resolve, especially the unwinding of significant credit overhang and restoring macro stability.

Because of the weakness of the U.S. currency and the diminishing role of the U.S. economy, there is renewed interest in diversification of foreign reserves, especially by strong economies in Asia. At the recent ADB meeting in Hanoi, this was also discussed. What is your comment on this?

- The dollar diversification has been happening for several years already and is more recently moving outside the G10. And I think the diversification will continue. Every country in Asia, apart from Vietnam, keeps accumulating more reserves and if they accumulate more reserves, the demand for diversification grows. U.S. Treasuries are still where they are, because even though we worry about American fiscal issues, the reality is that everyone is still accumulating a lot of reserves and the U.S. dollar is still the world's reserve currency.

One implication of diversification is the difficulty of emerging countries (especially in Asia) to manage monetary policy and liquidity because, as money keeps coming in (and if people don’t want to let the currency appreciate, which is what is happening) then you have to keep intervening to prevent your currency from appreciating, and this exacerbates liquidity injection and fuel inflation risks. This can be very difficult for the emerging countries.

Can Vietnam do the same, instead of pegging the dong to the U.S. dollar?

- Vietnam has to focus more on accumulating sufficient reserves first before thinking more aggressively about diversification. In the longer term it can be possible: when you have a huge amount of reserves than you can start diversifying. The focus is to first accumulate reserves, and then think about the diversification. 

Vietnam is still at an early stage in restoring macro stability and trying to stabilize reserves. Your country has lost a lot of reserves already since the peak of 2008. You lost a third of your reserves in 2009 and you lost another couple of billion in 2010. You should restore confidence in the currency first.

The U.S. dollar has lost 12% of its value against foreign currencies, since the period after the failure of Lehman Brothers in 2008, and nearly 5% since end-2010. What will be the impact of the declining dollar on the world economy?

- A weaker dollar can facilitate the rebalancing of other currencies, and U.S. goods can be cheaper abroad. The depreciation of the dollar can have effect in the reallocation of portfolio flows as well: people expect a depreciation, so there will be great demand to diversify assets outside the U.S. dollar. This fact can push other currencies’ appreciation.

Will the greenback likely decline further in the near future?

- In the middle-long term, I believe in the U.S. dollar weakness. Over the longer term there will be a decline in the global GDP share from the U.S., even if the American economy is still important. Asian markets are taking a larger share of the global GDP pie. But the U.S. dollar is still the reserve currency, and at the moment there is no viable alternative to this currency: Europe has its own problems, Japan has its own problems too, and the renminbi of China is not convertible. We do not have a lot of options. So, even if the dollar is declining, it doesn’t mean it is no more a reserve currency. 

The euro is the most real alternative to the U.S. dollar in the long term. But we can also have multiple reserve currencies.

Source: Saigon Times.