Vietnam to End Stimulus Program

VNBusinessNews.com - The Vietnamese government said it will end a key economic stimulus program earlier than expected as it moves to counter signs that parts of its economy may be starting to overheat.

The stimulus program – which provided subsidized loans to borrowers to inject billions of dollars of cash into the economy – is credited with helping Vietnam maintain far stronger growth than most other countries this year despite the worst global recession in decades. Some officials and business leaders wanted the program to continue until March, and possibly much longer.

But the loan subsidies have come under fire recently from analysts who fear they could be flooding Vietnam with too much capital. The Vietnamese government now plans to terminate the loan-subsidy program by the end of this year, it said on its Web site Wednesday, after bank credit growth reached 36% in the first 11 months of the year – exceeding a full-year target of 30%.

The announcement came less than a week after Vietnam devalued its currency, the dong, by about 5% and raised interest rates a full percentage point in a bid to ease other speculative pressures weighing on the economy.

Although Vietnam's gross domestic product is forecast to rise 5.5% this year, compared with 6.2% in 2008, it continues to grapple with imbalances left over from 2008, when the country was a hotspot for international investors and foreign money flooded in. Inflation got out of control, topping out at 28%.

Vietnam's economy has stabilized since then, but many of the underlying problems remain. Vietnam is one of the few Asian countries with a both a fiscal budget deficit and a current-account deficit, and inflation, while much lower than in 2008, has started to tick up again. HSBC has predicted inflation could reach double-digit levels by the middle of next year, and property prices have continued to spiral higher.

Some analysts feared the loan subsidy program was exacerbating those problems, with stimulus money leaking into real estate and other sectors and driving up asset prices.

Others worried the subsidized lending program could escalate bad debt problems in Vietnam's banking sector. By offsetting the cost of four percentage points of interest on any loans by Vietnamese banks to the business sector, the program encouraged financial institutions to lend aggressively at a time when credit in other countries was drying up. Banks made loans worth more than 415.9 trillion dong, or roughly US$22 billion, through the program.

"We've been saying for some time that Vietnam should be shifting to some monetary tightening," said Ayumi Konishi, the Vietnam country director for the Asian Development Bank in a recent interview in Hanoi. Another problem of the stimulus, he said, is that it may have allowed some companies to sail through the downturn without taking necessary steps to improve efficiency so they can emerge more competitive as the global economy rebounds.

Other countries in Asia, including Australia, have taken their own steps to rein in stimulus over the past couple of months, including raising interest rates.

The termination of Vietnam's loan-subsidy program is in line with the government's latest moves to raise interest rates and "will help businesses to increase their competitiveness," State Bank of Vietnam Deputy Governor Nguyen Dong Tien said on the government web site.

Stopping the program isn't without risks. Some companies may be dependent on the loans to keep their operations profitable, analysts warn. Vietnam's export industries continue to suffer from weak demand in the U.S. and elsewhere, and until exports fully recover, they could struggle without more government aid.

Vietnam shares ended down 3.1% Wednesday amid concerns that the end of the program will raise costs for Vietnamese companies. (Wall Street Journal)