At the heart of the escalating problems in the country are government actions aimed at preventing a loss of competitiveness on its exports, and therein hangs the tale for the rest of Asia.

The following brief mention in a recent article (Cheap talk, pricey banks, Asia Times Online, June 4, 2008) now appears to be rapidly becoming the main story in the region:

Vietnam represents a cautionary example for all Asian governments. The country attempted to fight market attempts to push the value of its currency, the dong, higher. This was "achieved" by strong-arm tactics including the arrest of some bankers and pushing through drastic limitations on foreign investors. Stuck with a number of their investments, foreign investors have pushed up Vietnam's credit costs in external markets, by more than 100 basis points in the past two weeks alone, essentially rendering any recourse to such financing untenable for the country. Meanwhile, the loss of investor confidence has pushed stock markets into a downward spiral, with the benchmark index falling every day in May (absolutely unprecedented anywhere in the world).

This is the problem with traditional Asian responses to market forces, dictated as they are by communist ideology rather than rational understanding. The fallout from Vietnam though is quite negative for smaller Asian economies, such as the Philippines, as it shows the limits to market patience with such government shenanigans. A rising US dollar would make matters worse for Asia in the short run, by creating greater inflation and sharper declines in household wealth, even as the concurrent benefits on exports fail to materialize thanks to a US recession.

Since then, the problems with Vietnam have only become worse, with the currency in free fall against the US dollar as foreigners are trying to get their investments out as quickly as possible. Averting this would require the authorities to increase interest rates sharply in order to maintain the attraction of the dong, but doing so will only increase bad debts at the local banks and in turn spark a surge in non-performing loans at state-controlled banks.

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This article first appeared on www.atimes.com/atimes/Asian_Economy/JF24Dk01.html

July 2, 2008

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