Vietnam is expected to be a strong economic performer in 2011, riding on high domestic demand, according to a recent report by the Standard Chartered Bank.
However, inflation and the trade deficit will also rise, leading to further dong depreciation, and higher interest rates, the bank said.
"We expect Vietnam to expand strongly in 2011, with growth forecast to accelerate to 7.2 percent from 6.7 percent in 2010. This makes it one of the few Asian economies where growth is expected to pick up next year in real GDP terms," the report said. "This strong performance, combined with ample liquidity globally, could revive international investors' interest in Vietnam's financial markets."
"According to our forecasts, Vietnam is likely to be the third-fastest growing economy in Asia in 2011, after China and India," the report says.
But it warns that Vietnam remains vulnerable to inflation, a widening trade deficit and currency depreciation.
Since Vietnam is still a net importer of products that are directly linked to commodity prices, its trade balance remains vulnerable to sharp commodity price surges. The government has imposed temporary export restrictions on selected commodities in the past to maintain domestic price stability.
Such measures would further dent the export side of the trade balance. Meanwhile, strong domestic demand has also supported imports of capital goods and consumer products, the bank said.
Strong domestic growth and the risk of surging global food and energy prices could stoke inflation and widen the trade deficit, both of which would revive downward pressure on the Vietnamese dong.
The bank has revised down its 2010 forecast to reflect tamer-than-expected inflation so far this year, to 8.9 percent from 9.5 percent previously.
However, for 2011, "we expect inflation to return to double digits, reaching 10.5 percent versus our previous forecast of 8.5 percent," it said.
"This reflects upside risks to global commodity prices as well as strong domestic demand. We also expect further dong devaluation, which will add to inflationary pressure."
The State Bank of Vietnam has devalued the dong, most recently by 2 percent on August 18.