A woman carries fruits at the wholesale Long Bien Market in Hanoi on Tuesday. Vietnam has made progress in taming inflation but the country's economic slowdown has deepened, Fitch said in a report.
The government's measures to tackle double-digit inflation have been effective, but economic growth could be a casualty, say economists, warning of a looming recession.
With the number of business closures rising, experts say the government has to face the truth that the economy is now in a bad state.
Le Dang Doanh said recession was actually "hiding" behind positive economic indicators.
Easing inflation, a narrowing trade gap and an improving foreign reserves position, at first sight, are good for the economy. However, they also mean that businesses have cut back on production and no longer need to import materials, the economist said.
"Inflation is a problem that can be solved as long as the economy keeps expanding. But when there is no growth, the situation gets serious. Production will be stalled, unemployment will rise, and there will be many social consequences," Doanh told Vietweek.
More than 17,700 businesses have stopped operations in the first four months of 2012, up 9.5 percent from a year earlier, and the number could hit 50,000 by the year-end, local media cited Deputy Planning and Investment Minister Cao Viet Sinh as saying Monday.
The economy expanded 4 percent in the first quarter, the slowest pace since 2009. The government has set a full year target of 6-6.5 percent growth for 2012.
Vietnam's economic growth may slow to 4.5 percent in the second quarter from 5.68 percent in the same period last year, the Vietnam Economic Times newspaper said, citing a government report to the National Assembly. According to the report, while inflation is likely to be below 10 percent, it could be difficult to achieve the economic growth target for 2012.
In April, the consumer price index inched up only 0.05 percent from March despite a hike in fuel prices. The index increased 10.54 percent over the same period last year.
For Hanoi, the index dipped 0.03 percent in April compared to March, the first time consumer prices actually decreased in at least two years.
Ratings agency Fitch said in a report last week that since Vietnam started implementing fiscal and monetary tightening measures in February 2011, the country has made "vital progress" in taming inflation. The efforts also lent support to the current account position, which recorded a surplus to 0.2 percent of gross domestic product in 2011 versus a deficit of 4 percent in 2010.
But Fitch noted that the country's economic slowdown has deepened, resulting in recent policy rate cuts by the central bank in March and April, which the agency described as an "appropriate" response.
The International Monetary Fund (IMF) has said that while the significant tightening of monetary policy in 2011 is beginning to yield a desired easing of inflation and exchange rate pressures, the scope for an easing of monetary policy is constrained by the need to preserve confidence.
"Since inflation has been coming down, there's room for monetary easing or cutting interest rates, but if interest rates are cut too fast, then that can introduce, again, instability and loss of confidence," Masahiko Takeda, Deputy Director of the IMF's Asia and Pacific Department, told a press briefing earlier this month.
Economist Bui Kien Thanh said it is unusual to see credit growth shrink by around 2 percent from the end of 2011 in the first three months. That is a sign of economic recession, Thanh said, noting that the economy will be in deep trouble when many companies are "dead."
The government has given businesses more time to pay taxes, but Thanh said producers need more support in order to lower prices and clear their stockpiles.