World Bank finds cause for worry amidst rapid recovery

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Vietnam's recovery from the economic crisis has been fast but uneven, and improved governance of state-owned enterprises is needed to ensure strong and sustainable growth, the World Bank says.

The nation's key economic indicators are expected to recover to "near their pre-crisis trend growth rates" but there are still concerns about a "soft landing" for the country, the bank said in its latest East Asia and Pacific Economic Update released Tuesday.

The current account deficit remains high and there is "persistent pressure" on the local currency as households and firms appear to continue to stockpile foreign currency and gold, it said.

Bankers said this week that speculation of another devaluation is putting pressure on the dong, making businesses more reluctant to sell dollars to banks.

Le Xuan Nghia, deputy director of the National Financial Supervisory Commission, told Reuters the pressure on the dong was increasing as businesses needed to accumulate dollars to settle greenback loans they had taken in earlier months of the year. "But I don't think there should be a devaluation at this point of time, as the pressures are not large enough," he said.

The World Bank also said Vietnam's current account deficit remains high and there are concerns about the balance sheet of some of the banks.

"The stock market, after staging a smart recovery in 2009, has slumped again and continues to underperform the broader economy," the bank said in the report. Vietnam's benchmark VN-Index has fallen by more than 11 percent so far this year.

The government is trying to "phase out the stimulus package without disrupting the economy", the bank noted, adding that the economy is on track to achieve the 2010 target of 6.5 percent

State sector

According to the World Bank, state-owned enterprises have played an important role in Vietnam's progress, but have also become "a source of long term vulnerabilities."

"While some of the Economic Groups have served the cause of their existence (e.g., Vietnam Posts and Telecommunications Group, Electricity of Vietnam, PetroVietnam, etc.), many have also contributed to magnify the economic instability," it said.

The bank said in its report that in late 2007 and early 2008, the groups invested heavily in the financial sector and real estate, exacerbating the asset price bubbles.  It cited the case of shipbuilder Vinashin, which was on the verge of default, as an example of a state-owned enterprise that failed.

Vinashin piled up to $4.5 billion in debt, leading to a restructuring and a financial investigation in to the firm. Several top managers of the shipbuilder have been arrested for mismanagement.

The World Bank said improved governance of the Economic Groups, along with a new law on public investment and a new framework for public private partnership, will "boost structural reforms in Vietnam and set the foundation for a strong and sustainable growth."

At the regional level, the bank said the economic recovery in East Asia and the Pacific is robust, but attention must now turn to managing emerging risks.

"Should inflows remain strong, especially against a background of weak global growth, the authorities will be faced with the challenge of balancing the need for large capital inflows especially foreign direct investment with ensuring competitiveness, financial sector stability, and low inflation," said Vikram Nehru, World Bank Chief Economist for the region.

The bank also said in its report that the ongoing relocation by manufacturing firms from higher wage countries in East Asia is beginning to benefit Vietnam, "which with its relatively low wages and easy access to coast is well positioned to absorb such investments."

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