Vietnamese economy slowing down

Inflation is hurting Vietnam although it benefits from rising rice prices

Vietnam's economy slowed in the first half of the year as soaring inflation dampened consumer spending, and pushed up imported energy and food costs.

One of Asia's economic success stories in recent years, Vietnam enjoyed growth of 7.9% in 2007 but expansion slowed to 6.5% in the first half of 2008.

Economists said the dip was welcome to prevent overheating but warned more action was needed to tackle inflation.

Consumer prices are currently more than 20% higher than a year ago.

'Unpredictable challenges'

Across Asia, countries are struggling to cope with the burden of higher fuel and food costs.

Vietnam's trade deficit has soared this year as the cost of importing fuel, fertilizer and steel has jumped although, as the world's second-largest rice producer, it has also benefited from rising crop prices.

It is important for Vietnam to give up short-term growth for long-term benefits Prakriti Sofat, HSBC

Despite the slow down in gross domestic product (GDP), ministers described the growth performance as a "major victory" given the uncertainty over the global economy.

However, officials warned of social pressures from the spiralling cost of basic goods after annual inflation hit 27% last month.

"In the second half of the year, the social-economic situation remains complicated," Vietnam's General Statistical Office said.

"We will continue to face the existing difficulties and possibly unpredictable challenges."

The International Monetary Fund said on Monday that Vietnam needed to tighten monetary policy further despite already having raised interest rates three times this year.

Growth choice

But experts said lower growth, if combined with other deflationary measures such as higher borrowing costs and credit restrictions, would have a positive impact.

"Overall, things are moving in the right direction," said HSBC's Asia economist Prakriti Sofat.

"It is important for Vietnam to give up short-term growth for long-term benefits."

Vietnam's economic resurgence has made it a magnet for foreign investment, with direct investment levels in the first half of 2008 almost $10bn higher than for the whole of 2007.