Vietnam Financial Crisis Analysis

Vietnam Financial Crisis Analysis

1. Introduction

In May 2008, the outbreak of Vietnam currency crises caused worldwide concerns. Be regarded as a paradise for investors in the last ten years, especially after the entry of WTO in 2007, Vietnam’s economic increased rapidly. However, some of the economic indicators reflected potential risks caused by factors that include rising inflation, falling share prices, an expanding trade deficit, and the falling value of the dong. The soaring prices brought in a lot of social uncertainties. According to the Vietnamese government statistics, there were 103 strikes at the first quarter, and 300 times in the first half year of 2008. Some economists working for Western banks at that time believed that Vietnam would be forced to seek assistance from the International Monetary Fund (IMF), like Thailand currency crisis.

2. Factors that result in the financial crisis

2.1 Inflation

The greatest cause of concern was that the inflation was out of control. Since 2008, with the soaring of oil and food prices, it showed a further deterioration of inflation in Vietnam. The rate of inflation had increased to 25.2%, which was the highest in recent years. However, Vietnam's central bank benchmark interest rate was 12%, which was a failure to control inflation expectations effectively. From January to May, due to the increase of prices of building material, chemical fertilizers and oil, the trade deficit in Vietnam had reached 14.4 billion USD. Although there was capital flow in Vietnam these years, it failed to offset the total external debts. On June 2th, 2008, central bank officer of Vietnam said that measures of increasing interest rates and others had been made to cope with the inflation problems. Unfortunately, Vietnamese dong to US Dollar exchange rates showed a decrease trend