Introduction

Viet Nam officially launched its Doimoi (Renovation) in 1986, but only started a radical and comprehensive reform package aimed at stabilizing and opening the economy in 1989. During 1996–1999, market-oriented reforms were somewhat stalled. Since 2000, a new wave of economic reforms has been stirred up with emphasis on structural reforms (state-owned enterprise [SOE] and financial reforms and development of the private sector) and further trade and investment liberalization. The years 2000-2007 witnessed a boom in the private sector and deeper international economic integration. In 2000, Viet Nam and the US signed the Bilateral Trade Agreement (VN-US BTA), which became effective in December 2001. Since then, the country has also joined several regional integration clubs such as ASEAN + 1 Free Trade Areas (FTAs). Most importantly, Viet Nam became the 150th member of the WTO in November 2006.

Since 2005, SOE and banking system reforms have shifted their focus on large corporations, including the State-owned commercial banks (SOCBs), though the pace of these reforms has been slower than expected (see also Table 1 [ PDF 119.1KB | 1 page ]). The first SOCB with the second-largest market size, the Bank for Foreign Trade of Vietnam (VietcomBank), after successive delays, got the approval of the Prime Minister of Viet Nam to proceed with its initial public offering (IPO) on the domestic market in December 2007.

Meanwhile, a notable observation during 2006–2007 is an expansion of the banking system and a boom of the stock market coupled with massive capital inflows and much higher consumption prices and asset inflation.

Market-oriented reforms have led to major positive changes in Viet Nam. The liberalization of trade and the balance of payments (BOP) as an essential ingredient of the reform process have contributed significantly to Viet Nam’s economic growth and development. The financial and currency crises in the 1980s and especially the Asian crisis in the 1990s, nevertheless, showed that the process of BOP liberalization, if not properly implemented, could also involve risks.¹

Experiences from various countries and the current position of Viet Nam are drawing attention to how Viet Nam can sustain economic growth and sound financial development while mitigating financial risks. This paper seeks to answer that question, taking into consideration the whole period before and after the Asian crisis (1995–2007), but with a focus on the recent financial and policy developments.

The paper is structured as follows. Section II briefly describes the changes in Viet Nam’s major economic fundamentals and the financial sector development. Section III analyzes in greater detail the capital flows and their impacts on real economic activities as well as on macroeconomic stability. Section IV then reviews recent macroeconomic policy responses to the surge in capital inflows, aiming to assess the strengths and weaknesses of those policies in Viet Nam. Section V summarizes the major findings and makes some policy recommendations for sustaining high economic growth and sound financial development in the country while mitigating possible financial and inflation risks.

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