Vietnam's 'tiger' economy losing its roar

The Ben Hai river running through this small mountain village in central Vietnam marks the 17th parallel, what was the dividing line between North and South Vietnam prior to the exit of US troops and the communist victory in 1975. 

It is a historic but neglected part of Vietnam – a world apart from the bustling capital Hanoi, with cell phone coverage disappearing on the snaking road up to the village as the early morning drizzle falls over the steep and green foliage-laden slopes on either side.  

Most of the people living along the rural river area are Van Kieu, one of 54 officially-recognized ethnic groups in Vietnam, where rising income levels for urban Vietnamese have not been matched by improved living standards in some isolated rural areas where minorities live. 

Despite Vietnam's "tiger" economy years "upland farmers [including and in particular the minority ethnic groups of the Central Highlands] have been left behind," says Roger Montgomery of the London School of Economics.

The Vietnamese government has repeatedly said that it wants to boost living standards in such areas, part of its overall ambition to achieve a modern industrial economy by 2020. But its ability to live up to these pledges are being constrained by bigger challenges facing the country and the ruling Communist Party, raising questions about the direction of Vietnam’s economy.

Several recent corruption scandals and multibillion dollar losses incurred by mismanaged, behemoth state-owned enterprises have belied hidden fault lines in Vietnam's economy which could in turn lead to reduced growth.

"The veneer of short-term high growth rates made it hard for the government to move forward on reforms. Why fix something that doesn't appear to be broken? Unfortunately, when growth in the region and major international markets such as Europe, the US, and China slowed, Vietnam's economic weaknesses were exposed," says Ernest Bower, southeast Asia analyst at the Center for Strategic and International Studies. 

While Vietnam grew by around 7 percent on average during the decade up to 2010 – lifting Vietnam to World Bank “middle-income” status and pulling in big-ticket investors such as Boeing and Intel – growth for next year is expected to dip to around 5.5 percent.

In Vinh-O, needs are basic, but vital support could be hindered by that dip, especially if slower growth means spending cutbacks or a nervous ruling party stalling on economic reforms. “We need better irrigation canals, better water systems. Eighty-three percent of the people in this area are poor,” says Nguyen Thi Hai, deputy chair of the local People's Committee of the ruling Communist Party of Vietnam.

This summer, the country's central bank conceded that bad debts amounted to as much as 10 percent of all bank loans. And analysts speculate that the real number could be at least twice that.

To compare, total nonperforming loans at four of China's biggest banks came to just 1 percent of all loans last year, meaning Vietnam's bad loans are likely closer to figures for Spain, where around 10 percent of bank loans are not being repaid according to the country's Central Bank.

Rare apology by the ruling party

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