Fitch's lowering of its outlook on Vietnam's sovereign rating on Thursday could be a sign of more weakness to come for many of Asia's economies and currencies, as record oil prices complicate their efforts to control inflation.
Fitch Ratings lowered the outlook on Vietnam's BB-minus rating to negative from stable, saying that authorities had not dealt quickly or strongly enough with inflation, potentially posing risks to banking system's stability. [ID:nHKG197848]
The agency cited the delicate position the government is now in, riding a fine line between containing price rises and setting off a sharp economic slowdown.
Some observers are even pointing to a potential currency crisis, given Vietnam's growing current account deficit, weakening fiscal position and limited foreign exchange reserves, on top of 25 percent annual inflation, the second-worst in Asia.
Some of Asia's largest economies are also grappling with the same risks. Although none look as vulnerable as Vietnam, some are set for their sternest test since the Asian financial crisis of 1997.
"I think (we could see) a much deeper and more prolonged slowdown than people are currently anticipating that lasts until the end of 2009, rather than being done shortly," said Bill Belchere, regional economist with Macquarie in Hong Kong.
The Philippines, South Korea and India share some of the problems that pushed Vietnam into its downward spiral.
In all three expensive oil imports are eroding their current accounts and dragging down currencies. Weak currencies are fuelling inflation, piling pressure on central banks to raise interest rates. Higher rates would hurt economic growth and stock markets, triggering a flight of capital needed to finance the trade gap. Continued...
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