Vietnam
Flu symptoms
Jun 19th 2008 | BANGKOK
From The Economist print edition
Is dangerous overheating contagious?

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EVEN by the standards of Asia's booms and busts, the turnaround in Vietnamese investors' sentiment has been remarkable, veering from wild optimism a few months ago to deep pessimism today. Surging inflation—it is now over 25% year-on-year—has aggravated a slump in the Ho Chi Minh City stockmarket, previously one of Asia's most bracing (see chart). From worrying about upward pressure on the dong, the authorities now fear a currency collapse. Some economists worry this could spill over to other Asian countries where inflation is also reaching alarming levels.
The central bank has announced a 2% devaluation, hoping to relieve the pressures on the currency. It also raised its base interest rate from 12% to 14%. The moves, however meek, briefly supported the stockmarket, which had fallen for 25 trading days in a row. But offshore trading in dong futures is pricing in a further devaluation of around 30% within a year.
It has been clear for months that Vietnam's economy is overheating. The trade deficit from January to May was over $14 billion, about the same as for all of 2007. Like the stockmarket, property prices have tumbled, leading to fears about the country's banks, which lent heavily for speculation in both assets. The government is already thought to be providing discreet liquidity support to a dozen small banks. For all these concerns, foreign investors still see Vietnam as “the next China”. It is the Vietnamese who are gloomy, and fears of hyperinflation run deep after some bruising encounters in the past.
Meanwhile, the government is trying to curb currency speculation by restricting foreign-exchange booths from selling dollars. To reduce imports, it is said to be allowing the central bank to sell dollars only to businesses that have its approval for their foreign purchases (such as buying capital goods). This, however, may push