GRIM OUTLOOK: When the government lifts subsidies on fuel and other essentials next month, inflation in Vietnam is expected to soar to more than 30 per cent. -- PHOTO: AP

HANOI - IT HAS happened before.

In the early 1990s, there was tremendous excitement when Vietnam's economic reforms (doi moi) kicked in. After decades of communist orthodoxy had almost bankrupted the nation, the change to more free-market policies had a startling impact. Living standards were transformed and a cavalcade of foreign investors, eyeing a new market of around 80 million people, flocked in.

But the bonanza soon fizzled out. Red tape, corruption, endemic anti-foreigner sentiment as well as Vietnam's inflexible bureaucracy sent many investors fleeing.

Fast-forward to today when similar factors, compounded by poor economic management, have tarnished Asean's new poster boy. Times are tough in Vietnam and getting tougher. And most people feel the government's actions have been too little, too late.

Dr Nguyen Quang A, director of Hanoi's Institute for Development Studies, said: 'The main reason for the economic downturn is the government's poor and uncoordinated economic policies.'

Vietnam has the worst inflation rate in East Asia. Last month, it hit 21.4 per cent on an annualised basis. Its trade deficit, expected to top US$25 billion (S$34 billion) this year, puts it at the bottom of the regional league.

Dr Quang A said: 'The government always said an excess of imports over exports was quite normal. It concentrated so much on reaching a high growth rate without paying proper attention to the quality of growth.'

That short-sightedness has led to chronic income disparity, with rural and factory workers finding that while they may be earning a little more, their standard of living is, however, falling. That in turn has led to Vietnam suffering an ever-escalating series of strikes.

Last Monday, nearly 7,000 workers at a Taiwan-owned shoe company in Haiphong went on strike for more money and shorter working hours. A week earlier, 3,000 workers went on strike at a Chinese plastics factory north of Hanoi. And the industrial heartland around Ho Chi Minh City has seen strikes almost every week.

Factory workers typically earn about US$55 a month. They say they can no longer survive on that kind of pay when their food and fuel bills are rising at 30 per cent and more.

As for Vietnam's stock market, it is currently the world's worst-performing bourse and has dropped 63 per cent over the past year.

Mr Phan Hong Quan, head of Europe Capital Securities in Hanoi, said: 'The reason for the downturn in the stock market is that the government's macro-economic policies have been risky and inconsistent.'

Mr Jonathan Pincus, senior country economist for the United Nations Development Programme, said: 'Vietnam's problems are worse than its neighbours' because fiscal and financial discipline broke down in 2007 and it is taking longer than expected to reverse this.'

And in an ominous move, US rating company Standard & Poor's recently slashed its outlook on Vietnam from stable to negative because of macroeconomic concerns.

Perhaps not unexpectedly, those concerns seem to have caught the government by surprise. After all, the country had enjoyed almost a decade of around 8 per cent growth yearly.

The country's young consumers had eagerly embraced a 'spend now, pay later' philosophy, clamouring for the latest Piaggio motorbike, Nokia cellphone and designer clothes. And it was hard to blame them, since the government too spent as if there were no tomorrow.

Naturally, the inflation rate rose and last November it hit double digits. At the time, the government insisted everything was under control and that it would soon tame inflation while maintaining a growth rate of 8 to 9 per cent.

That hope was soon shattered and the government has now dropped its growth target to 7 per cent. Few believe even that will be met.

Next month, when subsidies on fuel and other essentials will be lifted, inflation is expected to soar to more than 30 per cent.

Nor is there much hope that the stock market will rise from the dead or that the trade imbalance will lessen soon. Mr Pincus said: 'Vietnam's trade deficit for the first quarter this year was US$11 billion. On an annualised basis, this would be 40 per cent of GDP.

'The international markets are concerned that Vietnam cannot finance deficits of that size, and as a result, the local currency, the Vietnam dong, is weak.'

The ruling communist regime has also been weakened. There is a growing perception that it was the party's economic mismanagement and inconsistent policies that have led to this crisis.

Emboldened local reporters, seemingly more in touch with the grassroots than the party itself, have reported discontent in increasingly strong language. Last week, the best-selling Thanh Nien daily lashed out at the way party leaders seem to be clueless in the face of mounting economic turmoil.

Its editorial thundered: 'What's the point of boasting an 8 or 9 per cent growth rate if people's lives get worse and the poor get poorer?'

Early last month, the normally bland Vietnam News carried a bold front-page headline that was such a bombshell it fuelled speculation over the viability of the government of Prime Minister Nguyen Tan Dung. The article, which was also carried in other sections of the Vietnamese media, said the politburo, the highest body of the ruling Vietnam Communist Party, had given economic advice. That caused speculation about what it meant for Mr Dung and his team to be told what to do by the politburo.

It is generally agreed that there is a split in the politburo between those who back Mr Dung's internationalist approach and those who push a more nationalistic line, like party boss Nong Duc Manh.

Before the current economic turbulence, the Prime Minister had looked pretty solid. But it now seems clear that his position could be undermined if Vietnam's ailing economy does not turn around soon.

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