Although the country escaped the primary fallout from the banking crisis, slowing demand for garments, footwear, furniture and electronics components has hit the country hard.

Hanoi on Friday announced that it would subsidise interest payments equivalent to four percentage points on loans to small and medium sized enterprises for a year, at an estimated cost of 17,000bn dong.

The move will cut business interest bills by 30 per cent. The central bank has cut interest rates by more than 800 basis points in the last six months, reversing the tight fiscal policy put in place early last year to combat inflation that eventually peaked at over 28 per cent in August.

Vu Van Ninh, minister of finance, said on Friday that the markets can expect more rate cuts in the near future, according to a Bloomberg News report.

The interest subsidy announcement indicates that the authorities are directing much of their resources to conserving business infrastructure in the hope of maintaining jobs and being ready to react when demand revives.

The government has also strengthened its social safety net, announcing yesterday that it would give 200,000 dong to each of the country’s poorest families, amounting to a total of some 3,800bn dong, in time for the lunar new year celebrations, which start the week after next.

“Strategically, they are faced with the question of whether they are better using their limited ammunition to counter the consequences of the slowdown or to provide support to limit the social fallout,” said Benedict Bingham, head of the International Monetary Fund office in Vietnam.

It is unclear how many new loans the subsidy scheme will create, or how willing Vietnamese banks will be to extend new loans in the current business environment. In other countries, many banks have used government attempts to inject new liquidity into the monetary system as a chance to shore up balance sheets, blunting any stimulatory impact.

Vietnam’s relatively cheap production base might give it some advantage over its regional competition when it comes to fighting its way out of the crisis, but it also has some weaknesses. It does not have especially large foreign exchange reserves and a thin domestic debt market, limiting its room for fiscal manoeuvre. Three weeks ago, it devalued the dong by 3 per cent.

By Tim Johnston - The Financial Times - January 19, 2009