The bank said that Vietnam 's 2011 growth rate, although impressive at 5.9 percent, stood at a post-2000 low (excluding 2009 financial crisis related growth of 5.3 percent).

While this partly reflected a weakening global environment, domestic conditions were just as much to blame. Inflation was high, rising 18.6 percent year-on-year in 2011. Rising prices and measures to curb them took their toll on the economy, both in the short and long term.

However, macro-economic conditions have stabilised since the turbulent days of early 2011. Inflation decreased to 17.3 percent year-on-year in January, and HSBC expects it to hit single digits by the end of 2012.

Even the dong (VND) has stabilised and a one-off devaluation is no longer priced in. This is thanks to efforts by the State Bank of Vietnam (SBV) to gradually weaken the VND and dampen demand for imports. More encouragingly, after much talk, banking reforms are materialising: three banks merged recently and more are expected to follow suit in 2012.

In contrast to 2011, which began with a sharp weakening of the currency, high inflation, and several tightening measures, HSBC believes 2012 will be relatively stable. Several factors should contribute to this trend: slower inflation, better management of macro-economic policy by the Governor of the SBV, and improved trade and fiscal positions.

The trade deficit is expected to stabilise at 10 billion USD in 2012 (versus 9.8 billion USD in 2011) and the consolidated government balance is expected to decelerate to 3.8 percent in 2012 from 3.9 percent in 2011.

The dong has stabilised in recent months. Historically, the VND had come under a lot of pressure during the Lunar New Year due to stronger demand for USD. This reflected a rush towards the end of the year to pay for dollar-denominated loans, with higher demand for imports during Tet. For several reasons, this did not happen in 2011.

Vietnam Investment Review - February 21, 2012

Lending costs again prove a headache

Industry players are mulling sourcing dollar loans amid high local currency lending rates.

High borrowing costs have been a big burden to firms in the face of economic uncertainties. In fact, firms preferred taking dollar loans to enjoy softer interest rates.

"We export up to 80 per cent of products. Currently, lending rates are 5.6-6 per cent per year for dollar loans using as working capital and 7-8 per cent to loans for investment which are much lower than over 20 per cent per year dong lending rates. Hence, taking dollar loans is smarter for our firm," said Thien Nam Textile-Garment Company director Tran Dang Truc.

Truc said since imported materials accounted for a big share in the product structure, volatile input material costs were hurting the firm.

Deputy director Nguyen Khoa Van at Anh Khoa Company Limited - which produces and trades in garment products, assumed getting dollar loans would not be a top choice if firms were not reliant on imported materials.

Van argued that foreign firms, based in Vietnam's industrial zones or export processing zones, sell garment accessories and materials into local market. His firm bought 70 per cent of material demands from such firms using dong.

"We then sell dollars gained from export contracts to banks. That is more beneficial to us," said Van.

Van said that labour intensive garment textile sector usually paid labourers in dong and payrolls account for around 30 per cent of production costs, hence it would be better to take on dong than dollar lending.

Industry experts assumed dollar lending would be more risky than dong lending on the back of shaky exchange rate. Estimates show that resuming the exchange rate stays at VND21,000 per dollar in early year, then augmenting to VND23,000 per dollar by the year's end, the appreciation of dollar against dong currency alone is tantamount to 18 per cent interest rate per year.

Interest rate differences of buying and selling dollars is another matter of concern to firms when sourcing dollar loans. "Getting dollar loans will be beneficial to export firms having stable dollar raising sources. If firms then have to convert dong into dollars to pay up debts they should take into account their possible loss derived from exchange rate differences, " said Truc.

A director of a HCM City-based bank said: "In the current context, getting dollar loans is generally better than dong loans. The matter is could firms be accessible to the greenbacks since in fact banks just lend firms with import-export activities and having steady dollar raising sources."

Vietnam Investment Review - February 21, 2012