Vietnam’s Prime Minister Nguyen Tan Dung pledged to bring inflation down to a decade low as the nation seeks to boost foreign investment and cope with the aftermath of a credit boom that’s hobbled the banking industry.

“Inflation in 2012 will be about 7 percent and next year we will have even better control of it, at about 6 percent,” Dung, 63, said in an interview in Hanoi on Nov. 28. He said overseas investment will rise “sharply” in the next two years as officials overhaul state enterprises and recapitalize banks.

Slower gains in consumer prices would reduce the risk of labor strikes undermining Vietnam’s campaign to position itself as an alternative manufacturing base to China. Concern that growth has peaked after a quarter-century of market opening, and that policy makers are struggling to manage a legacy of non- performing loans, contributed to a 21 percent slide in investment pledges from abroad so far this year.

“It would help Vietnam’s image significantly” to contain inflation, said Peter Ryder, the Hanoi-based chief executive of fund manager and property developer Indochina Capital. “Clearly the fact that inflation hit 20-plus percent in two of the last four years has made people question the government’s management of the economy.”

Dung’s administration has made inroads into quelling what was Asia’s fastest inflation in 2011, at 18 percent in December from the previous year. Consumer prices rose 7.1 percent in November. The last year costs rose less than 6 percent was in 2003, according to data compiled by Bloomberg.

Growth Outlook

The nation of 89 million will see economic expansion of 5.5 percent next year, Dung, who has been prime minister since 2006, predicted in the interview at his office building known as the White House. The rate would be little changed from an estimated 5.2 percent in 2012, the weakest performance in 13 years.

Growth has slowed from the 7 percent average pace recorded since the “doi moi” market-opening reforms began in 1986 as Vietnam tightened credit to stem inflation and the rise of bad loans. Government-run banks often have been subject to political pressure to lend to favored state-owned enterprises, according to a January study from the Harvard Kennedy School.

Central bank Governor Nguyen Van Binh told the National Assembly on Nov. 13 the ratio of non-performing loans as of Sept. 30 was seen at 8.82 percent. The monetary authority aims to lower the ratio to below 3 percent by 2015, Binh said last month. Binh also has vowed to crack down on violations by groups with vested interests that manipulate bank operations.

Cleaning Up

“If the government goes about cleaning up the banking system the right way and reining in the state-owned companies, while growth would likely stay slow it’s reasonable to think that inflation would also remain under control,” said Jonathan Pincus, a Ho Chi Minh City-based economist with the Harvard Kennedy School’s Vietnam program.

Vietnam’s stocks have underperformed in the past year as its banking crisis deepened. The VN Index of shares is down about 0.7 percent over the period, compared with the MSCI Asia Pacific Index’s (MXAP) advance of 9.4 percent.

Dung, a former central bank chief, has faced domestic criticism over his management of the economy, with a rare suggestion in the Communist nation by a National Assembly delegate this month that the prime minister introduce a “culture of resignation.”

Preventing ‘Collapse’

“Vietnam is determined to restructure its banking system at the lowest cost possible, preventing any systemic collapse,” Dung said in a written response that was sent by his office after the interview.

Even amid the financial strains, some overseas lenders have boosted their presence in the country. HSBC Holdings Plc, Standard Chartered Plc, Mizuho Financial Group Inc. and Australia & New Zealand Banking Group Ltd. are among foreign banks that have bought shares in Vietnamese banks or opened branches in the Southeast Asian country.

Some foreign companies operating in Vietnam have seen their local units or suppliers affected by labor disputes. Yamaha Motor Co. halted production of motorbikes in Hanoi when 4,000 employees downed tools in March last year. They were given a pay raise to return to work. Dung asked officials and unions earlier this year to halve the number of strikes compared with 2011.

The ruling Communist Party has identified restructuring state-owned companies as one of its main areas of focus through 2015. The government has pledged to speed up a share-sale program known as equitization after delays in plans to sell stakes in enterprises such as Vietnam Mobile Telecom Services Co. and Vietnam Airlines Corp.

Stock Listings

“We encourage state companies that have sold stakes to the public to list on stock exchanges domestically and internationally,” Dung said.

A more stable economy should contribute to an increase in foreign investment next year and in 2014, the prime minister, who oversaw Vietnam’s entry into the World Trade Organizationin 2007, said in the interview. “We highly welcome foreign companies to invest in and take part in the process of restructuring state-owned companies, including our banks.”

Policy makers are planning new tax policies and land regulations to make Vietnam more attractive to foreign investors, with a focus on finding companies with “value-added projects and high technology,” he said.

Intel Corp. (INTC), Samsung Electronics Co. (005930) and Jabil Circuit Inc. (JBL) are among companies that have set up or are expanding in Vietnam, spurring the nation’s exports even as foreign investment pledges have dropped this year. Shipments of mobile phones and other electronics rose 91 percent in the first 10 months of the year to $16 billion, making them the biggest source of export revenue.

Foreign Reserves

The export gains have contributed to a buttressing in Vietnam’s foreign-exchange reserves, which Dung said are expected to reach the equivalent to about 12 weeks of imports by the end of the year. Such a figure would mark an increase from the 11 weeks of imports Dung estimated in an Oct. 22 address to the National Assembly.

The Southeast Asian nation will probably ship 7.5 million tons of rice this year, Dung said in a written response. Vietnam exported about 7 million tons of the grain last year, when it was the world’s biggest rice exporter after Thailand, based on figures from the U.S. Foreign Agricultural Service.

“Foreign companies are doing well in Vietnam with their export turnover rising 30 percent in eleven months through November and accounting for about two-thirds of total exports,” the prime minister said in the written responses.

Vietnam is a central player in what’s likely to be a migration in international manufacturing from China toward Southeast Asia, according to analysts at Daiwa Capital Markets Hong Kong Ltd.

The nation, along with smaller neighbor Cambodia, is “among the best candidates to replace China as low-cost textile and clothing makers due to their low labor costs,” Sun Mingchun, chief economist for greater China at Daiwa in Hong Kong, wrote in a Nov. 27 research note.

Source: www.bloomberg.com