The architect’s plans call for the 40-storey BIDV Tower, the latest symbol of Vietnam’s economic prowess, to rise elegantly into the skyline of Ho Chi Minh City.

But the reality is rather less lofty. In a property market hit hard by economic instability, construction on the project, backed by the state-owned Bank for Investment and Development of Vietnam, has stalled. The prime plot in Vietnam’s commercial capital is one of several fallow building sites that have been turned into temporary car parks, where office workers pay 5,000 dong ($0.24) a day to keep their scooters.

With annual lending rates increased to more than 20 per cent last year to fight Asia’s highest inflation rate, the once flourishing property market in Ho Chi Minh City seized up and prices tumbled. Premium office rents have fallen from above $80 per square metre per month in 2007-2008 to below $30, although they still run ahead of more developed regional cities such as Bangkok and Kuala Lumpur. With many developers running out of cash, the surge in bad debts has brought Vietnam’s undercapitalised banking system to the brink of a crisis.

Hundreds of projects under construction across Vietnam are “in hibernation,” according to Marc Townsend, managing director of the Vietnam branch of CB Richard Ellis, an international property agency.

State-owned companies, many of which planned to build skyscrapers with the help of cheap government loans and preferential access to land, have been affected, and individuals have also been caught out.

Phan Thu Ha, a 40-year-old housewife who bought an apartment in the Botanic Towers complex in Phu Nhuan district in 2010, is one of many small investors sitting on substantial paper losses. “I feel very frustrated,” she says. “One of my friends from Hanoi just came here and bought an apartment in Botanic Towers but she paid much less than I did in 2010.”

The imbalances in Vietnam’s real estate market are symptomatic of a wider malaise afflicting the economy.

“Last year was the worst for 20 years,” says Dang Thanh Tam, one of the wealthiest of Vietnam’s first generation of tycoons and a member of Vietnam’s Communist party-controlled parliament since last year. “Business could not live with interest rates of 25-30 per cent, so many companies died.”

By opening up the economy before joining the World Trade Organisation in 2007, Vietnam’s Communist rulers achieved the highest growth rate in Asia after China and India. But, propelled by a large expansion in credit, the boom came at the cost of economic stability.

Since the government began belatedly tightening credit 12 months ago, annual inflation has slowed, to 17 per cent in January, and the slide in the value of Vietnam’s currency has been halted.

Despite this, “both investors and the Vietnamese at large remain cautious,” according to Trinh Nguyen, an HSBC economist in Hong Kong. She forecasts gross domestic product growth of 5.7 per cent this year, down from 5.9 per cent in 2011 – well below the trend growth rate of more than 7 per cent per year that attracted international investors in the years before 2007.

One major risk comes from the banking sector, which Moody’s, the credit rating agency, warned this month was “highly exposed to external shocks because of the country’s relatively undiversified economy and weak financial system.”

The central bank plans to close or restructure more weak banks this year but has yet to explain how it will deal with the high levels of bad debt in the banking system.

“Banks don’t want to declare non-performing loans so they are rolling over or restructuring as it is better for their results,” says Fraser Wilson, who runs a London-listed $90m property fund for Dragon Capital, an investment management group in Ho Chi Minh City.

Mr Tam, whose Saigon Invest group has interests in property, banking and telecoms, believes the economy will “be much more positive this year.” He predicts that annual inflation will return to single digits by the end of the year, allowing the government to cut interest rates.

But economists say the government must resist pressure to expand credit too rapidly or inflation will take off again, undermining the return to economic stability and hitting the poor.

“The government never cares about us,” says Le Dinh Chien, a 51-year-old security guard who is forced to moonlight as a motorbike taxi driver to support his family. “It’s very difficult to earn money but too easy to spend it in this situation as all prices are too high.”

Additional reporting by Nguyen Phuong Linh, Ho Chi Minh City

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