Vietnam has come a long way. Helped along by ongoing deregulation and a resource-rich economy, growth has been at 7%-8% since 2000. Vietnam’s literacy rate is an impressive 92%, while 70% of the 85 million-strong population is under 35.
Wage levels are half those in China, while Vietnamese small- and medium-sized companies achieve returns on equity of 20%, four times Chinese levels, says David Stevenson in the FT. The consumption story has a long way to go – a mere six million people currently have a bank account. “The longer-term economic reform story… remains a compelling one,” says the IMF’s Benedict Bingham.
For now, however, “Asia’s newest tiger economy has stopped roaring”, as Ben Stocking puts it in the International Herald Tribune. Optimism among local investors, who drive the market, has vanished amid fears of overheating and a consequent sharp slowdown; the stock market has slid by 60% this year. Inflation has reached 25% year-on-year, with food prices up 42%.
Meanwhile, the current account deficit is around 13% of GDP. This has raised the spectre of an Asian crisis-style currency collapse, with speculators knocking the dong off its peg with the dollar. The government has announced a 2% devaluation to relieve pressure on the currency, but markets expect another 30% depreciation over the next year.
The market has perked up a bit after sliding for 25 days on the trot after the government signalled “a growing determination” to tackle inflation, said Amy Kazmin in the FT. The benchmark interest rate has been raised by 5.25% since mid-May to 14%, and could rise further. Still, real interest rates remain “hugely negative”, says Jim Jubak on Moneycentral.msn.com, which presages further inflation. The government’s reduced growth estimate of 7% seems “wildly optimistic” – the “standard medicine” for runaway inflation is interest rates above the inflation rate.
Christopher Wood of CLSA reckons a classic balance of payments crisis with an exodus of foreign capital does not look imminent, given that pledged foreign direct investment has continued to surge this year. A banking crisis may be a greater risk, with an “orgy” of property-led lending now unwinding sharply. The government is “already thought to be providing discreet liquidity support” to some small banks that lent heavily for speculation in tumbling stocks and real estate, says The Economist. And banks are legally obliged to price loans at no more than 150% of the base rate, which has “all but stopped lending”. This has increased the risk of a hard landing, says ABN Amro’s Dominique Dwor-Frécault.
Given all the uncertainty, rattled local investors burned by hyperinflation in the 1980s have rushed into gold, which is trading at a premium to international prices. They are showing “a stunning lack of confidence” in the government’s ability to stabilise the economy, says Sherman Chan of Moody’s. That suggests equity market sentiment may remain subdued for some time.
Still, given “one of the lowest ratings on the planet” for such a good long-term growth story, and a forward p/e of just ten, the market looks worth a punt for long-term investors, says Stevenson. He does, though, note that p/es in many Asian markets fell to six to eight during the Asian crisis, so this may not be the bottom. He likes the Aim-listed JSM Indochina (JSM) and the Vietnam Opportunity Fund (VOF). Deutsche Bank has just launched an ETF of Vietnamese blue-chips (XFVT).