While most Asian markets have rocketed over the past year, Vietnam’s Ho Chi Minh index has moved sideways. Why? In a nutshell, it’s down to fears that the Communist regime’s apparent pursuit of growth at any price is causing overheating. As in China, a government-induced, bank-lending spree helped Vietnam ride out the global crisis, but recent data have looked too strong for comfort.
GDP rose by 6.8% last year, exceeding the official target, while imports leapt by 15.5% in January. Industrial production and retail sales expanded by 16% and 25% respectively. Inflation last month rose to a two-year high of 12.3%. The high inflation rate has dented confidence in the currency, the dong, as has a large trade deficit. Repeated devaluations by the government have encouraged the population to diversify into gold and the dollar. That’s put more downward pressure on the dong and is threatening to raise inflation further. All in all, not an enticing prospect for foreign investors, says FAZ.net.
But things are looking up. Vietnam is “finally putting on the brakes”, says Standard Chartered. The dong was devalued by 9% against the dollar a fortnight ago, bringing it closer to black market rates. The central bank has hiked its main interest rate by 2% to 11%, a larger increase than expected.
“An unequivocal signal” that policy-makers are no longer “blindly” pro-growth “is essential to instil confidence in the currency and the economy more generally”, says Capital Economics. Given the momentum in the economy, tightening is unlikely to derail growth. The government also plans to limit credit growth to 20% this year (after 28% last year) and squeeze the budget deficit to 5%. Last year it reached 7.4%.
Keeping a lid on inflation “will not be easy”, given that Vietnam is especially vulnerable to high global food prices, says Standard Chartered. But provided the government implements these measures, the new emphasis on “stabilising the economy” bodes well, says the World Bank’s Deepak Mishra. Throw in Vietnam’s long-term potential and relatively low valuations and “if you have the risk appetite, it’s a high-risk, high-return opportunity”, says Anand Ramachandran Prasanna of Squadron Capital. The Aim-listed Vietnam Opportunity Fund (VOF) is currently on a discount to net asset value of 20%.