Fitch revises Vietnam outlook to negative

HANOI (AFP) — Credit risk evaluator Fitch Ratings on Thursday lowered the outlook on Vietnam’s BB-minus sovereign rating from stable to negative, calling double-digit inflation “a serious concern for Vietnam”.

The state-run General Statistics Office this week estimated that consumer prices shot up by 25 percent in May year-on-year in the country of 86 million, driven mainly by surging food, energy and construction materials prices.

The galloping inflation has stoked public anger and labour unrest and led the communist government in Hanoi to lower this year’s gross domestic product (GDP) growth target to 7.0 percent from last year’s 8.5 percent.

The Fitch report warned that “inflation is a serious concern for Vietnam” and said government responses, including price controls, higher interest rates, bond issues and other steps to soak up liquidity, haven’t yet worked.

“In Fitch’s view, the policy response has been both too slow — as official pronouncements have not been followed up by immediate action — and too small, as real policy interest rates remain deeply negative even following their recent increase,” the agency’s report said.

The agency affirmed Vietnam’s BB minus long-term foreign currency issuer default rating (IDR) and its BB long-term local currency IDR, but revised the outlook to negative from stable.

Fitch also affirmed its short-term foreign currency IDR at B and the country ceiling at BB minus, the agency statement said.

“In the medium term, crucial factors affecting the sovereign’s rating prospects include further fiscal and state enterprise reforms, ongoing efforts to keep inflation under control, policies to further attract FDI (foreign direct investment) and programmes to improve infrastructure,” said the agency.

http://afp.google.com/article/ALeqM5jQVh70Tlu4_3XPj-pFUxePkCzArw

Hints of a Crisis in Vietnam

There’s trouble brewing in Vietnam, judging by what’s happening to its currency.

The Vietnamese dong is effectively pegged to the dollar and only fluctuates within a very narrow band. However, investors can make bets on its impending direction using forwards, or contracts which allow buyers to purchase a currency at a set price at some future date.

On Tuesday the dollar-dong exchange rate implied by those contracts spiked by 11%, according to a note from Morgan Stanley — in other words, twelve months from now, investors expect the U.S. dollar to buy many more dong than it does today (over a third more, in fact). In effect, the contracts are pricing in a breaking of the peg and a drastic weakening of the dong.

That’s a major reversal from just months ago, when Vietnamese were racing to stockpile the local currency on the belief that it would strengthen. Since then, however, there has been a spate of bad news on inflation and trade.

On Monday, the government said that inflation jumped to 25.2% in May over a year earlier, raising fears that prices could spiral out of control. The trade deficit is also projected to expand to $14.4 billion in the first five months of the year as imports surge. Meanwhile, Vietnam’s stock market has plunged by more than 50% this year, making it the worst performer in Asia.

All this “was too much for the market to ignore, leading to a complete reassessment of macro balance and inflation risks at hand,” wrote Stewart Newnham, a currency strategist at Morgan Stanley. “When prices shift this much in emerging markets, it is rare that they recover,” he noted.

The bottom line: Mr. Newnham believes a currency crisis could be looming in which Vietnam is forced to defend the dong by selling dollars from its currency reserves.

http://blogs.wsj.com/marketbeat/2008/05/28/hints-of-a-crisis-in-vietnam/