Is Vietnam The Next China?

Donald H. Straszheim 06.12.08, 6:30 PM ET

Vietnam’s government has been working hard in recent years to reform its economy in ways reminiscent of the successes of her neighbor to the north, China. I have been bullish on Vietnam for many years, and remain so for the long term. But, in the short term, real economic trouble is brewing that threatens a major economic disruption.

Here is the essential background. After the American war (as they call it), and years of internal conflict, the Vietnamese government launched a so-called “doi moi”–economic revival–in 1986. The economy was opened up, in steps, to foreign investment, Vietnam joined the Association of Southeast Asian Nations in 1995, a U.S.-Vietnam trade pact was signed in 2000 and Vietnam became a member of the World Trade Organization in 2007. Selected state-owned enterprises are being privatized, and new equity markets were launched, letting market forces start to work in the economy.

The very positive results are no surprise to those of us that believe in free enterprise. Vietnam has been the second-fastest growing economy in the world the last half-decade, behind only China. The people have never been better off. All they want to do is work, earn and consume. But too much of a good thing is turning into a bad thing.

Inflation is surging. In May, Vietnam’s prices were 25.2% higher than a year earlier. This was up from 16% in March, 13% in December 2007 and 8.4% in May 2007. The economy has gotten overheated. With commodity and energy prices spiking everywhere, Vietnam’s inflation rate is likely to go even higher. The history of developing economies in Asia over the last quarter-century is that they rarely come back from inflation this high without experiencing a severe economic setback. That is exactly what I see.

Hanoi is trying to slow inflation via a series of little steps–limits on key exports, tariff reductions on some imports, public-sector construction cuts and more. Really, only tighter monetary and fiscal policies will work, and Vietnam has no track record here.

In addition to inflation, Vietnam has a trade deficit and a budget deficit that are both in the range of 6%-7% of gross domestic product. These are also reliable signs of spreading economic trouble.

The most visible sign is a young equity market that is plunging. The Ho Chi Minh Stock Exchange (HOSE index; $11 billion market cap) is down 67% from its March 2007 peak and down 60% year-to-date. Volumes are down 95% over the last year. Domestic investors are dispirited, and foreign investors can’t get their money out of the market fast enough.

In an effort to slow the market’s decline, daily trading-band limits were imposed on all stocks of 1% in March of this year. This was the wrong step by a government that knows little about markets. Those limits were raised to 2% in April. But what has been happening? The market opens–and the price of virtually every security traded on the exchange opens down the daily 2% limit. Trading essentially stops at that level, and the next day the market opens limit-down again in a perfect stair-step fashion, now repeated for 23 days in a row. That’s really ugly.

Vietnam’s currency, the dong, has been gradually depreciating against the dollar in recent years. Just this week, Hanoi announced a 2% depreciation of the currency as part of its basic economic repair medicine. But with inflation currently at 25% and headed higher, a mere 2% depreciation on the currency is far from sufficient to keep Vietnam’s export industries competitive. And the declining currency has the added feature of making equity market participation uneconomic for foreign investors. It also makes foreign imports of essential commodities more important, aggravating the inflation problem.

Vietnam’s rapid economic ascent over the last decade has been impressive indeed. But the near-term outlook is not so rosy. The government has recently reduced its 2008 economic growth forecast from 8.5% to 7.0%, a figure I think is unrealistically optimistic. It will take months of unambiguously better statistics on trade, the budget deficit and inflation to convince investors that Vietnam is back on the right track. A significant devaluation on the order of 33% is also an ingredient in Vietnam’s economic rebound. But until that time, the current slow-motion crash in Vietnamese equities is likely to continue unabated.

Don’t get me wrong. The country is beautiful. The people are well-educated, entrepreneurial and energetic. Vietnam is positioned in the middle of the fastest growing portion of the world, right next to China. But when an economy gets off the track, due to bad luck or bad policy, it usually takes a fresh start to get it back on the track. In that circumstance, the first round of investors often loses out, and the second or third round of investors get to pick up the pieces and capitalize most profitably.

Donald H. Straszheim is vice chairman of Roth Capital Partners
in Los Angeles, former global chief economist at Merrill Lynch, a visiting scholar at the University of California-Los Angeles Anderson School of Management and a longtime China specialist. He previously served as president of the Milken Institute and joined Roth in 2006 to spearhead the company’s China initiatives.


Vietnam Stocks Turn Into World’s Worst Market on Ratings, Dong

By Chen Shiyin and Nguyen Dieu Tu Uyen

May 30 (Bloomberg) — The worst may not be over for Vietnam’s stock market, the world’s biggest decliner, as the stock exchange returns to business after a computer breakdown halted trading for three days.

The benchmark VN Index may extend this year’s 55 percent retreat after a government report showed prices jumped the most since at least 1992, Morgan Stanley said Vietnam is heading for a “currency crisis” and Fitch Ratings cut its outlook on the nation’s debt rating.

The Ho Chi Minh City Stock Exchange fixed the computer error that interrupted the VN Index’s 16-day tumble, the longest streak since October 2003, according to a statement yesterday from the bourse. The gauge had tripled in value from the end of 2005 through 2007.

“We’ll see a continuation of the selling,” said John Shrimpton, a director of Dragon Capital Group, a Ho Chi Minh- based fund manager with assets of $2 billion. “Inflation is one aspect causing the drop. The market was clearly overvalued.”

The VN Index, started in 2000, surged almost fivefold in the two years through its March 12, 2007, peak as the economy grew at the fastest pace in a decade and a government equity sale program helped lure foreign and domestic investors. Refrigeration Electrical Engineering Joint-Stock Co., the Ho Chi Minh City- based maker of air conditioners and electrical appliances, rose 523 percent from the end of 2005 through 2007. The company’s shares have slumped 74 percent in 2008.

Lost Savings

Local investors who own about 75 percent of listed shares in Vietnam, a Communist Party-led nation of more than 85 million people, are reeling from the plunge. Nguyen Van Hai lost almost 700 million dong ($43,000), and his parents sold their house to help repay loans he’d used to invest.

“I entered the stock market with hopes that I could earn enough to own a house and get married,” the 29-year-old Hanoi- based taxi driver said. “Those wishes have now vanished.”

Even after the tumble, Vietnamese stocks aren’t cheap enough to prompt Templeton Asset Management Ltd.’s Mark Mobius to buy.

The 151 companies in the VN Index trade below 10 times estimated earnings, down from as high as 30 times, according to data from Dragon Capital. Stocks in the MSCI Emerging Markets Index trade for 13.5 times profit, data compiled by Bloomberg show.

`Little Way to Go’

“It’s got a little way to go down still,” said Mobius, who oversees $47 billion in emerging-market equities at Templeton in Singapore. “If you’re going to go in there, you better think long-term, otherwise you can get stuck with a very illiquid security.”

About 52,000 stocks and bonds changed hands on average each day this month on the Ho Chi Minh exchange, plunging from the 2007 daily average of 965,000.

The International Monetary Fund said last November that inflation in Vietnam was more “entrenched” that in any other Asian country.

Consumer prices jumped 25.2 percent in May from a year earlier, the most since at least 1992 and the fastest pace in Asia, according to May 27 figures from the General Statistics Office in Hanoi. Food prices surged 67.8 percent.

Vietnam’s central bank raised its key interest rate to 12 percent on May 17, the highest since it was introduced in 1998, from 8.75 percent. The country is heading for a “currency crisis” because the bank has kept the dong too strong as inflation soars and the trade deficit widens, Morgan Stanley said in a May 28 report.

Rating Outlook

Fitch Ratings cut its outlook for Vietnam’s BB- rating to negative from stable yesterday, citing risks to the banking system because the government was too slow to respond to higher inflation.

Property developers slumped amid concern higher borrowing costs will curb home purchases. Idico Urban & House Development Joint-Stock Co., a Dong Nai province-based builder, retreated 80 percent, the most this year for any company listed on the Ho Chi Minh exchange.

Some foreign investors say the market is attractive enough to add to their holdings.

“We’re increasing our investments in Vietnam even more,” said Beat Lenherr, who oversees more than $20 billion of assets as Singapore-based chief global strategist at LGT Capital Management. “This is an embryonic market that had a strong birth. Now the baby is struggling a little, but we think it’ll get its strength back.”

Luong Minh, a 53-year-old state employee, who earns 5 million dong a month in Ho Chi Minh City, is less sanguine after losing 100 million dong in the stock market.

“I don’t want to sell the shares I have, but the longer I keep them, the bigger the loss,” Minh said. “It is hard to sell now anyway as the market is almost frozen. We are desperate.”

To contact the reporters on this story: Chen Shiyin in Singapore at; Nguyen Dieu Tu Uyen in Hanoi at

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.

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.

Asian Inflation Begins to Sting U.S. Shoppers

BAT TRANG, Vietnam — The free ride for American consumers is ending. For two generations, Americans have imported goods produced ever more cheaply from a succession of low-wage countries — first Japan and Korea, then China, and now increasingly places like Vietnam and India.

Justin Mott for The New York Times

Bricks are stacked in a kiln in Bat Trang, Vietnam. Prices have tripled in the past year. More pictures

But mounting inflation in the developing world, especially Asia, is threatening that arrangement, and not just in China, where rising energy and labor costs have already made exports to the United States more expensive, but in the lower-cost alternatives to China, too.

“Inflation is the major threat to Asian countries,” said Jong-Wha Lee, the head of the Asian Development Bank’s office of regional economic integration.

It is also a threat to Western consumers because Asian exporters, even in very poor countries, are passing their rising costs on to customers.

Developing countries have had bouts of inflation before. Indeed, some are famous for them, like Brazil, which experienced triple-digit inflation in the late 1980s and early 1990s. But two things make this time different, and together promise to send prices higher at Wal-Mart and supermarkets alike in the United States, just as the possibility of recession looms.

First, developing countries now produce nearly half of all American imports. Second, inflation in these countries is coming at the same time that many of their currencies are rising against the dollar.

That puts American consumers in a double bind, paying at least some of producers’ higher costs for making their goods, and higher prices on top of that because the dollar buys less in those countries.

Asian businessmen say they do not have a choice about charging more. “This is a tough time to do business,” said Le Hoai Vu, the sales manager for the Quang Vinh Ceramic Company here in northern Vietnam.

The company just increased by up to 10 percent the prices it charges Pier 1 Imports in the United States for hand-painted vases because labor costs are rising 30 percent a year.

Over all, in Vietnam, one of the fastest-growing destinations for manufacturing investments and one of the fastest-growing sources of American imports, prices rose 19.4 percent from March 2007 to March 2008.

In China, Foshan Shunde Augustus Bathroom Equipment Ltd. in Foshan City is about to raise prices by 10 percent for a range of bathroom fixtures exported to North America.

“Rising inflation is a way of life in China these days, you see it everywhere,” said Faye Kong, the company’s international business supervisor.

The cost of American imports from less industrialized countries as a group is rising. A Bureau of Labor Statistics index of average prices for imports of manufactured goods from such countries fell gradually through early 2004, but is now rising briskly and was up 5.6 percent in February from the same month last year.

That contributes to rising inflation in the United States; in the 12 months through February 2008, the prices of goods for sale in the United States increased by 4 percent, according to the government’s Consumer Price Index.

But so far, Asian exporters have passed along only a portion of their costs. In China, for instance, prices are now rising almost 9 percent a year, triple the pace of a year ago.

Workers in the developing world facing higher prices have been increasingly vocal in demanding higher wages, with protests erupting in recent days in Vietnam, Cambodia and Egypt.

At the same time, inflation keeps rising: the Philippines announced that its inflation at the consumer level had doubled in the last five months, showing a 6.4 percent increase in March over the same month a year ago. And weekly inflation at the wholesale level has accelerated in India, reaching an annual rate of 7 percent in the week ended March 22, up from 3.1 percent as recently as last October.

Not long ago, it would have been unlikely for a poor country with high inflation to see its money strengthen in value against the mighty dollar. But the dollar is not quite as mighty as it once was. Large American trade deficits and other problems have weakened its appeal.

And there are signs that the dollar could fall further if developing countries’ central banks stopped supporting it, particularly in Asia.

Vietnam’s central bank even had to order the country’s commercial banks late last month to resume buying dollars within the tight range of exchange rates set by the government. Many banks had started betting on dollar depreciation and refusing to accept large sums in dollars, to the point that multinationals and exporters had trouble wiring money into the country to pay their employees’ salaries.

Additionally, the dollar’s weakness is itself a cause of inflation in developing countries, particularly those that have barely let their currencies rise against the dollar in an effort to hold on to export markets.

In a street market around the corner from the 270-year-old Lungshan Temple in Taipei, Taiwan, Teresa Gau, a fishmonger, is charging up to a third more for fish and crabs than she did a year ago. That is because fishing boat owners are charging her more as they struggle to cover higher costs for diesel fuel, which is priced in dollars.

“They have to raise the price to compensate,” Ms. Gau said.

Inflation in Taiwan has started to creep up partly because the government waited until this year to allow the currency, the New Taiwan dollar, to appreciate. Taiwan imports all its oil, and only now is the slightly strengthening New Taiwan dollar starting to hold down the cost for consumers in filling up their gas tanks.

Here in Bat Trang, an ancient ceramics center near Hanoi, Quang Vinh Ceramic’s fastest-rising expense is for vivid blue ink for painting vases and other pottery. Imported from Belgium, the ink is priced in euros and has soared 80 percent over the last year in Vietnamese dong.

Keeping the dong inexpensive in dollar terms helped Vietnam increase its exports by 24.1 percent last year, but also lured a flood of investment. Bank loans rose more than 50 percent last year, feeding a real estate frenzy that has not yet abated.

Brick kiln owners like Le Thi Hop here in Bat Trang have responded by tripling prices in the last year.

“Most of the people who buy my bricks say the price is crazy, but I say, ‘This is the market,’ ” Ms. Hop said cheerily.

High costs for construction materials are making it more expensive for the many multinationals like Samsung of South Korea and Hanes and Emerson Electric of the United States that are now building factories in Vietnam, partly in response to rising costs in China.

In addition to the weak dollar, economists say that countries like Vietnam, Egypt, China and Brazil are inherently more vulnerable to inflation when, as now, rising prices are led by increasingly expensive commodities.

Soaring food and energy costs have a far greater effect on developing countries like Vietnam, because of their large agricultural and energy-hungry manufacturing sectors, than on industrialized countries, which tend to have larger service sectors than manufacturing sectors.

Quang Vinh, which was founded by a 15th-generation pottery maker, has raised wages by 30 percent over the past year to keep up with food prices, which have also risen. Food is the biggest expense for the company’s workers, who earn $75 a month working eight hours a day, six days a week.

“Before, I used to go out with friends regularly,” said Nguyen Xuan Tu, a 29-year-old Quang Vinh worker who rides a motor scooter, like many Vietnamese. “But now, with the high cost of gasoline, I don’t go out too much.”

Two opposing trends have made it hard to gauge the true extent of inflation in the developing world.

Very heavy investment in new factories, especially in China but increasingly in emerging countries like India and Vietnam as well, has created a lot of extra industrial capacity. That could drag down prices somewhat if the American economic slowdown causes a global slump in demand.

But many developing countries, led by China and India, have blunted the full impact of inflation so far through a combination of price controls and subsidies, and more countries are joining them — Vietnam has imposed price controls on transportation and gasoline over the past week, for instance.

As businesses figure out ways around price controls, like charging the same while shrinking the quantities in each package, and as the cost of subsidies may become unsustainably high, inflation may worsen.

Mery Galanternick contributed reporting from Rio de Janeiro.