June 25th, 2008

We’re safe, Vietnam’s controls will avert crisis

I know a bunch of people working, having invested and living in Vietnam who are happy to know this.

Look,  this can only be true because it has been stated on a report by S&P, a major rating agency.

Those guys are never wrong, as we all know.

Vietnam’s extensive” capital controls and the management of its currency will prevent overseas investors from fleeing the nation even as inflation accelerates and economic growth slows, said Standard & Poor’s.

Foreign funds are mostly limited to buying property and stocks, said Ping Chew, the Singapore-based head of Asian sovereign and corporate ratings at S&P, the first of three ratings firms to lower the Southeast Asian nation’s credit outlook to negative. Stocks have slumped almost 60 percent this year, the world’s worst performance, and the dong is set for its biggest drop since 2001, falling 3.6 percent.

Is this so bad ?

“Vietnam is not in a currency crisis,” Chew said in a June 17 interview. “There’s definitely a bit of hot money that went in. But is it going to leave en masse like that which decimated Asia in 1997? I don’t think so.”

Vietnam’s inflation rate rose to 25 percent in May as food and energy prices climbed and the trade deficit tripled in the first five months of the year.

Foreign investors have cut their stock purchases in half this year to $334.2 million, according to data compiled by Bloomberg. Morgan Stanley last month said the dong was heading for a “currency crisis,” citing a widening current-account deficit. Calyon, Credit Agricole SA’s investment banking unit, said this month there was a threat of a balance of payments crisis and Citigroup Inc. said a banking crisis is the primary problem facing Vietnam.

“Vietnam is turning into a very bad story,” said Thomas Harr, a senior currency strategist from Standard Chartered Plc in Singapore. “The 2 percent devaluation a few weeks ago was not a good move. They should instead have been more aggressive on hiking rates to signal that they are committed to dealing with inflation.”

The dong won’t stop falling until investors are convinced of the central bank’s commitment to fight inflation, he said.

What else ?

The impact of flagging confidence will be limited as investors will “have difficulty” taking profits out of Vietnam, said Joseph Lau, an economist at Credit Suisse Group in Hong Kong.

“Generally banks aren’t allowed to trade the currency for speculation, you need to have a reason for it,” said Lau. “It is difficult for a householder to purchase dollars legally, which is why when they do want to do it, they have to go through the black market.”

So what’s the good new ? Got Any ?

Vietnam’s economy “is in reasonably good shape,” buoyed by strong currency reserves, Alex Thursby, Asian-Pacific managing director for ANZ told reporters in Ho Chi Minh City. “I don’t think there’s a crisis.”

Vietnam’s foreign currency reserves are about $20 billion to $22 billion, Credit Suisse’s Lau said. By comparison, the market capitalization of companies on Vietnam’s benchmark stock market, the VN Index, is $9.08 billion, the second smallest in Asia after Sri Lanka, according to data compiled by Bloomberg.

“This is still a managed currency with extensive capital controls,” said Chew at S&P, which issued a report today saying that Vietnam faces pressures but no crisis.

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