Market views & Insights in Q2/2008

Economic Fundamentals

The second quarter was quite a volatile time for the financial markets, with inflation as the main driver for market sentiment. The monthly inflation figures for April to June are 2.2%, 3.91%, and 2.14%, respectively. This brought year to date inflation to 18.4%, far exceeding the government’s initial target to make it lower than the GDP growth. Many believe that the reason for the problem is the economic overheating, in that the money flowing in for investment could not be fully absorbed by the country. This is due to slow growth in infrastructure, and other production factors. This also led to the costs of production increasing, and as a result, prices of goods also increased at the consumer level.

To overcome the above problem, the government continued with its tightened policy stance, which includes increasing the interest rate. The SBV raised its base rate twice, from 8.75% to 12%, and again to 14%. At the same time, the cap in the deposit rate was replaced by a ceiling in the lending rate, with strict monitoring by the SBV especially towards the end of the quarter. With the high inflation rate, banks had faced difficulty in attracting deposits, and creating liquidity problems for some financial institutions. The SBV action has somewhat eased liquidity concerns. Furthermore, the government plans to reduce their expenditures and focus on the more vital ones. The price control policy has been maintained, with some reluctance to adjust electricity and oil prices. This is aimed to balance the economic slowdown risk and inflation risk. By the end of June, inflation started to stabilize. We expect interest rates to remain at current levels. The economic growth slightly slowed down from 7.4% to 6.5%, but is most likely to still become the highest in the region.

Other issues include the widening trade deficit. The most significant imports include machinery and spare parts, petroleum, and steel products. Machinery and spare part imports increased due to strong investment demand combined with import tariff reduction. Meanwhile, the latter two increased due to higher commodity prices worldwide. This caused concern since there would be more demand for USD currency than its supply, and that could lead to a depreciation of VND. To tackle the problem, the government has done some efforts, including raising import taxes for luxury goods. There are also some early discussions about giving some tax breaks or other support for exporters.

The VND did in fact depreciate by 4.55% during the quarter. The government indicated that despite the pressure, it would try to keep the managed devaluation policy, instead of free-floating the currency. By the end of June, the VND/USD exchange rate was VND 16,842/USD, compared to VND 16,110 at the end of the first quarter.

The short-term sentiment is starting to improve. However, we remain cautious on the medium term outlook of the economy. Global factors are still not very supportive in light of the domestic inflation outlook. Having said that, the long-term growth potential in Vietnam still exists, and there are still big opportunities to start investing in the local market.

Bond and Money Market

The bond market had been quite volatile in the second quarter, with inflation concern driving the 5-yr bond yields from 8-9% in March to more than 20% by the end of May. In June, however, the bond market showed some improving trends, even though the yields were still high. The 5yr bond yield started going down from 20% to around 18% at the end of the month. As the liquidity situation improved, some local banks were seen collecting short-term bonds. This has also been influenced by the credit growth limitation of 30% imposed by the SBV, which made the banks look for alternative instruments. The current yield level is very attractive, especially when we compare with other countries with similar fundamental condition and country ratings, i.e. Indonesia and Philippines. In the long run, it is expected that foreign investors would start looking at Vietnam bonds as attractive instruments, and it will support the market quite well.

Meanwhile, with the tight monetary policy from the central bank, the deposit rate increased quite significantly in both local and foreign banks. At the end of the quarter, the average 1-month VND deposit rate in foreign banks was between 15-16%. With the medium term inflation outlook, it is likely that the central bank will keep the interest rate at the current level, and it would provide some benefits for money market instruments.

Stock Markets in Q2/2008

Vietnam’s stock markets continued their downtrend in Q2, before rallying towards the end of June.

The VN Index lost 121.59 points (or -23.33%) versus 481 points (or -48.2%) in Q1. Hanoi mirrored the weakness, declining 71.36 points (or -38.60%) versus 141 points (or –43.89%) in Q1. Macroeconomic factors were the main sentiment drivers: CPI spiking (CPI: 18.4% YTD), a ballooning trade deficit of USD 14.74 Bil, which resulted to a sustained tightening of monetary policy. GDP expectations were also scaled down to 6.5% from 8.5% for the full year.

In the last three months, Vietnam’s market capitalization plunged another USD 4.75 Bil from USD 14.05 Bil to USD 9.3 Bil (or –33.76 %). 

Market liquidity was tight during the quarter, following the adjustment of trading bands for both HASTC and HOSE. The government narrowed the trading band down from 5% to 1% on HOSE and from 10% to 2% on HASTC on March 25. One week later, they re-adjusted the trading band up to 2% on HOSE and 3% on HASTC on April 3 after observing the significant decline in trading value. Then on June 19 the trading band was been lifted up one more time back to 3% for HCM stock market and 4% for Hanoi market. Liquidity is starting to improve.

Efforts to increase transparency and increase the market’s confidence were also seen. During the quarter, the Minister of Finance and SBV officials held a global conference call with investors to give investors an update on the current economic situation in an effort to restore confidence on Vietnam’s economy. This marked the first time that the government officially released slides or documents on macroeconomic data to the public.