Forex woes knocking markets off their stride

David Charles Kadarauch

The forex rate is  worsening domestic investor sentiment, reflected by declining market transaction values. What is your view?

The forex rate is a long-lasting problem for the Vietnamese economy. It is one of the hardest puzzles that the government must sort out. However, in the short-term, investor sentiment is the problem. Local residents have shifted to safe harbours like gold and foreign currencies on anticipation the Vietnamese dong will continue depreciating given the country’s trade deficit. Many neighbouring countries are facing similar problems but their currencies remain stable since people there uphold trust in their currencies, from which the stock markers are benefiting.

Indonesia and Thailand are typical cases. They maintain stable currencies and their stock markets have been recording good performances. The point is the government must make good of their pledge that the domestic currency will ensure interest for long-term buys.

What measures could cool off the forex tension in Vietnam?

The central bank should widen the trading band. In the long-term, the government should give the central bank more independence in monetary policy changes.

The State bank should follow China pegging the dong to a basket of currencies of its trade partners. Statistics on sovereign debt, foreign reserves, inflation trajectory and credit expansion should be transparent to ease people’s sentiment tense.

Is it correct that inflation fears are overshadowing the local stock market?

Inflation is really a monetary issue. The year 2010 has witnessed special contexts, public spending and budget deficit got swollen while government bond issuances were not as successful as last year. The gap has been offset by the central bank’s pumping out more money. But, while more money is in circulation, the volume of goods does not rise proportionately, giving rise to inflation.

Stabilising the forex rate and taming inflation is a must. Public spending must be streamlined so as it will not run into black spots like Vinashin, equitisation process be revved up while macro statistics must be more transparent.

Can Vietnam rein in inflation by narrowing credit expansion via interest rate hikes?

In theory, it is correct but it is not that simple in my view. Credit growth this year is capped at 25 per cent. But enormous fund is being channeled into low efficiency state-owned enterprises (SOEs), while private domestic enterprises are thirsty for low cost financing.

The former is depriving the latter of many credit opportunities. The 500,000 private domestic enterprises are the very force driving the economy, which foreign investors see as a leading bustling business venue in South East Asia. Despite the interest rate hikes, they maintain 20-30 per cent revenue and profit growths. That is the internal strength and real potential of Vietnam.

What are the prospects of portfolio investment from foreign institutional investors?

Investors are excited searching opportunities on Vietnam’s stock market. However, they are long-term investors. Short-term investors have seen risks. For instance, “hot money” is strongly flowing into Asia but Vietnam does not benefit from this trend directly. Apart from macro problems, barriers like account registration procedures for foreign investors, investors eligible to open only one account each and T+4 payment disheartening investors.

In 2011, global stock market prospects are positive. International portfolio investment will continue to find their ways into Asia, home to young, dynamic and most fast-growing economies. Whether Vietnam can directly benefit from this trend or just enjoy some indirect ripple effects largely depends on whether the government could harmonise its macro targets, apart from increasing market liquidity.

Vietnam’s price to earning (P/E) ratio is the lowest in the region. But there are arguments that part of Vietnamese enterprises’ profit comes from one-off incomes. Thus, they are not really attractive. Do you agree?

Before being here, I had experience working at some emerging Asian markets. Thailand and India used to face problems similar to Vietnam’s today- enterprises’ profit partly comes from one-off incomes. Vietnam is not the only exception in Asia. But, correctly, the Vietnamese stock market now has the lowest valuations in the region.