Recovered faith

Mr Alan Pham, Chief Economist with VinaSecurities. Photo: Viet Tuan.

The stock market recovered during 2009 but investors remain concerned about pressures on the balance of payments and the weakness of the Vietnam dong (VND). Will current macroeconomic policies support a continuation of the recovery in 2010?
In my opinion government policy is now on the right track to support economic growth in 2010. Monetary policy was tightened in 2009 and will be tightened even further if necessary in 2010. Foreign currency policy is now pre-emptive and the State Bank of Vietnam (SBV) will not wait for a foreign exchange crisis to occur. The two most recent devaluations, in December 2009 and February 2010, were both pre-emptive in nature so I conclude that this is a change in how the SBV is managing its foreign exchange policy. 

Foreign indirect investment (FII) was modest in 2009 but many new accounts were opened by foreigners and asset managers are showing interest in Vietnam once again. What are your expectations for FII in Vietnam in 2010?

I am cautiously optimistic about the flow of foreign indirect investment in 2010. I think that the sentiment of foreign investors towards the Vietnam market has improved compared to 2009. As evidence, I point to the successful floating of the $1 billion bond issue in January and that the bond issue was over subscribed. There was $2.4 billion being offered when the Vietnamese Government only needed $1 billion, so the sentiment seems to be favourable. Last week there was a country downgrade by Fitch Ratings but the credit default swap, the CDS rate, has held stable at 233 basis points. This means the quality of Vietnam’s debt was not damaged by the Fitch downgrade. The non delivery forward rate “NDF” for the VND actually fell on the international market again showing the strength of the VND was not damaged by the Fitch action. So I think these are indications that form investor opinion about the prospects for financial investment in Vietnam, and while I am not saying there will be a flood of new money I am cautiously optimistic. I think the sentiment is better and improved. I would say that any increase in FII would be fairly moderate in size. 

In which sectors are foreign investors most interested at this point, and under which investment modalities? Do you expect new funds to be open soon? With Vietnamese partners? With what time horizon?

It is my opinion that there will not be new funds open in Vietnam to invest primarily due to the number of funds already in existence, and one of them, Indochina Capital Fund, is in the process of closing. I expect the inflow of financial investment will increase from a variety of sources. In our company we are now talking with a few hedge funds in Singapore who are willing to come here to talk with us about the local stock market and visit some companies to see for themselves how these companies are being run. We are also doing some road shows for some hedge funds. I see financial investment occurring through individual funds overseas putting their money into Vietnam but I don’t expect new investment funds to be set up specifically for Vietnam. This may change by late 2010 or into early 2011 if the stock market performs well by the end of the year and things may change and funds may be set up, but not at this time. 

What can the government do to increase attractiveness?

Government policies right now certainly can do more. The market is well organised but they could authorise margin lending and short sales, which are two features modern investors would like to see if the government authorised and monitored them carefully because margin lending and short selling can be abused by speculators. The government should have some monitoring mechanisms to ensure that these policies are honestly and openly conducted.

  How do you see the bond market in Vietnam at the moment?

The bond market in Vietnam right now is fairly dormant. The domestic bond market in VND has not been successful in raising much money by the government or private companies. For the government the interest rate they offer is not enough to attract investors. Even in 2010 several bond auctions by the government have failed because the interest rate offered of 10.5-11 per cent are not attractive enough. The dollar bonds issued, which would be of interest to foreign investors, are frozen right now. The government does not want to further dollarise the economy.

There has been a private organisation that issued some ratings on some banks but the ratings did not offer credibility, prestige or reputation to the marketplace. The SBV right now takes on the task of rating corporate bonds. The Vietnamese Bond Association (VBA) is working with the SBV to set up an independent agency to rate bonds but this is still in the planning stage. I would hope that by the end of the year the bond market will be completely reorganised to make it more transparent and streamlined (right now it has over 500 bond codes, which is too many). The bond market is important, where the SBV can carry out its  open market operations. Without a wide and deep bond market government market operations don’t work well.

In America the Federal Reserve can carry out government market operations every day because they have a very wide and deep bond market to support its monetary policies. The process has started to reform the bond market. The VBA is working with the SBV to set up a new code of conduct for the market to streamline the codes and establish an independent rating agency that is respected in the short term. Other issues such as transparency can be taken up later but it is a long-term process. It is going forward as well as you can expect. 

In other emerging countries there is already clear pressure on exchange rate appreciation and even some talk about asset price bubbles, as capital inflows recover. Could something similar happen in Vietnam in the near future?

The VND is still under depreciation pressure even after two devaluations, one of 5.44 per cent in December and one of 3.36 per cent in February. The gap between the black market rate and the official rate has reduced to about 1.8 per cent. This is quite reasonable, as in late 2009 the gap between the black market rate and the official rate was about 10 per cent. The SBV has declared in the past it would like to reduce the gap to below 1 per cent, which is a good intention but difficult to achieve. There will always be a segment of the population that would prefer to hold dollars in preference to VND and these people will keep the black market rate higher than the official rate. Other Asian countries see substantial capital flows into their markets and currencies are being appreciated, but not Vietnam. I don’t expect to see a similar stock market bubble like 2008 or what was seen in real estate in prior years. I do not foresee an asset bubble in Vietnam or speculative capital that would cause an asset bubble, and inflow capital will be moderate in 2010.