Vietnam financial markets profile 2008-09

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== 1. Crisis cools overheating economy but leaves debris ==
 
One year ago Vietnam's economy looked like it was overheating, as inflation and asset prices rode a wave of foreign investment and easy credit. Then came the credit crisis. 
Six months later Vietnam, like fellow frontier market nations Kenya and Hungary, had seen equity, property and interest rate markets pummeled as spooked foreign investors fled. Asset values dropped, credit dried up and the Vietnamese dong began sliding in value. On the other hand, so did the Vietnamese inflation rate.
When the crisis hit, Vietnam's central bank, the State Bank of Vietnam (SBV), was forced - as in most frontier markets - to cut interest rates quickly as investment capital dried up. That reversed a tightening trend at the SBV aimed at tackling inflation. Trading on Vietnam's blue-chip HoChiMinh Stock Exchange (HSX) and Hanoi Securities Trading Center (HaSTC), already in decline after recent gung-ho years, slumped and the benchmark VN Index lost two-thirds of its value over the year.
Vietnam's's property markets, already on a slide after several boom years, tanked completely as the financial crisis worsened in late 2008. By the end of the year, several listed Vietnamese property corporations were salling for government intervention in the country's real estate market after it all but froze.
And Vietnam's quarterly economic growth rates dropped below the government's target figure of 7% following growth in 2007 of 8.5%. That led some analysts to speculate that Vietnam may have abandoned its overall economic strategy of high growth in favor of financial and social stability. Bolstering this, Vietnam's GDP growth in the first quarter of 2009 dropped to an annualized rate of around 4.5%, down from 6.5% one year ago.
But the ill wind of the 2008 financial crisis has blown some good in Vietnam. Inflation, which menaced the country in mid-2008 with month-on-month rates of almost 30%, has receded significantly. From its height of 28.3% in August last year, Vietnamese inflation has fallen every month since to stand at 14.78% in February 2009, down from 17.48 one month earlier.
Now Vietnam aims to export its way back to economic safety and re-attract foreign direct investment (FDI), partly by using monetary policy to control the value of its currency, the Vietnamese dong. The SBV, which controls the dong's vaue against foreign currencies, recently loosened its trading band with the U.S. dollar and also sold a tranche of dollar-denominated government bonds in March 2009 and aims for a further sale later in the year.
But Vietnam also faces internal challenges threatening the government's goals on economic growth and financial development. One is a vast pool of underemployed urban workers that will be created by estimated layoffs in 2008-2009 of almost one million people. These mostly migrant laborers laid off from the shoe and garment factories suffering worst from the downturn are likely to return to their extended families in rural areas, placing further strains on the social fabric of those areas.
Nonetheless, economic analysts seemed to concur with the Vietnamese government's targeted 2009 GDP growth figure of 6.5% by late in 2008.
But boosting exports will be a challenge as industrial production begins to slow and commodity prices remain depressed (see story below), although the Vietnamese government recently introduced its own version of a "stimulus package". And Vietnamese-equity investors on the HSX and HaSTC don't expect the VN Index to bottom until sometime in late 2009, itself somewhat in advance of the Vietnamese economy itself.
On the other hand, popular South East Asian fast-food chain Jollibee, based in Manila, recently announced it would add four more Vietnam outlets to its existing 10. A company executive said that Vietnam, which contributes 15% of Jollibee's total Asia-Pacific/Middle East revenues, "has been showing much promise vis-a-vis other mainstream markets."
== 2. Mixed commodity markets make exports uncertain ==
Vietnam has largely exported its way to rapid rates of economic growth so far this decade. So as GDP growth after last year's global financial crisis suddenly slows, the nominally communist nation is again looking abroad for customers.
To boost Vietnamese exports, the government has offered a fiscal stimulus package of subsidies and tariffs and sought to weaken the Vietnamese dong by gradually loosening its ties to the U.S. dollar. Hence the announcement in late March 2009 by State Bank of Vietnam (SBV) Governor Nguyen Van Giau (left) that the trading band for the Vietnamese dong against the U.S. dollar would be widened, weakening the dong and making exports cheaper.
That followed the introduction a month earlier by Vietnam's Ministry of Industry and Trade (MOIT) of a stimulus programs aimed at increasing exports through loan subsidies and reducing imports through tariffs. The government will spend $1 billion on loan subsidies to exporters after dropped 5.1% year-on year in January and February of 2009.
But although Vietnam is probably best known as an exporter of low-cost manufactured goods like clothing, which recently overtook crude oil as the nation's top forex earner, Vietnam is still largely an exporter of primary commodities. That means the country's near-future export performance will be determined by the global commodity markets, which had been kind to Vietnam until the 2008 credit crisis.
Vietnam's economy in general and its commodity-export performance in particular are largely determined by market conditions in its largest trading partners. Vietnam's recent financial growth surge was largely the result of increased demand in other countries for Vietnam's commodities and low-cost manufactures as credit and real estate bubbles inflated there.
Several widely-traded commodities number amongst Vietnam's biggest export revenue earners. It is the world's second-largest coffee exporter by value after Brazil and its second-largest rice exporter after Thailand and remains South East Asia's third-largest producer and exporter of crude oil at 300,000 barrels per day. Rubber, coal and cashew nuts are also big forex earners for Vietnam.
At first glance, the government's export-boosting strategy appears sound. Vietnam recently doubled it volume and value of rice exports and has also rapidly increased its production and export of coffee - both significant sources of export revenue. But markets for both rice and coffee have weakenedsince their 2008 peaks and the Vietnam Coffee and Cocoa Association (Vicofa) is expecting a drop in profits this year. 
One reason for Vietnam to cheer on the commodities market has been the price of crude oil, recently overtaken as Vietnam's largest export earner. Oil prices soared and then crashed in 2008 but have since recovered steady growth and are forecast to keep rising. Plus state-owned PetroVietnam announced late in 2008 it would sell 30% stakes in its oil refineries to foreign crude suppliers, which should reduce its own imports of refined petroleum.
But since more than one-third of all its exports go to the U.S. and the European Union and the U.S. is its single largest export market, Vietnam will need to watch global commodity markets for sign of growth.
== 3. Loosening monetary control tests how low currency can go ==
Vietnam's currency, the Vietnamese dong, already ranked the world's lowest-valued, looks like losing even more ground to the U.S. dollar and the euro over the next few months at least.
With the Vietnamese government re-focused on promoting the country's exports, it has recently allowed the dong to slide against the currency of both its largest trading partners (see story above). The dong hit a three-month low against the greenback in late March 2009 after the State Bank of Vietnam (SBV) widened the dong/dollar trading band from 3% to 5%.
The dong began sliding in value around June 2008 as Vietnam's inflation and trade deficit began soaring while stocks at the HoChiMinh Stock Exchange and Hanoi Securities Trading Center were tumbling. At one stage the spread between official and black-market conversion rates widened 2,500 over official rates of around 16,000 dong to the U.S. dollar.
The SBV was forced to raise interest rates three times in mid-2009 to cool what was widely perceived as an overheating economy. The financial crisis and global securities-market meltdown that began in September 2008 then led the SBV, like the central banks of other frontier markets like Kenya and Hungary, to lower rates again in October to re-stimulate lending.
The dong finished 2008 valued 8% lower on the year against the U.S dollar and continued to weaken to February 2009, when comments by a deputy to SBV Governor Nguyen Van Giau indicated the central bank would hold rates stable through 2009. But it soon slumped again to 17,700 (18,000 on the black market) to the following the SBV's March 24 decision to widen the dong/dollar trading-band.
Reuters reported in mid-Februaury 2009 that foreign banks in Vietnam expected the dong to keep falling to around 18,000 to the greenback by the end of the first quarter (the rate stood at 17,785 on April 8). The banks also anticipate a further gradual slide in the dong's value to 18,500 to the dollar by the end of 2009 as forecast declines in foreign investment and exports drain Vietnam's forex reserves.
That would likely cement the dong as the world's lowest-valued currency at official rates against the dollar, since Wikipedia's number one-ranked Somali shilling's quoted 35,000 to the dollar is the black market rate. The dong is currently more than one thousand units ahead of the Sao Tome & Principe dobra (left), the world's second-weakest, trading at 16,352 to the dollar on April 9, 2009.
But the biggest losers from the dong's ongoing slide continue to be investors in dong-denominated [[bonds]. Yield on the benchmark 5-year government bond, the market's worst performer in Q1 2009, rose to 9.47%, the highest since January 9, 2009. Bankers expect increasing sales in 2009 of Vietnamese bonds by foreign investors, and thus increasing yields over the year, as they anticipate further depreciation of the Vietnamese dong to around 18,500, Bloomberg reported. 
The lone bright spot for dong investors could be a plain old bank deposit. Many Vietnamese commercial banks are now offering higher interest rates on dong-based deposit accounts, which the SBV claims is a result of higher demand for local loans following a recent government subsidies. In February 2009, VPBank, part-owned by Oversea-Chinese Banking Corp. (OCBC), lifted 12-month dong saving rates to 7.6% while rival Techcombank, partly owned by HSBC Holdings, boosted its 36-month savings rate to 7.7%.
By contrast, banks recently cut deposit interest rates on forex-denominated bank accounts to around three percent - the same rate as the coupon on a recent tranche of $100 million in dollar-denominated Vietnamese government bonds.
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