Good morning Vietnam, good after noon and good night

With a then estimate of 500,000 participants, Vietnam’s “Gray Market” was a quick and easy process created by hopeful individuals who wished to cash in on the country’s economic boom. As reported in Time Magazine, retail investors with aliases such as “warrenbuffet74” frequented unsanctioned markets composed of websites and internet chat rooms allowing users to trade unlisted shares of, formerly 100% state owned, Vietnamese companies.

Brought on by the country’s move to partially privatize 3600 state owned companies, pure demand fueled the creation of web sites such as Santoc.com that reported accelerating growth in users hoping to make their profits on the ad hoc market, growing at an average of 300 users per day. However, this was back in Feb 22, 2007.

Today, the Vietnamese markets speak a different story. According to Reuters, Vietnam’s stock market has become the world’s worst performer for 2008. The ailing market is down 60% this year from its 23% surge in 2007. The slump has largely been credited to a 7 month long reign of double digit inflation which has reported to be 25% in May.

In an economic report created by Merrill Lynch, Vietnam has been credited as a victim of its own success, i.e. economic overheating. With Vietnam’s entry into the WTO in January 2007 capital inflows surged, and according to the experts, Vietnam’s economy could not handle the optimism.

Foreign direct investment and other capital inflows are estimated to have reached US$ 7.5 billion and US$ 8.9 billion which amounts to 8.1% and 12.7% of Vietnam’s GDP respectively. Thus, resulting in a rise in fixed investment to reach 23% in 2007, which over shadows its performance in 2006 by 14%. Not to be outdone the current account deficit and credit growth showed their respective gains by reaching 9.1% (of GDP; US$ 6.4 bn) and 54% respectively. Ushered by the growth in capital inflow the currency appreciated against the US dollar over the 3rd and 4th quarters of 2007.

As pointed out in the report, other countries in Asia saw a spike in inflation brought on by the rise in food prices, which should reflect the rise in inflation in Vietnam. However, besides the rise in liquidity and demand within the country, nonfood related inflation rose above 10%. As such, inflation rose over the 4th quarter of 2007 to reach 10% in November 2007, followed by 15% in Feb 2008 and 21% in April 2008.

In response, on May 17 2008 the SBV, Vietnam’s central bank, increased its prime lending rate by 325 basis points and removed a previously imposed ceiling on deposit rates. The steps taken would mainly result in lower liquidity, a rise in interest rates and depreciating growth outlook for the economy. In addition, as reported by Reuters, credit agencies have lowered their outlook of the economy stating that the government was too slow in its response. Furthermore, Prime Minister Nguyen Tan Dung mentioned in his statement to JP Morgan’s chief economist that “with the foreign currency surplus, the government will be able to intervene to maintain the Dong’s value and ensure imports”. It should be noted that as of June 15 2008, Vietnam’s trade deficit has soured to $14.4 billion.

As stated by the economists at Merrill Lynch, the severity of the steps taken by the SBV, demonstrates that the timing of the policy to reduce inflation comes at a cost to Vietnam’s over all economic growth, which echoes the criticisms stated by credit agencies in their outlook of Vietnam’s economy. Therefore, it can be assumed that “warrenbuffet74” may not reach his targets this year.

Direct source : Google News http://afp.google.com/article/ALeqM5gOsDikMP3MmjRkz6Y5IyyUoS4MAw

Sources:
• Time Magazine: http://www.time.com/time/magazine/article/0,9171,1592579,00.html
• Reuters: Ravaged Vietnam stock mkt logs first rise in 6 weeks http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSHAN27568920080612
• Merrill Lynch: The Asian Macro Weekly: Vietnam anatomy of an inflation stock
• Google news: http://afp.google.com/article/ALeqM5gOsDikMP3MmjRkz6Y5IyyUoS4MAw .

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