Thứ Hai, ngày 28 tháng 6 năm 2010

Vietnam Monitor (Issue 21)

Economics: Growth to weaken to 10-year low of 5.4% in 2009 but then recover on the back of lagged impact of rate cuts and large fiscal stimulus. Inflation to
collapse to 5% by mid-2009 and then gradually rise to long-term average of 11% by end-2010. Central bank to cuts rates by another 100bps in Q1 to 7.5%, which we think will be the bottom of the cycl Equity Strategy: Vietnam was the worst market in Asia in 2009, falling 69%. With no stocks over USD1bn, it has become uninvestible for mainstream foreign investors. Keys for 2009: restarting privatisations and more transparent earnings. Fixed Income Strategy: Balance of risks favour rebuilding positions in VGBs as positive bond fundamentals to continue, though potential further downside unlikely to be as brisk as in recent month. Higher VGB supply is likely to be absorbed by the market. FX Strategy: The authorities set the USD-VND midpoint 3% higher on 25 December. Better exchange rate regime management should keep the currency market more orderly and functional. However, continued gradual trend depreciation is still in order

Economics

Overview
The year 2008 was very challenging for Vietnam, having flirted with a balance of payment crisis and runaway inflation. However, 2009 brings with it new challenges and also opportunities. In the first edition for the year, we thought it best to lay
out our main macro calls for Vietnam.
But before we get into the details, we think it is fair to highlight that Vietnam has indeed come a long way. GDP per capita is slated to surpass USD1000 in 2009, a year ahead of the government’s target, compared with USD400 in 2000.
Our main macro calls:
(1) Growth to slow further Vietnam grew by 6.2% year-on-year in 2008 – the
worst performance since the 4.8% print in 1999. For 2009, we look for the economic momentum to slow further, with GDP growth printing at 5.4%, a view which we have held for sometime now. This compares with the government’s target of 6.5%. The trouble is that it’s not just exports that will slow, but domestic demand is expected to take a breather as well, largely on account of lower investment. A part of this is a spill over from the export weakness, but at the same time foreign direct investment, which makes up 20-25% of total investment, is likely to fall to around USD5bn in 2009 from a very robust USD11bn in 2008. The rationale for this unusual turnaround being that the financial crisis is going to make it that much more difficult for firms to fund investment and expansion whilst at the same time – in an environment of deteriorating growth outlook – firms are bound to be more cautious.
All however is not lost, as we believe that the lagged impact of the policy stimulus (see below) together with a gradually improving external demand environment1 will allow growth to bounce back in 2010, with our forecast being 6.6%. This gives us a V-shaped recovery, similar to what was seen following the Asian financial crisis.
(2) Inflation to collapse
On the inflation front, just as CPI went up dramatically in 2008, it is going to fall with as much vengeance in 2009 as high commodity prices drop out of the comparison. In addition, weaker growth should help contain underlying price pressures in the economy. As such, we think inflation is slated to hit a low of 5% by the middle of 2009 and then start heading up gradually, reaching its long-term average of 11% by the end of 2010. For 2009, as a whole, we expect inflation to average 9.5% compared with 23% in 2008.The decline in inflation will no doubt boost real disposable incomes in the country, thereby supporting consumer spending. However, it is fair to highlight that in an uncertain economic environment, the extra cash will probably go more towards saving rather than increased spending,
(3) Budget deficit to widen
The government, in an attempt to meet its 6.5% growth target for 2009, has announced new spending plans to the tune of USD6bn (6% of GDP), in infrastructure and export-oriented sectors, with the objective of generating more employment. Although the details have not yet been stated, media reports indicate that roughly USD1bn will be given to the Ministry of Planning and Investment to boost investment in the country. It remains to be seen whether the plans will materialise in full though. Based on the experience of other countries in the region, such as Indonesia, Malaysia etc, we are doubtful. Nevertheless, increased spending, even if it’s not of the magnitude the government has predicted, and lower revenue collections on the back of weaker growth, will see the budget deficit widen. Our forecast is for a shortfall of 7% of GDP, compared with 5% in 2008.The other point worth highlighting is that the fiscal boost, if it materialises, is large and, as stated by the IMF in the conclusion to its 2008 Article IV consultation, may result in an undesirable weakening of the external position in the absence of additional external financing.

Economics

(4) Central bank nearly done
The central bank has been doing its bit to support growth, having slashed the base interest rate by 550bps to 8.5% over a two-month period ending December, unwinding all but 25bps of the tightening that was delivered in the first half of 2008. With the base rate at 8.5%, the cap on the lending rate stands at 12.75% (1.5 times the base rate). Given the aggressiveness of the move, we think the bulk of the easing has now been delivered by the central bank. However, we do believe that the bank will, as an insurance policy, cut rates by a further 100bps in the first quarter of 2009, with rates bottoming at 7.5%. After that, we think rates will hold steady right through the year and into 2010. Commercial bank lending rates are coming down in line with the policy rate cuts, although the question remains whether firms will be willing to get additional loans, especially when few new orders are coming their way. Additionally, banks are likely to be prudent in an environment of slowing economic growth and rising nonperforming loans, and so may prefer to lock their funds in government bonds rather than expanding their balance sheets.
The central bank has also taken aggressive action to boost liquidity in the domestic banking system by slashing the reserve requirement ratio by 600bps to 5% and agreeing to buy back VND20.3trn of compulsory Treasury bills sold to commercial banks in March last year. The central bank may be inclined to do a bit more, but if overnight rates are used as an indicator then liquidity is already clearly ample in Overall then, we expect the trade deficit to improve in 2009, declining to around 14% of GDP from 22% of GDP in 2008. Assuming FDI inflows of USD5bn and remittances of a similar amount, this sees the current account deficit to improve by 3ppts to 10.5% of GDP.
(5) Trade deficit to shrink
As we mentioned in the growth section, exports have turned sharply and will continue to weaken into 2009 given the collapse in demand from the developed world and also softer growth in Asia.
To re-iterate, we expect exports to contract by 3% over 2009, down from a 30% expansion in 2008.
On the import side of the equation, we think the fall will be even greater, on the back of the collapse in commodity prices, weaker demand for intermediate goods (inputs for exports) and softer domestic demand. As such, we are pencilling in
an 8% contraction in imports compared with a 30% expansion in 2008.

Equity strategy

Becoming investible
What would make 2009 better?
The Vietnamese market is becoming increasingly marginalised. In 2008, the VN Index was down 69% in US dollar terms, the worst performance of any Asian market. MSCI Asia ex Japan, by comparison, fell 53%. Neither did Vietnam share in the rebound in equity markets in the last six weeks of the year: while Asian equities rose 23% from 20 November to the end of the year, Vietnam actually fell by 3%. have been net sellers consistently since September (see Chart 3) and have sold a total of USD127m net over that time. The selling slowed in December but perhaps only because most foreign investors, except for specialist Vietnam country funds, have now sold out. The market’s largest IPO in the past 12 months, by Vietinbank on 25 December, was fully subscribed (just) but only three foreign institutions bid for shares. With this backdrop, in our latest Asia Insights Quarterly, we dropped to zero our small nonbenchmark recommended weighting in Vietnam. We take the view that, even when risk appetite does come back to global markets, there are other markets in Asia that look more attractive as a first entry-point. Vietnamese companies’ earnings are highly non-transparent, and massive macro policy errors last year have put the long-term attractiveness of the market in doubt. Furthermore, Vietnam’s high dependence on FDI flows and exports means that 2009 growth is under significant pressure. Vietnam’s entrepreneurial spirit and appealing demographics will make this market interesting again one day, but not for the next few quarters.

Equity strategy

How to make 2009 better
What are the factors that will decide whether
Vietnam has a more successful year in 2009? Cheaper valuations. Despite the collapse of the stock market over the past two years, the Vietnamese market does not look unarguably good value. The PE, based on the last reported earnings (2007) is 9.0x. If we assume that EPS fell 10% last year and will be flat this year (we have lowered this year’s growth assumption from the previous +15% to take into account worsened global conditions), that puts it on a 12-month forward PE of 10.1x (Chart 6). In an Asian context, that is only middle-ranking: among Asean markets, for example, Indonesia is on 8.0x and Thailand on 7.2x. Given the lack of transparency on Vietnamese earnings, investors will probably demand rock-bottom valuations before they are willing to re-enter. single stock foreigners can buy that has a market cap over USD1bn (and there are only five stocks with a market cap of USD500m or more and reasonable room for foreigners to buy that might qualify for small-cap funds) – see Table 7 for details. Moreover, turnover on the stock market (Chart 2) has almost dried up again, with the Hanoi Stock Exchange (the only one of the two Vietnamese bourses that most foreigners are happy to trade on) seeing turnover of only USD14m a day on average during December.In this environment, foreign enthusiasm for the Vietnam market has almost completely evaporated over the past few months. Foreigners Company earnings. A major problem with Vietnam is that listed companies’ earnings are highly non-transparent. That is partly because of a lack of consensus forecasts (very few analysts cover the companies), but also because only annual results are audited, and because extraordinary write-offs are generally taken only at year-end. The coming results season (listed companies have to report by end-January) will give some clarity on how bad real estate and stock market related losses were in 2008, and on the outlook for this year.
Privatisations. Large-scale IPOs were almost non-existent last year after the IPO of
Vietcombank in late 2007 (of course, global conditions did not help). We continue to take the view that privatisation of some of the crown jewels of the Vietnamese economy (in particular oil and gas, telecoms and banking), if well structured and sensibly priced, would attract significant foreign interest and get the stock market going again. The mooted IPO of telecoms operator Mobifone in H1 would be the first sign that this is happening. Interest rates come down significantly further. Despite sharp cuts in official interest rates (by 250bps in December alone), market rates remain high – and, indeed, government officials still talk frequently about the continuing risk of inflation. Overnight interbank rates are 5% and 10-year government bonds 10% (see Chart 4). This makes equities look relatively unattractive to local investors. Moreover, concerns about the currency (which fell 9% against the US dollar in 2008 – and was devalued a further 3% on 25 December) and the lack of dollar liquidity which makes it difficult to repatriate profit from VND-denominated equities – deter foreign investors too.
The end