VietFinanceNews.com – You wouldn’t know it from what’s been going on in the markets lately, but most Asian economies are in pretty good shape. Yes, inflation is a problem. But that’s partly due to the region’s rapid recovery from the crisis.
Everything that’s been said about debt, deleveraging and the outlook in these countries compared to the troubled West remains true. For most markets, the recent sell-off is about fear not fundamentals.
But there are exceptions. One is a country that’s been lauded by many – including me – as one of the best long-term prospects around: Vietnam.
Vietnam had a dreadful 2010, hot on the heels of a pretty shabby 2009. So what went wrong? And is now a good time to get back in?
The Vietnamese government needs to get a grip
I backed Vietnam as a good recovery play after the global crisis. And I’ve tipped it on several occasions since.
One glance at the chart below is enough to tell you that, so far, I have been desperately wrong…
So what’s the problem? While the rest of Asia has emerged from the crisis in a way that gives investors confidence, Vietnam certainly hasn’t.
The country has struggled with three main macroeconomic issues.
First, there’s persistently high inflation (12% year-on-year in January).
Second, it has continued to run a yawning trade deficit (around 12% in 2010).
And third, the budget deficit has ballooned to around 8% of GDP in both of the last two years.
Vietnam is not the only country in Asia with one or even two of these conditions. But what bothers investors is this: it’s hard to say whether the authorities will get a grip on the situation, or whether Vietnam is instead heading for the traditional emerging market crisis.
For one, there’s the central bank. Faith in its judgement and competence has been shaken. When it tried to tighten up on lending in early 2010, it went too far. Loan growth slowed right down, and monetary conditions had to be relaxed. But now it has been far too slow to raise rates to contain inflation. And overly-rapid credit growth means investors are worried that banks will be left sitting on hefty bad debts when the economy slows again.
Similarly, exchange rate policy has been a mess. Vietnam’s large trade deficit has left it with foreign exchange reserves of around $10bn-$12bn according to latest reports. That’s enough to guarantee only around two months’ worth of imports.
The currency – the dong – has been devalued on several occasions in recent years. As you might expect, this combination of high inflation and steady devaluations has encouraged Vietnamese people to switch their earnings into gold or US dollars. And that only pushes the dong down further.
To sum it up, the government has been too willing to tolerate the economy overheating, with all the problems that brings. Why? Because we’ve just had the five-yearly Communist Party congress. Amid the infighting that surrounded this, senior politicians wanted to be able to point to a solid growth performance – regardless of the consequences.
The $4.4bn cost of copying Korea
As if this wasn’t enough, the country’s reputation took another hammering late last year with the collapse of state-owned conglomerate Vinashin. This firm was one of the flagships of the government’s industrial policy, which has involved building a number of large industrial groups loosely modelled on Korea’s giant chaebol such as Samsung and Hyundai.
The fact that China had already tried and rejected this approach should perhaps have warned them off. But it didn’t. Thus Vinashin, a shipbuilder, had expanded rapidly into businesses from motorbikes to spas. In doing so, it incurred $4.4bn in debt (around 4% of GDP).
A combination of its incompetence in many new ventures and a downturn in its core business of building ships due to the global crisis brought it to the brink of bankruptcy. Several executives have now been arrested on charges of mismanagement and fraud.
Foreign bond investors had assumed that Vinashin’s debt carried an implicit government guarantee. But they may have miscalculated. While the business is being restructured, it’s been granted tax relief and soft loans to keep it running. But it missed a debt repayment in December. This has obviously raised concerns about the potential defaults at similar state-owned enterprises (SOEs) such as miner Vinacomin.
And loans to SOEs are said to account for around 40% of Vietnam’s banks’ assets – which raises worries over possible bad debts there. Small wonder that ratings agencies Moody’s, Standard & Poor’s and Fitch all downgraded Vietnam last year.
Tougher decisions are being made
Sounds pretty grim. And I can’t blame investors for avoiding it.
But Vietnam could be about to turn the corner.
With the congress out of the way, there’s a chance that policymaking will become more consistent and pragmatic. The three top officials for the next five years have been chosen.
Nguyen Tan Dung will retain his job as prime minister. Truong Tan Sang will take over as president. And Nguyen Phu Trong will become party general secretary.
I’m no expert on Vietnamese politics. But I gather that both Dung and Sang are considered market-minded reformists (despite mistakes such as Dung being a major supporter of groups such as Vinashin). And it seems there’s little love lost between the prime minister and the other two, which may ensure that they hold each other to account. This is something that seems to be a growing trend in Vietnamese politics in any case. The normally compliant national assembly gave Dung quite a hard time over Vinashin – in fact, it wasn’t a sure thing that he’d keep his job.
And there are already some concrete signs that better decisions are being made. The official dong exchange rate was devalued by 9% – much more than expected – earlier this month. That brings it much closer to black market rates. Since then, the central bank has hiked rates more aggressively than usual, suggesting it’s getting more serious about cooling the economy. On the fiscal front, a government statement this week said that it aims to bring the budget deficit down to less than 5% this year.
And top policymakers seem to realise that they need to reform the state-owned enterprises. Plans to float a couple of the better-run ones – Vietnam Airlines and fuel distributor Petrolimex – on the stock exchange are underway, in an encouraging resurrection of a long-stalled privatisation programme.
Vietnam still has plenty of problems. Beyond the immediate macroeconomic issues, bureaucracy and corruption are major problems. And reforming SOEs will be easier said than done due to their political influence.
But the country also has many strengths, as I’ve discussed here before. Good demographics, abundant natural resources, substantial foreign direct investment from Asia and elsewhere, and an entrepreneurial culture.
And the current situation perhaps has some parallels to what China went through in the late 1990s and early 2000s, when it restructured many of its SOEs. China emerged stronger from that. (Although bondholders in Vietnamese SOEs today might want to note that China did not stand behind the debt of SOEs such as Guangdong International Trust and Investment Corporation (GITIC) with heavy foreign investment.)
Given my track record on Vietnam so far, it probably doesn’t mean much if I think this is the turning point. But others seem to think so.
The discount to net asset value on the Vinacapital Vietnam Opportunity Fund (LN:VOF), an Aim-listed investment trust that’s one of the most popular ways to invest in this market, has narrowed from around 35% earlier this year to around 19%.
There is still a risk that Vietnam descends into crisis, perhaps ultimately requiring an international bail-out (which could, in the long run, be a good thing). But I think this is looking less likely. My serial over-optimism so far means that I’m holding back on saying that Vietnam is a good buy at this point – but I am watching it closely. (MoneyWeek)