Vietnam Emerges from the Crisis

Talk about bounce. The Vietnam stock market has outperformed all others in Asia since hitting a low in February. Since then it has risen by a remarkable 80 percent -- though at 425 on May 26, the index is still far from its all time peak of 1,174 reached in March 2007.

So is this the biggest of dead-cat bounces, a stunning rally within what is still essentially a bear market? Or is this telling us something not just about the revival of the global economy but more particularly about Vietnam's own underlying strength?

Despite its high level of dependence on trade, which is now 62 percent of GDP, and remittances, its economy should still grow by 3-4 percent this year. This will keep it in the top league close to China and on a par with those much less trade-dependent economies India and Indonesia and well ahead of Thailand and Malaysia, both of which may be lucky to end the year with any growth at all.

Perhaps more remarkably, its current account is now just about in the black after hitting a peak deficit of 25 percent of GDP in the first half of 2008, a level which set alarm bells ringing and came close to causing a currency crisis and a financial sector meltdown. As it was, it was only the stock market which melted down as the government resorted, just in time, to tough measures to curtail loan growth and inflation which peaked at over 20 percent.

In retrospect, Vietnam was fortunate that its domestically-driven crisis, also exacerbated by the surge in food and energy prices in the first half of 2008, occurred a few months before the global one. So stabilization measures were already in place. Although stocks continued to suffer from the global gloom, high interest rates and the exodus of footloose foreign money, the broader economy only slowed. It is still slowing but is proving more resilient than the neighbors.

Exports for the first five months of the year are estimated to have fallen by 7 percent, but that is a very satisfactory number given the steep decline in prices of oil, coffee rice and other commodity exports. Garment and shoe exports were down only 2 percent and 10 percent respectively and some other items increased significantly as new investments, particularly by Taiwan and Korean companies, came on stream.

The massive trade improvement was however mainly due to a 37 percent fall in imports, a mix of declining prices, lower luxury consumption and a fall in machinery imports. The latter, which is closely linked to direct investment flows, suggests that the economy's overall growth rate will remain sluggish for the rest of the year. The overall trade situation is likely to deteriorate as the year progresses with imports recovering faster than exports.

Remittances and tourism are also contracting moderately and the current account may be back in the red, perhaps to 3-4 percent of GDP. However, that is unlikely to cause any alarm. The dong has already been allowed to decline by 5 percent against the dollar so far this year and, given the dollar's weakness and the fall in inflation, Vietnam's competitiveness is being more than sustained relative to neighbors.

Indeed with inflation now down to probably no more than 5-6 percent for 2009 and the external position back on even keel there is scope for domestic stimulus. Interest rates are down and the government has committed to increasing its target fiscal deficit to around 8 percent of GDP with US$6-8 billion in additional spending. However, not all of this may materialize as the current National Assembly meeting has heard expressions of concern that this is too high and could re-ignite inflation.

Longer-term, here are concerns at the rate of capital inflow and the buoyancy of export markets. However, with Vietnam still playing catch-up, benefiting from movement of some exporters out of China and generally being viewed positively by Asian and non-Asian investors alike, and continuing to receive substantial foreign aid and loans from development banks there is an underlying optimism. In addition, its 2 percent a year workforce growth rate and continued success in raising agricultural productivity both provide a basis for growth no longer so available in China and Thailand.

The government has taken a second look at export-driven growth and decided that this is still the best alternative given Vietnam's size, location and level of development.

As for the stock market, it may, like others, now be running rather ahead of any actual recovery. However, corporate profits, which fell sharply last year because of the currency and interest rate dramas, are likely to recover sooner than those in neighboring countries which were more affected by the global crisis. The bottom for earnings may have passed already.

Foreign portfolio investors, who panicked earlier this year, are now coming back into the market. Discounts on overseas-listed funds have also narrowed, though they are still quite high, a reflection of the skittishness of foreigners who in 2007 were paying premia for the privilege of investing in Vietnam.

The recent recovery has been mainly driven by domestic investors who have both followed overseas recoveries and regained confidence in the local market and been moving out of bonds and bank deposits into stocks as interest rates fall. Some too have been taking profits on gold which was heavily bought during last year's turmoil. With price earnings multiples having now risen to around 16 times projected earnings for 2009, and some speculative stocks again leading the advance, the bounce may have run its course for now.