Economics Markets Strategy - the DBS Vickers Securities Equities ...

More documents

Recommendations

Info

VIETNAM Economics: Vietnam Economics – Markets – Strategy VN: Growing pains • Inflation has reached a crisis stage and strong measures are needed to cool the economy • The State Bank of Vietnam (SBV) raised interest rates sharply again on 10 Jun08, less than a month after the previous hike, in a bid to tame inflation. • Yet, despite the measures by the government to rein in inflation, it is unlikely to abate in the near term and is set to average about 26.3% for the full year • Vietnam’s widening trade deficit is another concern. The trade deficit has ballooned to 53% of GDP in 1Q08 on an unadjusted basis • With fiscal and monetary tightening, and the negative impact of high inflation, growth this year will be sub-par at 6.4% CPI inflation surged to 25.2% YoY in May08 Inflation worries Inflation worry in Vietnam has taken a new dimension in recent days. CPI inflation surged to 25.2% YoY in May08 , as food prices continue to drive the headline number upwards (Chart 1). Overall food and foodstuffs prices were up 42.4% compared to a year ago while prices of primary food items were up a shocking 67.8% YoY! The situation is worrisome as food items take up about 40% of the overall CPI basket and prices are unlikely to stabilize in the near term. The rice crisis spreading across Asia and much of the world threatens to keep prices elevated. Global supply is unlikely to catch up with demand from both speculative and real sources in the short-term and with that, grain prices are expected to stay high in the near term. Earlier on, the Vietnamese government has taken measures to curb domestic speculation in addition to tighter export controls on rice. However, food inflation is also increasingly spreading into prices of other non food items. Apart from commodity prices, the inflation problem in Vietnam is also partly due to excessive liquidity. Money supply growth registered about 46% increase by end 2007 according to the Asian Development Bank (Chart 2). Sharp increase Chart 1: High inflation is a key concern % YoY 45 42.4% 40 35 Overall CPI inflation Food 25.5% 30 CPI inflation ex food 25 20 Latest: May08 15 10 5 0 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Chart 2: Excessive liquidity also stoking inflation VND bn % YoY 1600000 50 Money supply, M2 1400000 45 M2 growth (RHS) 40 1200000 35 1000000 30 800000 25 600000 20 15 400000 10 200000 5 0 0 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Irvin Seah • (65) 6878 6727 • irvinseah@dbs.com 132
Economics – Markets – Strategy Economics: Vietnam in FDI inflows, remittances and portfolio investment betting on the property and equity market boom in 2007 are probably the key reasons. The banking sector is flooded with cash and the aggressive credit extension by commercial banks to earn market share probably exacerbated the situation. Indeed, the inflation problem in Vietnam has reached a crisis stage and drastic counter-measures are needed to bring an overheated economy into order. After some drastic tightening move on 19 May, the State Bank of Vietnam (SBV) again raised all three policy rates by 200bps on 10 June in a desperate bid to tame inflation. That’s two series of sharp rate hikes within a month. The prime/base rate was raised to 14%. The discount rate and refinance rate were lifted to 13% and 15% respectively. Yet, the drastic and painful monetary tightening was needed to contain the excess liquidity in the system and to ensure banks have the mechanism available to mobilize deposits if necessary. Apart from monetary measures, the government has also adopted administrative measures to tame inflation. For example, the government froze prices of 10 “essential” goods until June. They include petrol, electricity, coal, water, cement, steel, school fees and hospital fees, bus, rail and air travel. The government also promised to cut fiscal expenses by 10% through belt tightening. That is essentially a contractionary yet necessary fiscal policy which will surely affect overall growth outlook as many public infrastructure projects will be postponed as a result. More tightening needed Despite the desperate measures by the government to rein in inflation, it is unlikely to abate in the near term. In fact, our estimation based on the current global trend for crude oil and food prices point to even higher inflation ahead. Moreover, effects of the monetary tightening will take time to filter through the system while the declining VND is complicating matters. Full year inflation in Vietnam is estimated to average 26.3% and will easily breach the 30% level once some of the existing subsidies are lifted Chart 3: More tightening needed to tame inflation % YoY, % pa DBSf 40 30 20 10 0 -10 -20 -30 Real prime rate Inflation Prime rate Jan-07 Jul-07 Jan-08 Jul-08 (Chart 3). However, inflation in 2009 should taper off to 15% on average as growth moderates and the tightening measures start to take effect. Nonetheless, more tightening may be needed in the near term to keep the lid on inflation. In fact, the real base rate (inflation adjusted) is expected to remain in negative territory in the near term until mid 2009, which will gives more room for rate hikes (Chart 3). The government has demonstrated its will to fight inflation in its recent tightening moves. With that, we expect the base rate to be lifted by another 200bps in the next 2 quarters to 16% to help clamp down inflation. Inflation has reached the crisis stage and strong counter-measures are needed Despite tightening, inflation will hit 26.3% for the year Expect another 200bps hike in base rate Widening trade deficit is another big concern Apart from inflation, Vietnam’s widening trade deficit is another big concern. Trade deficit registered USD 14.4bn in May year-to-date, about four times higher than a year ago and already surpassed the deficit for the entire 2007 (Chart 4). Trade deficit exploded from about 18% of nominal GDP for the whole of 2007 133
Page 1 and 2:
Economics Markets Strategy 3Q 2008
Page 3 and 4:
Economics - Markets - Strategy June
Page 5 and 6:
Economics - Markets - Strategy June
Page 7 and 8:
Economics - Markets - Strategy Econ
Page 9 and 10:
Page 11 and 12:
Page 13 and 14:
Page 15 and 16:
Page 17 and 18:
Page 19 and 20:
Page 21 and 22:
Page 23 and 24:
Page 25 and 26:
Economics - Markets - Strategy Curr
Page 27 and 28:
Page 29 and 30:
Page 31 and 32:
Page 33 and 34:
Page 35 and 36:
Page 37 and 38:
Page 39 and 40:
Page 41 and 42:
Page 43 and 44:
Page 45 and 46:
Economics - Markets - Strategy Yiel
Page 47 and 48:
Page 49 and 50:
Page 51 and 52:
Page 53 and 54:
Page 55 and 56:
Page 57 and 58:
Page 59 and 60:
Economics - Markets - Strategy Asia
Page 61 and 62:
Page 63 and 64:
Page 65 and 66:
Page 67 and 68:
Page 69 and 70:
Page 71 and 72:
Page 73 and 74:
Page 75 and 76:
Page 77 and 78:
Page 79 and 80:
Page 81 and 82:
Page 83 and 84: Economics - Markets - Strategy Econ
Page 133: Economics - Markets - Strategy Econ
Page 155: Economics - Markets - Strategy 3Q 2
show all

Economics Markets Strategy - the DBS Vickers Securities Equities ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?