[Vnbiz] Inflation tests Vietnam's growth

[Hong-Phong_Pho at ita.doc.gov]

Dear anh Hoanh:

I beg to differ with many of your critique of the Symon piece.  While not 
extra ordinary, it did a decent job of presenting the picture.
Some of your hurried reactions had to do with your imprecise reading of 
the writer's words, and/or careless use/insertion of your own words. 

On the stock market and inflation; Mr. Symon wrote the stock market is 
"hit" by inflation, he did not say that the stock crash was "created" by 
inflation, as you implied.  If your hypothetical stock broker works on 
Wall Street, his environment is vastly different from the HOSE floor, 
where the majority are retail investors who are much more sensitive to 
speculative pressure or irrational depression, to borrow from Mr. 
Greenspan's phrase.  Can hyperinflation "create" a stock market crash? You 
bet it can.  In Vietnam's case, if an investor took the risk in investing 
in stocks that are now yielding or growing less than 15% a year 
(inflation), he will quickly shift it out to other investments be it 
realestate, non-dollar foreign currency, or gold.  That's how inflation 
hit the stock market; a reasonable scenario.  If all investors decided to 
do the same, the market will indeed crash.  In a bear market, there will 
be those with either internale fortitute strong enough or pockets deep 
enough to buy up stocks at good value when others a fire-saling that will 
keep the market from crashing.

On inflation and strikes;  Mr. Symon wrote "discontent over increased 
inflation is on the rise", a simple statement that can be verified with 
just about any wage earner.  Although you hedged with the conditional 
"may", your statement that "The labor strike in February may has nothing 
to do with February inflation." is not supported by the many articles 
already out there interviewing workers.  Every last one of them raised the 
high cost of living as a main factor.

Cancelling a major international conference at the last minute is not a 
wise move; people have made arrangements and paid money to attend.  It 
shows a diffidence in the leadership.  That Vietnam is experiencing 
macroeconomic instability is not  exactly  unknown to the global 
investors.   Most financial managers/leaders would want to know exactly 
how bad things are and what the GVN is planning to do about it.  No news 
is the worse news.  This is not a time to circle the wagon, but to 
actively bring in and listen to investors who can help decide the most 
competitive sectors/opportunities in Vietnam.

The ability to exchange currency quickly as needed is important to any 
companies that deals with foreign trade.  Not being able to convert your 
dollar earning from exporting into local VND to pay your workers and local 
raw materials certainly affects any company's opperation.  There are press 
reports of banks charging a fee to buy dollars, or to buy at all.

Lastly, Mr. Symon wrote about the "isolationist communist era shell" that 
the GVN appears to be retreating into.  Please, please read carefully to 
see that the word "communist" here simply modify the word "era", and 
together they describe the word "shell".  Nothing here to get excited 
about.  Remember Vietnam is an economy in transition from a command model 
to a market model.  Any steps backward will be read as a retreat. 

To handle this storm well, the leadership of Vietnam must take the bull by 
the horn and show the world its determination to succeed.  It's no use to 
hide the fact that it (VN) lacks the technocratic expertise to tackle the 
very challenging market calculus that even the Greenspans and the Bernanke 
of this world, with all the tool and skill sets at their disposal have a 
hard time tackling.  If the PM listens to the same advisors who advocated 
circling the wagon and cancelling the Euromoney conference, and decided to 
stay in the safety of his shell rather than coming to visit the U.S. this 
year, it will be an opportunity missed.

HPP




"Tran Dinh Hoanh" <tdhoanh at gmail.com> 
Sent by: vnbiz-bounces at mail.saigon.com
03/19/2008 12:26 PM
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Re: [Vnbiz] Inflation tests Vietnam's growth






[ Vietnam Business Forum ]

Dear CACC,
 
I have done a series on inflation issue so I am not going to go over them 
again.  Just want to say that Andrew Symon did a very poor job on 
"analyzing" the situation.  Ex:  He said the stock market is hit by 
inflation.  Sorry that is dead wrong  (Ask any stock broker whether he 
thinks that the stock crash was created by inflation, he will die 
laughing).  The stock crash create more inflation pressure.  Andrew got 
things backward. 
 
The labor strike in February may has nothing to do with February 
inflation.  Strikes have been there for a couple of years, and that is 
very healthy sign of labor sophistication.  It may indicate the wages have 
not been keeping up with inflationary prices, but the primary cause could 
be that employers are too cheap, not that inflation is too high.
 
The cancellation of the EU investment conference was wise move.  You are 
in the middle of a bunch of issues (stock crash, inflation higher than 
normal) and you are trying to do some quick fix, what would investors meet 
in the middle of all that mess for.  It is much better fro everyone to 
wait several months to see how things settle, better or worse.  Wouldn't 
it better for both the government and the investors that way?
 
And "foreign businesses in the export sector have been most adversely 
affected by the SBV's recent interventions. That includes the central 
bank's efforts to tighten the local money supply, which have made it 
increasingly difficult for firms to exchange foreign currency, primarily 
US dollars, for the local currency, the dong."  Is any firm already in any 
kind of trouble because they don't have enough dong?   That is unreal. 
Actually these foreign firms in export sector should benefit from the 
SBV's action to keep the dong value relatively low (when they use the dong 
to pay for employee wages and other things) and from increasing demand for 
export.
 
And what the crap is this: "Now the government appears to be crawling at 
least partially back into its isolationist communist era shell as it 
avoids a possible platform for criticism of its new, more restrictive 
policy settings."? Is there anything here to say communist or capitalist 
or catholic or Buddhist?  Crazy!
 
I am confident that Vietnam will handle this current situation well.
 
Have a great day!
 
Hoanh


On Wed, Mar 19, 2008 at 8:02 AM, Tai Phan <k.phan007 at gmail.com> wrote:
[ Vietnam Business Forum ]


Southeast Asia

     Mar 18, 2008 








Inflation tests Vietnam's growth
By Andrew Symon 

Vietnam's transition from a centrally planned to market oriented economy 
faces a new host of challenges posed by galloping inflation. Depending on 
how deftly economic and financial policymakers respond, it could make or 
break the country's until now successful economic reform program. 

The country's main consumer inflation benchmark was up 15.7% year on year 
in February, the biggest jump in over a dozen years and currently the 
highest rate in industrializing East Asia. Inflation has jumped by double 
digits for each of the past five months, 




threatening to undermine the macroeconomic and social stability that has 
underpinned fast GDP growth, which over the past five years has averaged 
over 8%. 

In particular, discontent over increased inflation is on the rise in the 
industrial sector, the backbone of Vietnam's export-driven economy. That's 
been witnessed in the growing number of industrial disputes and strikes 
over wages and work conditions, which to date have disproportionately hit 
foreign-invested firms. 

In mid-February, more than 5,000 workers went on strike demanding pay 
rises, more allowances, and a reduction in working hours at the 
Japanese-owned Yazaky Eds Viet Nam Ltd, which produces automobile parts 
for export from the northern industrial city of Haiphong City. Local 
newspapers reported that the workers said that their average monthly wages 
of between 1.1 milion dong - 1.2 million dong (US$68.75 to US$75), which 
are above minimum wage rates, were not enough to cover even their daily 
living expenses. 

In the first two weeks of this year, 50 strikes took place across the fast 
industrializing country, according to the Ministry of Labor. In early 
March, some 10,000 workers walked off the job at the South Korea-owned Tae 
Kwang Vina factory, which makes shoes for US apparel company Nike on the 
outskirts of Ho Chi Minh City. Those factory workers similarly demanded 
higher pay to keep pace with rising prices. 

>From 1995 to the end of January 2006, more than 1,000 strikes took place 
in Vietnam, with some 387 of those worker walk-outs occurring last year 
and coinciding with rising local costs, according to government 
statistics. Of those, 300 strikes targeted foreign-invested firms. To the 
chagrin of foreign investors, the government last year increased the 
minimum wage for industrial workers by around 25%. But as consumer prices 
surge, labor unrest is nonetheless on the rise. 

Vietnam is not alone in Asia in facing inflationary pressures, but its 
headline rates are nearly double those of its main regional competitors, 
with China's rate hovering around 7.1% and Indonesia 7.4%. Hanoi's 
emerging inflation problem can only partially be blamed on global market 
forces, including fast rising food and petroleum prices. 

The state-run General Statistical Office said upon its announcement of 
February's 15.7% year-on-year spike in consumer prices that the increase 
was driven mainly by a 25.2% increase in the cost of foodstuffs and a 
16.4% rise in housing and building materials, reflecting the country's 
breakneck construction boom. 

The overheating economy is also unsettling the balance of payments, with a 
huge trade deficit opening up as imports rise. For the first two months of 
2008, the deficit was US$4.2 billion, compared to $12.4 billion for the 
whole of 2007. That statistic represented a sharp rise on the $4.8 billion 
for 2006. 

But those pressures are being compounded in Vietnam's particular case by a 
host of domestic factors, including the rapid inflow of foreign capital, 
consequent fast growth in the local money supply and, apparently, the 
government's relative inexperience in managing such technocratic 
challenges. 

The government has in recent years sought to modernize the State Bank of 
Vietnam (SBV) into a capable steward of monetary and exchange rate 
policies, as part of its World Bank endorsed financial sector reform 
program. It was precisely those types of market-friendly reforms that had 
in recent years made Vietnam a regional darling for international 
investors and manufacturing businesses. 

Now with macroeconomic stability at risk, that love affair has hit choppy 
waters. Those concerns were underlined when the government abruptly 
postponed a major EuroMoney investment conference scheduled for earlier 
this month which last year drew over 1,500 delegates from more than 30 
different countries, resulting in scores of new multi-million dollar 
investments and joint venture deals. 

Then there was only praise for Vietnam's economic dynamism and the 
government's pro-market and pro-investment policies; now the government 
appears to be crawling at least partially back into its isolationist 
communist era shell as it avoids a possible platform for criticism of its 
new, more restrictive policy settings. The conference organizers have said 
the event will be held in September instead. 

But it's not clear that by then macroeconomic stability will have been 
restored. Inflation and other pricing distortions brought on by what some 
analysts refer to as Vietnam's "overheating" economy clearly represents 
the government's and central bank's first big technocratic test since 
opening widely the economy to foreign capital inflows. 

The SBV has in recent months put a brake on money supply growth, in a 
blunt attempt to mop up the liquidity flowing into the financial system 
through foreign direct investments and portfolio flows. The SBV has long 
maintained an effectively fixed exchange rate at an artificially low rate 
to promote exports. Now that rate, as of March 13 officially at 15,865 
dong per US dollar, is coming under increasing speculative pressure for an 
upward revaluation. 

Foreign businesses in the export sector have been most adversely affected 
by the SBV's recent interventions. That includes the central bank's 
efforts to tighten the local money supply, which have made it increasingly 
difficult for firms to exchange foreign currency, primarily US dollars, 
for the local currency, the dong. 

At the same time, the government has ordered the central bank and other 
ministries to put more restrictions in place. That includes stricter rules 
for lending, raising interest rates, increasing compulsory bank reserves 
and expanding bond issues to absorb local currency. Credit growth through 
the banking system is also through government order to be limited to 30% 
in 2008, capped lower than the 40% growth seen in 2007. 

The government has also tentatively allowed the exchange rate to 
appreciate above its current above-under trading band of 0.75% to 2%, an 
official rate set and managed by the SBV. A strong dong, policymaker 
hopes, will help reduce inflation by making imports relatively cheaper, 
but also raises concerns that an appreciating currency will also make 
exports less competitive vis-à-vis China, which has also recently allowed 
its fixed exchange rate to rise only marginally. 

Hanoi's new tighter monetary policy settings are also straining local 
businesses, particularly those with significant foreign currency receipts 
and which draw on foreign funds in order to make local payments. There are 
a growing number of reports about foreign-invested firms encountering dong 
shortages at local banks, with some as a result lacking the resources to 
pay staff and rents. With banks under strict orders to preserve their dong 
holdings, many businesses are now operating outside of the official 
banking system for their local currency needs. 

Vietnam's nascent stock market, which has lost much of its luster over the 
past 12 months, is also being hit by inflation and the government's 
restrictive response. For instance there has been widespread selling on 
the Ho Chi Minh Exchange among the local retail investors who dominate the 
US$20 billion market. In an attempt to calm investor jitters, the 
government's investment arm is reportedly purchasing more shares to shore 
up prices. 

The bigger risk is that tighter monetary conditions afflict the banking 
sector, which some argue was already wobbly before inflationary pressures 
entered the financial equation. Analysts predict that cracks could appear 
first at the so-called joint stock banks, as competition for deposits 
increasingly favors larger state-owned banks because of their inherent (or 
at least hoped for) sovereign guarantee. The US credit rating agency 
Standard & Poor's (S&P) warned in a February report that "a prolonged 
liquidity squeeze will exacerbate the inherent structural weakness in 
Vietnam's banking system". 

Meanwhile US investment bank JPMorgan Chase expects headline inflation to 
average 16.1% this year, nearly double the 8.5% clip experienced in 2007. 
However views about how dangerous the inflationary situation is to the 
country's overall economic health vary. S&P says it does not expect high 
inflation to result in a sovereign credit rating downgrade in the next one 
or two years, unless inflation accelerates much faster. 

That's cold comfort to the country's huge poor population, which with the 
rising price of basic staples is finding it increasingly difficult to make 
ends meet. Jonathan Pincus, the United Nations Development Program's 
(UNDP) senior economist in Hanoi, recently told the media that the 
government needs to target inflation below 10% so that businesses can 
confidentially map out production and investment plans, exports remain 
competitive, and the poor are not disproportionately hurt. 

The economist noted that Vietnam's inflation rate is now twice as high as 
other countries in the region, including China. "It is a big blow if the 
inflation is above 10%," Pincus said. "Vietnam has to recognize that there 
are global problems, but there are also problems that are very specific to 
Vietnam and need to be solved in Vietnam." For now, the verdict is still 
out on whether Vietnam's until now untested technocrats are up to that 
task. 

Andrew Symon is a Singapore-based journalist and analyst. He may be 
reached at andrew.symon at yahoo.com.sg.



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