In its Vietnam economic outlook 2012 released last week, the Ho Chi Minh-based Vietcapital Securities (VCSC) says Vietnam is going through a deleveraging cycle that exposes serious issues in the banking sector amid a bursting real estate bubble. Pain will be inevitable, but VCSC does not adhere to the Armageddon scenario.
Detail Report:
Growth story intact on the back of financial sector stresses
We believe that although Vietnam is going through a deleveraging cycle that exposes serious issues in the banking sector amid a bursting real estate bubble, the back bone of the economy, that is agriculture, manufacturing and services has been and will remain strong in 2012. Pains will be inevitable, but we do not
adhere to the Armageddon scenario that some people have become accustomed to believe in. We argue that Vietnam will fare better than most other Asian countries as western countries economic growth slows down.
No Armageddon – While issues in the banking sector are serious and pain will be inevitable, we do not adhere to the Armageddon scenario. At this time last year, some international investment banks were calling for an imminent BOP crisis to hit Vietnam sometimes in 2011 and this never came, as we predicted about a year ago (see No BOP Crisis note of 25 January 2011). As a matter of fact, the country
actually ran a BOP surplus of USD 2.5bn according to the State Bank of Vietnam (SBV). We think that main street is doing just fine all things considered and that the stresses are almost exclusively centered on the banking sector and inefficient SOEs. Slower, albeit decent growth – We expect GDP growth to slower to 5.5% as tight monetary policies and slower growth in Vietnam’s traditional export markets hit, but growth will remain decent thanks to growing exports and robust consumption.
Construction will remain subdued however. With inflation and interest rates abating, companies should be able to find space to grow, although monetary conditions will remain subdued compared to previous years as credit growth will continue to be closely monitored and we don’t expect a relaxation of credit for
“non‐productive sectors”. This will put a cap on stock market performance. The economy is more stable than neighbours – Albeit macroeconomic difficulties, we also believe that Vietnam’s economy will do better than most in the region thanks to competitive manufacturing costs and lower value added, inelastic, export
goods. Also, the lack of hot foreign flows in and out of the country enables Vietnam to see less volatility in its currency.
NPLs, an inflationary waiting game – With NPLs estimated close to 10% system wide, everyone wonders where Vietnam will find the money to recapitalise its banks. The large banks have ample liquidity, so we’re not overly concern about an imminent collapse. Also, as inflation and interest rates fall, so should NPLs,
alleviating part of the problem. However, we believe the country will have to print money to pay for its banks and its SOEs past excesses and that would mean inflation could more difficult to bring down than most people think.
Ideas to play Vietnam – We finish our report with a few ideas on how to play Vietnam in 2012. We have four compelling ideas; (1) while valuations are at historical lows, we think not all is warranted, (2) with asset prices depressed, cash rich companies could go on an M&A spree, (3) the year of the Dragon means a huge boost in babies and companies that cater to infants, (4) Vietnam’s has become one of Asia’s top agricultural goods exporter.
Vietnam economic outlook 2012: Table of content
Predictions for 2012
Economy – 5.5% GDP growth
Balance of payments – +USD2.9bn
Banking sector – relaxed, but tight
Stock market – +20%
Risks
Banking sector – Leverage & NPLs
Electricity prices
Fuel prices
What Vietnam really has going on for
Strong exports performance
Stable foreign fund flows
Stable currency (so far)
Technicals on medium term positive
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