Imparting insight

Mr Louis Taylor, CEO of Standard Chartered Bank (Vietnam) Limited, shared his views with on the occasion of the launch of non-stop flights from Hanoi and Ho Chi Minh City to London.

Mr Louis Taylor, CEO of Standard Chartered Bank (Vietnam) Limited.

  

 What is your view of the bilateral relationship between the UK and Vietnam in recent years in terms of economic, trade and investment links?

The UK-Vietnam relationship has intensified rapidly in recent years. Since the signing of the Vietnam-UK strategic partnership in 2010, co-operation across various fields, including economic, trade and investment links, has been strengthened and deepened.

According to the UK’s Statistical & Analysis Directorate, in 2009, UK imports from Vietnam reached £1.059 billion and its exports to Vietnam stood at £209.7 million. This suggests that there is still a long way for exports from the UK to Vietnam to grow.

According to Vietnam’s Ministry of Planning and Investment (MPI), as at February 2010 there were around 79 licences issued to UK investments in Vietnam, valued at approximately $2.51 billion, making it the third largest European investor in the country.

The UK also stands as the Number 1 foreign investor in Vietnam’s financial services sector. This is the strongest proof of the development of the trade and investment relationship between the two countries.

We see many signs of increased cooperation between the UK and Vietnam in trade and investment activities. There have been several key visits and missions from the UK to Vietnam, such as that by the Duke of York in October 2010 on Hanoi’s 1,000th anniversary.

During his visit the Duke opened Standard Chartered Bank’s new Priority Banking branch in Hanoi. In March, our Standard Chartered team also attended a roundtable discussion on the “Development of Hanoi as a Financial and Trade Centre” with the Lord Mayor of the City of London during his visit to Vietnam.

What do you think of the role of British enterprises in these bilateral ties? What has Standard Chartered added to these ties?

British enterprises play an important role in promoting and strengthening the bilateral ties. Without commerce, an important result of collaboration is missing. We, as a British enterprise, commits to sharing our expertise, technology and experience in international markets with our counterparts in Vietnam. Our growth here also proves that Vietnam is a market with great potential, and we can communicate this to others in order to attract more investment flows from the UK to Vietnam.

We are proud to be an active player in the financial and banking field here in Vietnam. With our strengths in the Wholesale Banking segment, Standard Chartered has led a range of innovative and challenging transactions to support Vietnamese enterprises, such as the debut international Syndicated Loan for the PetroVietnam Exploration Production Corporation Ltd. and the funding of Holcim’s new waste heat recovery power plant in early 2011. And our Consumer Banking service quality is setting new standards for the industry here in Vietnam.

What examples could we use for Standard Chartered being a successful British enterprise in Vietnam?

Standard Chartered’s history in Vietnam can be traced back to 1904 when the Bank opened its first branch in Saigon - now Ho Chi Minh City. Following official approval from the State Bank of Vietnam (SBV), effective on August 1, 2009, Standard Chartered commenced operations in its locally incorporated entity - Standard Chartered Bank (Vietnam) Limited (SCBVL).

Local incorporation was an important milestone in Standard Chartered’s development in Vietnam. The Bank provides a full suite of Wholesale Banking products and services to corporate and financial institutions. We also have Consumer Banking to serve individuals and small- and medium-sized enterprises (SMEs).

For us, the most obvious measure of success beyond pure financial measures lies in the quality of the products and services that we offer to clients and customers and the contribution we make to the broad community in which we operate.

In Wholesale Banking, Standard Chartered has led a range of innovative and challenging transactions that demonstrate the range of options open to investors in Vietnam. Most recent is a financing package for an oil field development of PetroVietnam. And I’ve already mentioned the funding of Holcim’s new waste heat recovery power plant, saving 25,300 tons of CO2 per year. We have developed funding and transaction banking products to serve the needs of corporate customers, from the largest multinationals to SMEs.

Standard Chartered Bank was ranked as the top Book-runner of US dollar Syndicated Loans for Vietnamese borrowers - a position we have held for three consecutive years - and also top Book-runner for VND bonds.

These achievements emphasise Standard Chartered’s world-class capability, deep understanding of the market and strong relationship with clients. Transactions were closed successfully despite market turmoil caused by the global crisis and an uncertain macro-economic environment.

In Consumer Banking, Standard Chartered has become the first international bank in Vietnam to join the Smartlink network, which gives our customers access to over 5,000 ATMs nationwide and helps to strengthen the collaboration among Smartlink’s 28 member banks.

To help improve the quality of the services provided to customers, SCBVL has implemented the Eight-minute service pledge, in which the Bank will make a contribution to charity for every customer not served within eight minutes at a counter. The pledge embeds a strong service culture among employees to ensure they provide friendly, fast and accurate service to our customers.

Just this October the Bank launched a Platinum Debit Card, which provides cardholders with a wide range of benefits and privileges, including travel and golf. This is a strong testament to Standard Chartered Bank’s commitment to grow the Priority Banking customer segment in Vietnam and to give our customers their desired lifestyle.

Most importantly, Standard Chartered understands that our success is measured by our impact on and contribution to the community in which we operate. Through our global “Seeing is Believing” campaign, we are addressing the problem of avoidable blindness across our footprint, including in Vietnam. Hundreds of thousands of children in Hanoi and Ho Chi Minh City have benefited from the Vietnam Urban Childhood Blindness Prevention Project, under the “Seeing is Believing” campaign.

In Hanoi, over 200,000 children have been provided with free eye screening and nearly 2,000 pairs of spectacles were given to children in need. With the help of doctors from the Hanoi Eye Hospital, over  15,933 children have been diagnosed with refraction errors. More than 200 surgeries have been carried out and Standard Chartered  is looking forward to bringing back the light to more children.

At the end of October, during his visit to Vietnam, Mr Peter Sands, Standard Chartered Group’s Chief Executive, opened a media training conference for the SBV. The three-day training course, sponsored by Standard Chartered Bank, benefited nearly 60 staff working for the SBV and other local banks by providing them with essential skills to improve communication capabilities at a strategic level.

I recently delivered a lecture on the role of international finance in Vietnam to 200 young Vietnamese professionals working in the financial and banking sector. It was the first of six UK-branded training seminars initiated by UK Trade & Investment, aiming to promote UK financial expertise. Standard Chartered is proud to be part of such an initiative.

Through these activities and others, Standard Chartered expresses our commitment to supporting the growth of the banking and finance segment in Vietnam. They also demonstrate clearly the realisation of the Bank’s brand promise, to be “Here for Good”, meaning Here for people, Here for progress, Here for the long run. Standard Chartered is proud that we have been able to build a sustainable business in Vietnam. In the future we look forward to expanding our presence further in Vietnam and to contributing more to long-term development here.

How do you view the future of UK-Vietnam co-operation in terms of economic, trade and investment links over the next decade?

We are optimistic about the future of the UK-Vietnam bilateral relationship, especially in economic, trade and investment flows. To take one example, Vietnam is in the process of developing the infrastructure its economy will need to realise its growth potential. There are many UK companies that offer world-class capabilities in the design, engineering and operation of large infrastructure projects.

These will be highly relevant to the future of Vietnam’s infrastructure. I can see a rising interest from UK companies, advisors and investors in this market. At the same time, UK businesses that already operate in Vietnam, like Standard Chartered, will have more opportunities to expand further and contribute to the local community.

How will Standard Chartered support British companies doing business in Vietnam?

Although our business is primarily across Asia, Africa and the Middle East, Standard Chartered is a UK bank. At the same time, having had operations in Vietnam since the early 1900s, Standard Chartered Bank is confident that we have the local experience to help the new pioneers to enter the market. We certainly have the answers to the questions and guidelines that new businesses coming into Vietnam may face.

With over 150 years operating in some of the world’s most dynamic markets and a network covering more than 70 countries, Standard Chartered has the right resources, experience and insight to support not only UK companies but also other international enterprises to do business in Vietnam.

Our broad geographic footprint, proven long-term relationships and decades of experience help business growth globally while making a real difference to local economies. With a network that covers Asia, Africa and the Middle East, we help advance trade flows and create new business opportunities all around the world.

How can Standard Chartered help Vietnamese firms to expand their business in the UK market?

As an international bank, Standard Chartered Bank can connect Vietnamese firms to its global network. With our headquarters in London, Standard Chartered is in an even better position to help our Vietnamese clients to enter the UK market.

In addition to the many Group functions based in the UK, London is a global financial centre and a key hub for Standard Chartered’s Wholesale Banking business. It also hosts significant Private Banking and International Banking operations. Through one integrated business, our clients are able to operate through Standard Chartered in multiple countries and have access to offshore capital.

In short, Standard Chartered, with a rich history in the UK and in Vietnam, is an ideal partner for businesses and individuals thinking of undertaking trade between the two countries.   

Read More

Vietnam real estate market 2011 report

Vietnam real estate market 2011 report summary: Housing prices (including apartments, adjacent houses and villas) in 2011 tended to go down by averagely 30%-40% from early 2011 in Hanoi and 5-10% in HCM City.

In Hanoi

Within one year from early 2009 to early 2010, apartment price had increased rapidly by 40%, then stood at high level in 2010. Till the end of 2011, apartment price decreased 10-30% from early 2011, but falling slightly over early 2010. Currently,  apartment  average  price  in  Ha  Dong  district  is ranging around 17 – 22 million  VND/m2, in Tu Liem district (My Dinh) ranging  25–32 million VND/m2, in Dong Da at 30-40 million VND/m2, Hai Ba Trung  (Minh Khai) at 24 – 33 million VND/m2,…

In HCM City

There  were  no  strong  discounts  and  sells-off  in  the  past time but  the market  is still witnessing downward  tendency, discounts  and  payment  reschedules. These forms aimed at supporting customers to stipulate the real demands.  In addition, businesses are accelerating the recovery of cash flows and sale of outstanding projects.  In December, there were three typical projects for this trend namely Petro Land Tower apartment project in district 7, An Tien (Gold House) apartment project and V-Citi Light apartment project.

Project land market

Land price from early 2009 to early 2010 in Hanoi surged sharply 70–80%, even some projects saw double increase. Till the end of 2011, project land price declined  by  30  –  40%  from  early  2011  but remained  unchanged  from  January  2010.  Presently, land price in Gia Lam district is averagely at 45-65 million VND/m2
; Ha Dong district at 45-50 million VND/m2, even up to 80 – 100 million VND/m2
, Hoai Duc at 24-35 million VND/m2, Me Linh at 12-18 million VND/m2,…

Office for lease

Office market in HCM City still saw difference between old and new buildings. New projects such as Bitexco and Vincom still posted high vacancy ratio while old buildings in the central area reached the fulfillment of over 90%. Regarding the office rental price, this is the third year; office rental charges have continued to fall and posted the strongest decline in the fourth quarter of 2011. According to CBRE, average rental price for Grade A is currently at $32, Grade B at $18 and Grade C at $14. New supply is constantly increasing. In Hanoi,  after  three  quarters  of  relative  stability, the  rental  price  tended  to  increase  slightly  and market performance was quite good.  In the fourth quarter of 2011, office market saw clear downtrend. New supply continued to increase at approximately 40% from Q4 previous year (figures from Savills).Average rental price decreased by over 2% from the previous quarter and 3-4% over the same period of previous year. The rental rate is also decreasing; the statistics of Savills showed in Q4 the rental rate reached 75%, marking the lowest level in the year. Market is still under pressure from abundant new supply from newly-completed  large  projects  such as Keangnam, Indochina Plaza,…

Retail market

Retail market by the end of the year saw many high-class  projects  in  operations  such  as  Vincom Centre  Long  Bien,  Savico  Mall  Long  Bien  and Parkson Landmark Keangnam,… It is easy to see that the supply is constantly increasing and it is estimated to welcome 1.5 million m2 of new floor area in the next three years, of which in 2014 Thanh Xuan district is forecasted to provide the biggest area with about 50% of the total supply. This will create competitive pressure in rental price in the following years.

Read More

Vietnam market strategy 2012

Vietnam market strategy 2012 summary:

A year of flying dragon or dragonflies?

One of the frequent asked questions is whether any past year had similarities with each others, as analysts usually use historical data to establish future expectations. We admit that 2011 was a similar year to 2008 year for certain reasons. So, if 2008 had some similarities with 2011, would 2012 be a replicate of 2009? We do not think it would be that simple. What we face ahead in 2012 is more challenging. Set aside global risks, we see some key specific challenges for Vietnam economy in 2012 as below:

1.    Public investment will be tighter in 2012
2.    Given  pressures  on  consumer  price  still  out  there  though  less  serious  than  2011  as  large  part  of  the increase was made, we expect Vietnam’s 2012 CPI growth pressure  to be  lower  than 2011, at around 12% higher YoY, on average.  This is much different from 2009, when CPI only rose modestly by 6.52% by year-end.
3.    In  2012, with  the  fact  that many  small  banks  are  still facing high NPLs and  liquidity  risks, high credit growth is not feasible. Liquidity supports might be much more refined and focused on some particular groups.
4.    Restructuring will aim at 2 sectors, namely banking sector & SOEs sector. This is the main difference from 2009. While  year of Dragon  is normally anticipated as a good  year  in Asian culture, depicted  by  the  image of a flying dragon, it remains unclear about whether the picture of the “dragon who flies” or just some dragonflies, to best illustrate the year of 2012. Actually, we remain a “between scenario” with conservative view regarding the 2012 economic outlook, due to the long time required for restructuring, as there is no quick fix for any of the Vietnam issues and possible recession at global scale could weigh in. Big catalyst to observe is interest rates might be eventually reduced to support economic growth in Vietnam, by the time that inflation pressure should be eased in order to assure macro stability and sustainability.

2012 Equity outlook: 2009 will come back?

In short, we think that the type of aggressive policy loosening or generous stimulus packages witnessed in 2009 is unlikely to happen again. On the contrary, as discussed in the macro part, in order to pay back for the  consistently high  investment and money  supply  growth  recently, and  to  reduce  the  risk of  shaping an even  bigger  asset-price  bubble  in  the  future,  government  is  likely  to  adopt  a  prudent monetary  and investment  policy  and  any  policy  loosening  in  1H12  would  only  be  temporary  and  limited. 2012 equity outlook therefore will be much different from 2009, and expected to be a special year with following themes.

1.    Banking reform: we see the banking reform as the base for a sustainable interest rate reduction.  In our view, the reform will include 3 courses: (1) stress-test of banks to specify weak ones and strong ones; (2) M&A of banks and (3) Recapitalization of banks (this phase will go together with the M&A).
2.    Liquidity issue within the banking system.
3.    Interest rate reduction will be among the key positive catalysts that the market expects.
4.    Impact of the Restructure of SOE sector on market
5.    Divestment by a number of close-end funds

Market valuation: Is that a true distress?

Our forward 2012 P/E for the 61 companies under coverage with market cap accounting for over 70% of total market cap is 7.22x. If excluding MSN, VIC and BVH, 2012 P/E will be 6.10x. Current P/E for 2011 that excludes MSN, BVH and VIC is 6.77x. While  it  is  true  that  the  low valuation does not mean  that we have hit  the bottom, we check  the  following questions:

1.    Are the earnings are going to reduce further and short of expectation? The answer is NOT LIKELY, in our view, as according to interviews with companies this is the most difficult time and many understand that they are in a very difficult situation.  While the interest rate has chance to reduce, most companies know that they are in deep difficulties therefore would set a very conservative target for 2012 (which will be officially announced in the AGM).
2.    Besides earnings, are there any factors that can keep valuation at the distressed level? Our answer is Yes with all the above-mentioned factors. As  a  result,  the  low  valuation  of  the  market  should  be  an  opportunity  for  long-term  investors  once  the banking  issues can be solved  fundamentally. If the VND interest rates can be reduced sustainably, people will look for other investment forms, of which equity is an option as valuation dropped strongly and can be in distressed in 1Q12.   However, we should pay attention to How the interest rate can be reduced as it can have long-term negative impact. While we keep a conservative view on the market for the above-mentioned reasons, the chance for short-term rallies cannot be wiped out.

Recommendation

Consumer  staple  and  pharmaceuticals  continue  to  be  our  favorite  sectors  at  this  time  owing  to  high sustainability  and  resistance.    Beside  this  defensive  choice,  we  are  also  in  favour of  a  number  of  other companies, who  can  survive well  in  2012  and  bounce  back  strongly  in  a market  rally.   Our current Top recommendation include: CTG, DHG, DIG, DRC, EIB, FPT, HAG, HVG, NTP, SBT, VCB, VNM and VSH.

Read More

Vietnam stock market outlook 2012

Vietnam stock market outlook 2012 commentary: FY2011 was a year to forget for the Vietnam stock market. With slowing M2 growth and restructuring in both the bank and brokerage sectors technical selling pressure accelerated throughout the year.  The shrinkage in liquidity was unprecedented as it came from several factors at once; a simultaneous series of macro & micro adjustment of imbalances that hit the market like a perfect storm. Talk of a year-end rally quickly ended as trading rally after trading rally over the last few months of the year ran into a wall of technical selling. Valuations fell steadily  and  by  the  last  trading  of  the  year  the HoSE was trading at a forward FY2011 PE of 6.8xs and PB of 1.5xs. The Hanoi market was even cheaper trading at a forward FY2011 PE of 3.9xs and PB of just 0.8xs.

Since then  the market’s  recent modest  little  rally  has brought  us  back  again  towards  year-end  levels.  And while the recent 7 day run-up has run into some selling pressure sentiment has improved by several degrees. However we would still characterize this as a trading rally caused by an easing in selling pressure related to some position unraveling and portfolio restructuring at the year-end. Even so there is a growing belief (or hope depending on how you see it) that post Tet some measures will be taken to restore some liquidity to the interbank market. In addition we also await some proposals to boost stock market sentiment although on past form we are less hopeful for anything substantive here.

Of these three factors, improving the liquidity position of small & medium sized banks would have the biggest impact on market sentiment. At the moment the interbank market is still requiring collateral for lending which effectively locks many mid-sized banks completely out of  the market and prevents most banks  from meeting all their requirements. Hence pressure on the SBV is growing to help restore the interbank market to some degree of normalcy. If larger banks can be persuaded to ease their strict approach to counterparty risk this would release some of the stagnant pools of liquidity into the whole system. This is not a case of accelerating M2 but simply allowing for the efficient circulation of the liquidity already present in the system. Boosting the money multiplier if you like.

What form might these measures take? We think the SBV would need to work to reduce perceived counterparty risk by either abolishing the 14% deposit cap or actively recapitalizing restructured banks.  The former would enable medium sized banks to raise deposit rates to attract new customer deposits. This would partially offset counterparty risk and make them more viable partners again in the interbank market. While injecting long term capital into restructured banks would also directly reduce the counterparty risk. However it seems neither will happen in Q1 at least.

The central bank governor did recently appear to scotch hopes for an early abolition of the 14% deposit cap indicating that it would remain in place for the 1-H FY2012 at least. The media has noted recently that more banks seem to willing to risk breaching the cap and offering deposit rates up to 17% in some cases. This appears to be related to pre-Tet funding demand with smaller banks in particular funding themselves short of cash. Some offcials of the central bank did speculate about a possible relaxation of the cap back in December but clearly the governor feels it still serves a useful purpose.

The purpose of keeping the cap in place for now is likely related to the ongoing process of persuading some smaller banks to consolidate. In the same interview he said another 5-8 banks might enter this process in Q1 following the example of the three banks that merged to form Saigon Commercial Bank in Q4 last year. It seems that  we  have  now  reached  a  fairly  sensitive  point  in this process and perhaps  the governor does not want to send mixed signals to these banks by easing up too quickly.

Our guess is that he will want to complete the first phase of banking sector consolidation (at least in terms of formalizing the mergers and announcing the result) before considering any easing in the monetary regime. While interest rates are expected to fall from February but this will not initially lead to any meaningful increase in liquidity in our opinion. Currently larger banks have excess liquidity but are unable or unwilling to disburse this due to high perceived counterparty risk. Lower interest rates might lead to a slight increase in demand for loans but won’t reduce perceived counterparty risk.

This matters because improved liquidity is a prerequisite for a turn in the stock market. Yes it’s true that both larger brokers; many institutional clients and some individuals have cash on hand to kick start a rally. However they are reluctant to commit this cash unless they feel some follow up buying behind them. And that depends on opening up the banking system again to normal operations. Remember we are not expecting any pick-up in M2 growth at least in the 1-H.

So short of abolishing the cap the SBV might extend the life of existing refinancing loans or make further loans. And start thinking at least of how to recapitalize restructured banks. If this is well signaled in advance the market could well rally sometime after Tet. Especially if the government chooses to announce some market supporting measures such as a capital gains tax holiday or some easing in the margin trading rules. However on the other hand if the SBV keeps its cards close to its chest then it will be hard for the stock market to have any kind of sustainable movement before then. Although we are likely to see some short term trading rallies before then now that valuations look so cheap; interest are likely to fall  and the technical selling appears to have ebbed for now at least.

Valuations are currently very cheap but confidence is very fragile. Everyone is waiting for someone else to invest their money first. And so volumes remain very low especially of you strip out the recent spate of large put through. Confidence is what is missing. We know that brokers (the 13 listed brokers we follow had some VND9.16  trillion  in  cash  at  the  end  of Q3)  and many funds have gathered cash  in  recent months. They are awaiting a spark. Lower interest rates will certainly be helpful if only in terms of lowering the return on cash in the bank however we feel some gesture on improving money circulation inside the banking system holds the key. Even so while the exact timing of a move to the upside is hard to pinpoint we sense that the market is trying to confirm its recent bottom. And with some confidence boosting measures in the offing an extension of the current trading rally after Tet is very likely. Hence we see any short term downside as opening a nice buying window for all players regardless of their time horizon.

Vietnam stock market outlook 2012 summary:

Equities are cheap; nobody wants to touch them so clearly it’s time to start buying

• Year-end selling pressure has abated but sentiment remains very fragile.

• A chronic lack of liquidity due to a combination of macro and micro measures still plagues equities.

• Even so markets look very oversold.

• And CPI is decelerating while the currency has been very stable for several months.

• But ongoing financial sector restructuring and growing NPLs are still big concerns.

• Falling interest rates will help a bit but really we need more liquidity.

• And while 1-H FY2012 M2 growth will remain low we expect some micro liquidity constraints to be eased soon.

• These include the 14% deposit cap and the fact that the interbank loan market is hardly functioning.

• The SBV will address some of these issues before the end of Q2 which would be positive for stocks.

• Then from the 2-H we expect M2 growth will begin to accelerate.

• As for FY2012 corporate earnings HSC forecasts a slower top line growth but big improvements in the bottom line.

• And we note the equity markets look very cheap at 6.9xs and 3.7xs FY2011 PE.

• We expect to see some trading rallies in the 1-H but the next major up-cycle market won’t begin until the 2-H.

• We forecast the VN index (soon to be superseded) will end the year at 550 or so.

• For medium term outperformance we recommend investors buy “best of breed” stocks.

• We suggest a move into interest rate sensitive stocks only after M2 growth accelerates.

Read More

Vietnam economic outlook 1-2012

Vietnam economic outlook 1-2012 summary: In 2011, Vietnam’s economic growth decreased as many prudent policies have been implemented in an attempt to ease inflation pressure and stabilize macro economy. Consequently, MoM inflation decelerated by the end of the year. Besides, depreciating pressure on foreign exchange rates in 2011 was not as high as it was in 2010 thanks to the SBV’s regulations such as applying cap interest rates, restraining unofficial transactions in foreign currencies, forcing State-owned companies to sell USD to banks, selling reserved USD, etc. We think that whether economic conditions in 2012 become more stable or not, depends strongly on the Government’s efforts to reduce budget deficit and to restructure financial system in the coming time.

Economy
Real GDP grew at 6.1% in Q4, up from 6.07% in Q3, making 2011 GDP growth rate be 5.89% which was lower than the target of 6%;
2011 inflation was officially reported at 18.13% yoy. Inflation pressure remains high in the coming months;
Exports and imports reached $96.2 and $105.7 billion respectively. Total trade deficit stood at $9.52 billion, the lowest figure within the last 5 years;
Contracted and disbursed FDI reached $14.7 billion and $11 billion respectively. 2012 FDI may not flow strongly into Vietnam because of instability in both global and domestic economy;
The foreign exchange market was volatile at the end of the year;
Around VND62.2 trillion of Vietnam government bonds (VGBs) and nearly VND44.1 trillion of government guaranteed bonds were successfully issued in 2011;
Totally, VND37.5 trillion was net-withdrawn via OMO in 2011;
In 2011, M2 and credit growth were reported to be around 11.5%.

Read More

Vietnam Economic Outlook 2012

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.

Vietnam economic outlook 2012 summary: Vietnam is going through a deleveraging cycle that exposes serious issues in the banking sector amid a bursting real estate bubble. Economic growth will slightly slowdown to 5.5%, supported by robust domestic comsumption. Agriculture, maufacturing and services have been and will remain strong in 2012. The BOP should also slightly improve thanks to ongoing strength in FDI and remittances, puting the BOP balance in positive territory for a second year in a row, which somewhat will alleviate pressure on the currency. As inflation abates, we’ll see interest rates gradually come down and help companies reduce interest expenses. All in all, earnings will grow 18% in 2011 and VNIndex will rise a modest 20% by year end.
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

Read More