(21-03-2007)
Economist David Fernandez, managing director and head of JPMorgan Chase Bank’s Emerging Asia Research Department, shared his forecast on Viet Nam’s economy for this year with Viet Nam News.
What is the outlook for the nation’s economy according to JP Morgan’s recent report on Viet Nam?
JPMorgan recently published a report on Viet Nam’s economy which explores not only the macroeconomics of the country but also aspects like the local currency and foreign currency bonds, foreign exchange and the equity market. It is because JPMorgan’s clients are interested in all aspects of the economy and in all of its asset classes.
The first point in the report I want to mention is Viet Nam’s GDP growth this year.
The country’s GDP growth is still high and steady. For the last 10 years, Viet Nam has reached a GDP growth rate of 7.1 per cent, putting it between China and India in that field. The important thing is that the growth is very stable. Unlike other Southeast Asian countries which go up and down [according to their] electronics exports. Viet Nam’s economy has not been subjected to such swings. The share of electronic products in Viet Nam’s exports is less than 5 per cent. It is very low compared to other countries in Asia. That is a very important factor for investors.
In my analysis, I am looking at long-term factors such as demographics, capital accumulation and productivity, which indicate the medium term for Viet Nam will be higher at 9 per cent.
During the next few years, electronic products will become a greater export for Viet Nam with growth set to be at 7.8 per cent and higher during the coming years. And electronics will be a key factor in the economy’s growth.
Viet Nam continues to attract foreign direct investment (FDI). At present, foreign investors have wanted to diversify their investment market so Viet Nam will be a new destination.
Like other developing countries, Viet Nam is running a trade deficit which is resulting from importing materials for infrastructure building and production.
But a trade deficit is one of the points of the overall balance payment. Other points of the balance payment show a surplus. Even though Viet Nam is running a trade deficit, remittances from overseas Vietnamese, revenue from tourism and services continues to rise.
As a result, the current account balance continues to be in surplus. JPMorgan estimates the surplus is over US$1billion this year.
FDI has been high and steady and portfolio inflow looks this year to be extremely strong.
So our expectation is that the foreign reserves of the State Bank of Viet Nam (SBV) could rise up by between US$4 to 5 billion this year.
I forecast the Vietnamese dong to stay well below VND16,000 a dollar. There is about one per cent appreciation this year. Stability of the local currency is positive for investors.
The local bond yield could continue to drop sharply. Last year, the bond yield was at 8.5 per cent. Now it has dropped to 7.2 per cent and continues to decrease.
Inflation continues to come down this year. According to JPMorgan’s forecast, inflation will be at 6 per cent late this year. Lower inflation supports the idea of a lower bond yield.
More important is an imbalance between supply and demand in the bond market. Government issuance is steady this year but issuance from corporations is small. In the meantime, the demand for bonds from investors, fund managers and importantly new industries from outside of Viet Nam, continues to rise. JPMorgan’s clients from the UK and US continue to be attracted by Vietnamese Government bonds even though the bond yield has already fallen so much.
My view is Vietnamese bonds are expensive and will get more expensive because of the supply – demand imbalance.
You forecast the Vietnamese dong to continue to appreciate this year. But Viet Nam’s economy depends a great deal on exports. How will the currency appreciation affect the economy?
Export growth is rising so fast in Viet Nam. Total trade, including exports and imports over GDP has grown from 50 per cent in 1992 to over 120 per cent now, which makes the country a competitive option.
How much can currency appreciation damage the economy’s growth? I think the dong will appreciate but will still be stable.
For competitiveness of currency, we should look at the real exchange rate not nominated exchange rates. My analysis is that the dong is still competitive now. And the 1 per cent appreciation will not damage the competitiveness of Viet Nam’s exports.
The other thing to remember is that the 1 per cent appreciation over the US dollar needs to be looked at in the context of what is happening to other currencies in Asia at the same time.
We expected other Asian currencies to appreciate even more than 1 per cent. All Asian currencies except for the Japanese yen, Korean won and Indian rupee are expected to appreciate this year.
For example, in 2007, the Chinese yuan will appreciate over the US dollar up to 10 per cent while the Malaysian ringgit appreciates by about as much.
So 1 per cent appreciation for the dong is much smaller than other Asian currencies.
Currently, foreign indirect investment (FII) inflow is very high. If foreign investors draw back their money, do you think there is a great risk of a financial crisis like the one in Asia during the 1980s occurring in Viet Nam?
Before, Viet Nam did not have a portfolio indirect investment flow coming in so there was no risk. Now money continues to move in and it creates potential risks.
However, my view is that there is a little chance of capital outflow because at present foreign investors continue to struggle just to get in the market. They believe in the long-term structural positives of Viet Nam.
So there is a risk but creating an appropriate environment will make them want to stay.
I don’t think it is helpful to force people to keep their money in the country. The job of country and companies is to make them want to stay.
I think foreign investors want a stable political environment and transparency in terms of how assets are appraised.
In terms of policy-making, I am very confident that foreign investors can count on Viet Nam’s stable environment and predictable policies on exchange rate, investment and equitisation.
However, I am concerned about transparency. Although foreigners can see predictable policies for the next several years, people now ask for more transparency in companies. My observation is that transparency in Viet Nam is not very high.
If investors find that transparency is not improved fast enough, outflow of capital may occur.
Viet Nam was successful in issuing its first international bond. Do you think it should make the second issuance?
Coming from Viet Nam’s perspective, the country wants to issue international bonds with an aim to diversify its fundings. Besides, Viet Nam wants to evaluate the demand from investors as well as its prestige in the international market.
Coming from the perspective of foreign investors, they would love Viet Nam to issue more bonds in US dollars. And I forecast the demand would be very high.
You forecast that Viet Nam has a good perspective in the medium term. What happens if in the long term, the country’s economy slows down and has problems with paying international bonds?
Viet Nam still has an extremely small amount of debt on a commercial basis. The rate is much lower than that of other countries in the region. Viet Nam has just issued one bond while, by comparison, Pakistan has issued two and the Philippines has for decades been issuing long term dollar bonds.
By contrast, Viet Nam has issued a very tiny volume of bonds.
The best way to judge is to look at the market. Investors can pick up any bond in the world. They choose Viet Nam because they think it is safe. Market pricing indicates that Viet Nam should not have any difficulty in paying the debt in 2016.
The risk is possible but any country faces it.
Viet Nam’s equity marker is booming. Do you forecast any risks to it?
In the equity market, fundamentals and valuations are not important currently, rather pure supply and demand plays the most important role.
There are lots of imbalances in supply and demand in both official and OTC (over-the-counter) markets now.
I know the demand for buying Viet Nam’s equities is large and growing. The easy thing for foreign fund managers to do is to go to their clients in Europe and the US and tell them they are going to invest in Viet Nam equity and to raise the money from them. I know many investors in Singapore, South Korea, Hong Kong and outside Asia just dedicated to investing in Viet Nam. They have raised over $1 billion dollars that has yet to be put into Viet Nam’s equity market.
So the supply-demand dynamic tells me that even with acceleration of equitisation this year, the demand for listed companies is high and stock prices will stay high.
I think the bigger concern and big risk is at the OTC market where many more company stocks are available, but they are much less liquid. This is the place where risks are highest. It is because individual investors cannot know the stock price and find a place for security. It is time for people to look to the regulators to create a more transparent and predictable OTC market. There are many concerns in the OTC equity market and policy makers should take some action now.
Equity market valuation is so high and may continue go higher. This is producing the strange result that overall productivity in Viet Nam’s economy may be lower because more people will focus more on the stock market than on their jobs.
Many companies focus on increasing stock portfolios in the stock market. In other words, individuals and businesses are moving away from the core businesses because the stock market is moving up so quickly they feel they can earn more playing the market than doing their actual jobs.
And one of the solutions for the supply – demand imbalance is to increase supply. That’s why I think it is important to move the equitisation process forward and issue more equities in the formal market. — VNS
