EMERGING MARKETS REPORT
Vietnam stocks tank again; Moody's cuts outlook
Ratings agency cites need to get inflation, balance-of-payments under control
By Barbara Kollmeyer, MarketWatch
Last update: 3:36 p.m. EDT June 4, 2008Comments: 4LOS ANGELES (MarketWatch)
-- Stocks in Vietnam hit fresh two-year lows on Wednesday, as investors fretted about runaway inflation and Moody's Investors Services cut its outlook on the country's key ratings from positive to negative.
The ratings agency, which now is the third of the three major ratings agencies to cut their outlook on Vietnam, cited "policy shortcomings in addressing inflationary and balance-of-payments pressures." The outlook cuts affect the Ba3 long-term government foreign and local-currency ratings and the B1 foreign-currency bank deposit ceiling.
"The economic imbalances now emerging are greater than anticipated, thereby derailing the improving trend previously evident in the country's credit fundamentals," said Tom Byrne, Moody's senior vice president. "Rising inflation is proving very difficult to control, and pressures have rapidly built up on the balance of payments."
'For the authorities, the dilemma now is how to dampen growth without throwing the economy into recession or damaging the environment for FDI (foreign direct investment).'
— Tom Byrne, Moody's
Inflation hit 25% in May, which Moody's blamed on overheated growth driven by "excessive credit expansion" and large "off-budget" spending on development.
Shares in Hanoi fell below 400 points on Wednesday, closing down nearly 1.4% at 395.66, the lowest level since August 2006. Shares were also pressured after the stock exchange said many listed firms hadn't yet established provisional funds to cover losses, according to a report in the London Guardian newspaper.
Vietnam, considered a frontier emerging market, is now the worst performer in its asset class, with stocks nearly halved in value so far this year. See also Where has the mania for Vietnamese stocks gone?
"For the authorities, the dilemma now is how to dampen growth without throwing the economy into recession or damaging the environment for FDI (foreign direct investment)," said Byrne.
Cameron Brandt, global markets analyst at EPFR Global, said the move on ratings is a timely one by Moody's "For the most part it reads to me as a warning to Vietnam rather than this has already happened, and the one real red flag I saw in that was their assertion that actual direct foreign investment flows are beginning to seriously lag."
Moody's noted that direct investment tallied up to more than 9% of gross domestic product in 2007, financing the country's current account deficit for that year. This year so far, inflows have doubled to more than $15 billion, but have lagged a spike in trade and current account deficits for the first quarter.
Moody's said the measured policy response officials in Vietnam have taken this year was further bolstered in May, notably towards reining in credit growth and stabilizing the deposit base of the banking system. It said authorities have expressed intent to tighten further if needed.
"The months ahead will test their resolve in dealing more effectively with inflation and the gaping current account deficit, but for now, macroeconomic and balance-of-payments trends are unsustainable," said Byrne.
He added that Vietnam's high level of foreign exchange reserves is helping buffer fallout from "the abrupt shift now seen in foreign portfolio investor sentiment," but trade and current account deficits could "overwhelm the availability of more stable, long-term financing for the balance of payments, and may put substantial pressure on reserves and the exchange rate."
The ratings agency said Vietnam's credit fundamentals are still favorable with its peers, and long-term prospects will survive if they can put a stronger policy framework into place. Persistently high inflation and large current account deficits could overwhelm the country's capacity to absorb such a shock and further pressure the government's rating, warned Byrne.
"For the rating outlook to improve, we would need to see an end to high inflation, demonstrated stability in the banking system, and a decline in the current account deficit towards a level which can be financed by stable long-term capital inflows," said Byrne.
In or out of the money?
While Vietnam may scream buyer beware for the average retail investor, Brandt said dedicated funds both in the U.S. and Europe are viewing the downward spiral of the Vietnamese equity market as a buying opportunity.
"Vietnam country funds that we track have so far this year attracted more fresh money than has been pulled out of them," he said.
However, the assets of these funds are suffering, given the rough year for stocks, he said, Funds started the year out with $1.4 billion under management, which is now around $814 million.
"Just looking at the numbers that are being driven by investors outside Vietnam, they seem to indicate certainly quite a few people with money who believe the bottom has been hit. They're buying aggressively on dips that you would expect to be scaring people out of this. There are still people who believe Vietnam has value and there hasn't been a wholesale retreat from Vietnam given the market performance," he said.
"If you invest carefully instead of taking a broad brush approach, there are likely to be companies that do well regardless of the domestic background, ones that are geared to a U.S. or Chinese export cycle, serving those particular markets local companies," he said.
Transparency remains an issue for Vietnam, he said, notably official data that is shrouded in secrecy and the fact the government is now going after private business journalists. "Lots of numbers you'd normally base a rational decision on are shaky or just not there," he said.
Indeed, Moody's Byrne noted that it's extremely difficult gauge Vietnam's external payments situation given the secrecy surrounding the international liquidity position of the State Bank of Vietnam, which undermines confidence in analyzing the country's current credit conditions.
Barbara Kollmeyer is an editor for MarketWatch in Los Angeles.
