Vietnam's latest market woes

The stockmarket is down and ratings agency Fitch has cut the country's sovereign rating from stable to negative û are we through with the bad news yet?
Vietnam has been ducking punches of bad news lately. So it's no surprise that ratings agency Fitch cut the country's BB-minus sovereign rating from stable to negative, yesterday. The cut in the rating û which is three levels below investment grade û followed one by Standard & Poor's earlier this month.

The reason for the poor scorecard: skyrocketing inflation, an increasing trade deficit, and a nose-diving stockmarket û the Ho Chi Minh City Stock Exchange's (HOSE) index has fallen 55% this year. The stock exchange has been closed since May 27 because of what the exchange says is a technical problem but it will reopen today (May 30).

Vietnam's annual inflation accelerated to 25.2% in May from 21.4% in April. And that's up from March, when inflation hit 19.3%, which at the time was the highest level in more than 12 years.

The stockmarket, which has been on a meteoric rise for the past few years, had its worst first quarter in six years. The HOSE fell more than 44% during the first quarter. In February alone it slipped 21%, marking the largest drop since the August 2001 when it fell 34% in one month.

Gone are the heady days when retail investors would rock up on their motorcycles to make a quick trade before scooting over to the fastfood chain Pho 24 for a bowl of noodles.

But most analysts (if not retail investors on the street in Ho Chi Minh City) would say that the market was in need of a correction. For one, the IPO party wasnÆt all that much fun. For example, when Vietcombank launched its IPO last December, it was narrowly oversubscribed. The starting price in the auction was Vnd100,000 ($6.33) per share but the average final price was only Vnd107,000. Only 90% of the deposited shares were actually paid for in the end. Similarly, when the largest beer producer in the country Saigon Beer-Alcohol-Beverage Corp (Sabeco) went to the market in February, the average winning bid was a mere Vnd70,003, a squeak above the Vnd70,000 minimum level. The registration rate was only 68%. The paid-up rate was less than 50%.

While companies began to struggle with their IPOs, the market was still deemed hot by outsiders. The IMF told regulators that they needed to slow things down, and regulators took the guidance to heart. They instructed banks to stop lending to speculators. Now, securities lending cannot exceed 3% of a bankÆs total lending, nor can it exceed 20% of the bankÆs chartered capital.

Meanwhile, inflation is exacerbating the stockmarket problem. The days of low-cost fuel, rent and noodles (which no longer cost Vnd24,000 a bowl at Pho 24) are gone.

Fitch points out that the policy response to inflation has been both too slow, as official pronouncements have not been followed up by immediate action, and too small, as real policy interest rates remain deeply negative even following their recent increase. The agency noted that accelerating inflation could pose risks to the stability of the banking system, which is highly dollarised by regional standards. Aggressive policy interest rate increases, however, could also threaten the banks, especially if there is a sharp deterioration in economic growth, with consequent negative effects on the quality of banks' assets. Fitch indicated that the future path of inflation and the agency's assessment of respondent policy initiatives to lower it, while avoiding a sharp economic correction, will be decisive factors in any further rating actions.

High hopes
But this doesnÆt need to spell long-term gloom and doom for Vietnam. ôThe developmental challenges we have seen lately are not unexpected considering recent high rates of growth,ö says Tom Nguyen, head of global markets at Deutsche Bank in Vietnam. ôThe governmentÆs recent reduction of GDP growth to 7% is a step in the right direction as they attempt to strike a balance between growth and inflation. It will take some time but over the long term the compelling fundamentals that attracted investors û at even much higher valuations û will play out."

Indeed, valuations need to come into line. Analysts and stockbrokers have long been saying that the easy money provided by the stockmarkets for state-owned companies wanting to list, has been unrealistic. Rather than forcing companies to improve corporate governance, train upper management and become more efficient, companies could slide by. Now belt-tightening has to happen.

But, as always, traders in Vietnam are focusing on the sunny side of things. As one analyst said in a note to investors yesterday: it's ônot quite as bad as usual here in Vietnam although itÆs tough to tell given that the HCMC market is still closed with little clear idea of when it will re-open. We are looking for clarity on HOSE and positive steps from the government to alleviate the current macro concerns. LetÆs hope they come!"
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