Vietnam Economics & Strategy

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Economics: GDP growth is on a steady path. Buttrade deficit and inflation problems will persist. We

expect the central bank will tighten throughout 2010 to

deliver total rate hikes of as much as 4%.

Equity Strategy: The HCM Index continues tounderperform. Although the foreign sell-off has

stabilized and valuation is cheap, it is still too early to

call it a turnaround yet due to falling liquidity.

FX Strategy: Illiquidity in the FX market and lack

of confidence in VND will continue to exert depreciationpressure on VND. We expect VND will reach 18,400 at

year-end.

Trade deficit remains a gaping concern

-4-2

02468

10

2005 2006 2007 2008 2009 2010

USD bn

Trade ba lance Export Import

Source: HSBC, CEIC

Inflation pressures likely to intensify

-10

0

10

20

30

40

2003 2004 2005 2006 2007 2008 2009 2010

%

Ye ar- on- Year 3 m- on- 3m annua lize d

Source: HSBC, CEIC

VietnamEconomics & Strategy

Vietnam Monitor(Issue 27)Inflation and trade deficit concernsovercast Vietnam

8 February 2010Jacqueline Tse* Equity StrategistThe Hongkong and Shanghai Banking Corporation Limited+852 2996 6602 [email protected]

Daniel Hui* FX Strategist The Hongkong and Shanghai Banking Corporation Limited+852 2822 4340 [email protected]

Wellian Wiranto*

Economist The Hongkong and Shanghai Banking Corporation Limited,Singapore Branch+65 6230 2879 [email protected]

View HSBC Global Research at: http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to NYSE and/or NASDregulations

Issuer of report: The Hongkong and Shanghai BankingCorporation Limited

Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it
http://www.research.hsbc.com/http://www.research.hsbc.com/http://www.research.hsbc.com/


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VietnamEconomics & Strategy8 February 2010

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Growth spurt continuesThe Vietnamese economy appears to have

recovered firmly throughout the course of 2009. It

finished the year with a strong 7.7% year-on-yeargrowth in Q4. This growth rate is a huge uplift

from the 3.1% increase registered at the beginning

of the year and it is significantly stronger than the

4.4% and 5.2% seen in Q2 and Q3.

The construction sector spurred on by the

governments USD8bn stimulus package last year

that is heavily tilted towards infrastructure spending

has contributed greatly to the turn in GDP growth.

With an 8-9% share of the economy, construction

grew by 14.0% y-o-y and contributed 1.6 percentage

points to the overall GDP growth.

Most of the other sectors within the economy are

starting to show some signs of recovery as well.

The services sector, which accounts for over 40%

of the economy, is starting to inch closer to its

long-term rate of contribution to overall growth.

In Q4, the sector contributed 2.7ppt to growth

compared to its long-run average of around 3ppt.

The manufacturing sector, which constitutes about

a quarter of the economy, has started to pick itself

up from the doldrums it found itself in at the

beginning of the year. The sector posted 5.7%year-on-year growth in Q4, as compared to 0.5%

in Q1 of 2009. Although there is still some way to

go before Vietnams manufacturing returns to its

long-run average growth rate of 9.5%, its recent

trend is pointing towards the right direction.

The recovery in manufacturing is tied to the

recent uptick in the countrys exports, just as its

earlier slump corresponded to the decline in

exports. In keeping with our pan-Asian view of a

virtuous cycle of growth in the region whereby

exports pick up in response to a policy-led

Economics GDP growth is gathering pace and should remain strong in 2010 However, the strong growth has translated into trade deficit andinflation problems More aggressive tightening actions are expected to rectify thesituation, but policymakers are likely to only act in March atthe earliest

1. Construction remains strong and manufacturing is turning

-4

048

12

1620

2001 2002 2003 2004 2005 2006 2007 2008 2009

% YoY

Ma nufacturin g C onstruc tion

Source: CEIC


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demand recovery, Vietnams exports are bouncingback substantially.

2. Vietnam's exports are recovering firmly

-40-20

0

2040

6080

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

% YoY

Total Ex-Oil

Source: CEIC

Apart from exports, we expect the economy to gain

its strength from domestic consumption and animprovement in investments. Together, these factors

should allow the GDP to grow by 6.8% in 2010.

Worry #1: Trade deficitWhile the recovery in exports has only started to

gather pace near the end of 2009, imports started

galloping rather earlier. This gap has resulted in a

widening trade deficit of USD1-2bn per month

since April and the trend has continued until the

last reading of USD1.3bn in January of this year.

3. Trade deficits remain a gaping concern

-4-202468

10

2005 2006 2007 2008 2009 2010

USD bn

Trade balance Ex port Import

Source: CEIC

To some extent, the deepening of the trade deficitrecently has to do with some one-off factors

caused indirectly by the governments growth-boosting policies of 2009.

Take automobile imports, for instance. Courtesy

of the effects of a temporary VAT reduction as

well as the 4ppt interest subsidy scheme on loans

that was given by the government last year,

automobile imports have skyrocketed, helping topush up the countrys import bills in 2009.

4. 2009: The best year ever - for car imports

0

3

6

9

12

15

Jan-07 J ul-07 Jan -08 J ul -08 J an-09 J ul -09 J an -10

Unit th

0

100

200

300

400

500USD m n

Volume Value - RHS

Source: CEIC

In fact, monthly car imports registered the highestlevel ever in both value and volume terms by the end

of last year, as consumers rushed to procure their

choice vehicles before the scheduled withdrawal of

these friendly measures at the end of the year.

It is no coincidence that a major vehicle supplier

we spoke to this week told us that 2009 was their

best year ever in terms of sales. However, as these

temporary measures are no longer applicable atthe start of this year, automobile imports have

come down dramatically.

These temporary factors aside, there remains an

inherent imbalance in the economy that will

continue to result in strong imports which, more

often than not, outpace exports.

For one, a developing country like Vietnam requires

a higher level of infrastructure investments, whichare necessary to unlock the potential of the economy

in the long term. In the immediate period, however,

such investments translate into import bills for items


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ranging from construction steel to heavymachineries. The stimulus-driven increase in

infrastructure spending could not help but exacerbate

this further.

Moreover, as the country continues to position itself

to attract FDI investors, it is worth noting that the

capital expenditure involved in setting up productionfacilities for FDI investments would result in higher

imports for capital goods, etc. The hope is that,

eventually, these investments would turn around andbecome foreign exchange earners through exports.

The breakeven point remains to be seen, however.

All in all, due to the structural dynamics painted

above, we expect the trade deficit to remain an issuein the near term. However, we think that we might

have witnessed the worst parts of the trade deficit

problem, as the one-off factors resulting from

growth-boosting policies of 2009 get phased out.

For their part, the government is addressing thetrade deficit problem by trying to limit the imports

of unnecessary consumption items such as

luxury cars and electrical appliances. It remainsan open question as to how effective such

administrative measures will prove to be.

Worry #2: InflationVietnams CPI rose by 7.6% in January,

reaffirming our concerns that demand and prices

will continue firming in 2010. In sequential terms,Januarys number went up by 1.3% m-o-m sa, thefifth month in which prices have increased by

more than 1% in comparable terms.

Apart from the rise in prices that has been driven by

the overall strength in the economy, there are signs

that the infrastructure spending as part of the

governments stimulus measures has resulted in

price pressure in items such as construction materials

whose prices rose by nearly 14% y-o-y in January.

We believe that inflationary pressures will continueto build up, as suggested by the recent sequential

price rises. In 3m-on-3m seasonally adjusted terms,Januarys inflation rose by an annualized rate of

16.2%, pointing towards further increase in inflation

rates in the months ahead.

5. Inflationary pressures continue to build up

-10

0

10

20

30

40

2003 2004 2005 2006 2007 2008 2009 2010

%

Ye ar- on- Year 3 m- on- 3m annua lize d

Source: CEIC, HSBC

We project headline inflation to hit double-digit

by the end of Q1 and peak at 13% by the end of

Q2. By the second half, however, we expect to see

inflation coming down somewhat around 8% bythe end of 2010, as the adverse base effect of

commodity prices filters off.

The central bank is expected to react to the

incipient inflationary pressures by raising rates

incrementally throughout the year. They have

taken a step in the right direction by hiking the

policy rates by 1% point late last year, but we

expect another 400bps increase this year.

It is likely that the next rate hike will comein March.

In the last rates announcement from the central

bank in late January, they decided to hold the

policy rates steady at 8%. We believe this

decision has been prompted by the fact that the

central bank is cognizant that any tightening at

this time of the year will further exacerbate theseasonally tight liquidity around the Tet festive

period, which falls in mid-February.

Wellian Wiranto


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Worst performer in AsiaHCM Index down 8% in 3 monthsVietnam equity was the worst performer in Asiaover the last three months, with the HCM Index

down 8% vs the 3% rise in the MSCI Asia ex-

Japan (Chart 1).

1. Vietnam stock index vs MSCI Asia ex-Japan

0

50

100

150

200

250

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

VN IN DEX M SCI AEJ

Source: HSBC, Bloomberg

Turnover shrank 58%Turnover also fell off as anticipated. The 20-day

moving average of the HCM Index declined to

USD91m, a 58% drop from the November 2009

average. Hanoi saw a drop of a similar magnitudeto reach a 20-day moving average of USD44m as

of 3 February 2010 (Chart 2).

2. Daily trading value on HCM and Hanoi exchanges (20DMA)

0

50

100

150

200

250

J a n - 0

6

A p r -

0 6

J u

l - 0 6

O c

t - 0 6

J a n - 0

7

A p r -

0 7

J u

l - 0 7

O c

t - 0 7

J a n - 0

8

A p r -

0 8

J u

l - 0 8

O c

t - 0 8

J a n - 0

9

A p r -

0 9

J u

l - 0 9

O c

t - 0 9

J a n - 1

0

U S D m

HCM Hanoi

Source: HSBC, Bloomberg

Foreign ownership stabilizedDue to the recent stock market correction, the

number of companies with market capitalization

over USD200m has dropped to 24 compared to 32

recorded in November 2009 (see table 6 for details).

But foreign investors have been net buyers sinceDecember 2009, which was coincidentally after thewell-attended Euromoney conference in Hanoi. Of

the 600 participants at the conference, 400 were

from overseas, which is an indication of renewed

interest in Vietnam among foreign investors. Foreign

investor ownership has stabilized at 15% and the

foreign share of turnover is levelling off at around

8%. It will be hard to go much lower from the

current levels. The number of stocks that have

reached their foreign limit also increased to five(Vietnam Export-Import Commercial JSC, SaigonThuong Tin Commerical JS Bank, Sieu Thanh JSC,

Equity Strategy HCM Index down 8% in 3 months, worst performer in Asia Foreign sell-off eased but liquidity remains low At 12M fwd PE of 11x, value emerging but not time to get in yet


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Toro, and Tung Kuang Industrial JSC). We expect

the Vietnamese market will stabilize, but it is too

early to call a turnaround yet.

5. Key stock market data

HCM Hanoi Total

Market cap (USDm) 27,258 2,032 29,291No. of stocks 207 265 472Stocks with mkt cap >USD1bn 7 1 8Stocks with mkt cap >USD500m 16 2 18Stocks with mkt cap >USD200m 23 5 28Stocks that hit foreign limit 3 2 5Daily turnover (USDmn, 1mth ave) 91 44 135Foreign ownership 16% 8% 15%PE (2008) x 13.7 21.5 14.2ROE (%) 20.5 60.9 23.3DY (%) 1.2 2.4 1.2

Source: HSBC, Bloomberg (Up to Feb 2, 2010)

Valuation lowerAfter underperforming for the past two quarters,

the valuation of Vietnams stock market has nowreturned to a much more reasonable level. The

HCM Index now trades on 13.7x 2008 earnings.

Based on our forecast of 20% earnings growth for

2009 and 2010, 12-month forward PE would drop

to 11x, placing Vietnam at the low end of the

Asian peer group, just above Koreas 10.1x and

roughly in line with Thailands 11.2x.

but outlook still bearish

Although there seems to be an easing of foreignsell-off and value is starting to emerge inVietnam, low and still falling turnover continues

to be a concern for foreign investors. The

following negative factors also cloud the markets

outlook:

1 Monetary policy uncertainty

Inflation soared to 6.5% in December 2009,

driven by rising food and commodity prices.

The central bank, SBV, expects loan growthto reach 25% in 2010, after strong growth of 28% in 2009. Regulators are closely

monitoring the potential risk of overheating

in the economy. In the meantime, the VND

continues to trade materially above the

official rate of VND18,500/USD in the NDF

market (see the FX section). Therefore, we

expect SBV will continue to tighten policy in

the coming months.

2 Discontinuation of loan subsidies

The successful loan subsidy program expired at

the end of 2009. It was replaced with a scaled

down version of the loan program that offers a

2% interest rate for medium- and long-term

loans to companies that facilitate agricultural

production. Therefore, some subsidised loans

taken out in 2009 will gradually come due and

require refinancing at a higher market rate

(~8% or higher). This will further tightenliquidity and erode firms margins.

3. Foreign net buying of Vietnamese equities (USD mn) 4. Foreign share of turnover, HCM Exchange

-100

-50

0

50

100

J a n - 0

8

J u

l - 0 8

J a n - 0

9

J u

l - 0 9

J a n - 1

0

U S D

m

0%5%

10%15%20%25%30%35%40%45%50%

2007 2008 2009

Source: HSBC, Bloomberg (Up to Feb 2, 2010) Source: HSBC, Bloomberg (Up to Feb 2, 2010)


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3 Stagnant foreign investments

In 2009, foreign direct investment (FDI)

inflow dropped to USD22bn from the record

high of USD64bn in 2008. This can be only

partially explained by the global downturn.

More importantly, the structural problems in

Vietnam are a deterrent to significant FDIgrowth. For example, infrastructure is in poor

condition, roads are of low quality, urban

planning is lacking, the electricity system isunreliable, and regulations are ambiguous. The

government has plans to upgrade infrastructure

but implementation at the local level isextremely slow due to complicated

administrative procedures. Therefore, the

official FDI forecast for 2010 is only

USD19bn. The actual disbursement amount is

even more important and is estimated to be flat

from last year at USD10bn.

There are two key risks to our bearish view.Firstly, the government could speed up

privatization of state owned enterprises and

streamline IPO procedures so more companies

will be listed. But even if this happens, liquiditywill not pick up immediately as in most other

markets because the stocks are usually traded on

OTC markets rather than the stock exchange after

they are listed. Secondly, the Hanoi Stock

Exchange is pilot testing an online trading system.

44 out of 63 companies are in the first batch thatare qualified for online transactions. The online

system will facilitate the exchange of paperwork

between brokers and the exchange and increase

transparency. However, the small sample size of companies participating in the official launch on 8

February 8 is unlikely to boost liquidity

meaningfully in our view. Therefore, we maintain

our bearish stance on Vietnam equities until we

see foreign buying pick up to support turnover

above USD100m.

Jacqueline Tse


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Following a series of stabilization measures

announced at the end of last year (see Vietnam starts ,

25 November 2009 and VND stabilization , 4

December 2009), early this year the authorities took

additional steps, ordering the close of gold trading

floors, and asking the state owned firms to sell theirexcess stock of USD. Depreciation pressure has

since eased, though not disappeared. The NDF fix,

our preferred measure of the USD-VND market

clearing rate, has fallen to within 0.4% of the official

spot rate, which has been persistently constrained at

the ceiling of the trading band. This is the narrowest

NDF premium the market has seen since April 2009.

However, that there remains a premium in the NDF

fix belies an ongoing lack of confidence in the

VND, a shortage of USD in the market, and an

ongoing expectation of future official depreciation

(through the band mechanism either through an

adjustment of the mid-point or the width of the

band). This is due in-part to the ongoing rationing

of USD by the central bank, a practice we hadearlier expected to end alongside the package of

measures announced in early December (see VND

stabilization , 4 December 2009).

Without further proactive policy moves and

without fundamental FX regime reform, the VND

will likely face ongoing depreciation pressure.

Sentiment will continue to be weighed down byrising year-on-year inflation rates, which we

expect to reach double-digits by 2Q. Meanwhile

FX Strategy The VND has stabilized but USDs remain scarce; with poorliquidity, USD hoarding will continue Rising inflation in 1H this year will continue to weigh on sentiment,even as the trade balance stabilizes Expect depreciation pressure to persist for some time

1. USD-VND, trading band, and NDF fix 2. Trade deficit

16800172001760018000

18400188001920019600

Mar-09 Jun-09 Sep-09 Dec-09Official Mid USD/VNDCeiling NDF Fix

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

05 06 07 08 09 10

USD bn

Source: Bloomberg, Reuters, HSBC Source: HSBC, CEIC


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the trade deficit is expected to remain large,though more stable (see the Economics section for

more details on our inflation and trade balance

views). Given the interaction between the

widening trade deficit, rising inflation, and

currency depreciation in the last cycle in early

2008, sentiment is unlikely to improve until

inflation rates subside and the trade account

improves, something that is unlikely until at leastthe second half of this year.

Going forward, we expect the official USD-VND

rate to remain more stable around current levels,

with our year-end forecast remaining at 18,400.Depreciation pressure will likely continue to

manifest itself as market illiquidity, and in an

ongoing premium in the NDF fix above the

official spot rate.

Ultimately, we continue to believe that USDhoarding and market illiquidity will need to be

addressed with reform of the exchange rate regime.

Without it, exchange rate market illiquidity will

persist and result in more permanent spill-overeffects into the rest of the economy. For example,

recent discussions with foreign invested enterprises

suggest growing frustration at the inability to

conduct cross-border transactions. This effectively

raises the implicit cost of operating in Vietnam, and

could discourage future FDI. By allowing theexchange rate to fully clear, rather than determined

through a system of de-facto price-setting and FX

rationing, expectations can be better anchored and

USD hoarding will subside, allowing the return of de-dollarization and a better outlook for the VND.

Daniel Hui


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Disclosure appendixAnalyst CertificationEach analyst whose name appears as author of an individual chapter or individual chapters of this report certifies that the viewsabout the subject security(ies) or issuer(s) or any other views or forecasts expressed in the chapter(s) of which (s)he is authoraccurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly relatedto the specific recommendation(s) or view(s) contained therein.

Important disclosuresStock ratings and basis for financial analysisHSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, whichdepend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunitiesbased on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and whenHSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at

www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of thiswebsite.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor'sexisting holdings and other considerations. Different securities firms use a variety of ratings terms as well as different ratingsystems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each researchreport. In addition, because research reports contain more complete information concerning the analysts' views, investorsshould carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should notbe used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunitiesStock ratings

HSBC assigns ratings to its stocks in this sector on the following basis:For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,regional market and the relevant equity risk premium established by our strategy team. The price target for a stock representsthe value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For astock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over thenext 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, thestock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatilitystatus or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily

triggering a rating change.*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,


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