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Economics: Recent rise in inflation an
upward blip in a downward trendEquity strategy: Equities look expensive
at 25x this years earnings, but
upcoming IPOs could attract interest
FI strategy: Liquidity remains flush
despite SBVs tightening measures
FX strategy: Recent acceleration in VND
depreciation represents intra-band
repositioning; entry into long VND
positions more favourable now
Despite recent upticks in headline inflation, we think
inflation remains on a downtrend. The SBVs policy
tightening measures are mainly corrective as the call money
rate has increased by only a modest 20bp. We expect range-
trading in Vietnamese bonds near term.
Equities continue to look expensive at 25 times this year's
earnings. We would not be aggressive buyers at current levels even though the fundamental long-term story for Vietnam is
very much intact. We see the index largely moving sideways,
albeit in a wide range, over coming months.
Since mid-May, USD/VND has rallied more rapidly. We do
not interpret this as a shift towards an increased pace of
managed depreciation. We think the SBV is repositioning
USD/VND into the centre of the band, consistent with a policy
of accelerated currency regime liberalization. We believe SBV
will allow medium-term appreciation sooner than expected.
Asia
Economics and Strategy
Vietnam Monitor(Issue 2)Inflation remains on a downtrend
8 June 2007
Pieter van der SchaftAsia Local Rates Strategist
+852 2822 4277 [email protected]
Garry Evans*
Equity Strategist
The Hongkong and Shanghai Banking Corporation Limited (HK)
+852 2996 6916 [email protected]
Daniel Hui
FX Strategist
+852 2822 4340 [email protected]
Robert Prior-Wandesforde
Economist+65 6239 0840 [email protected]
Virgil Esguerra
Asia Local Rates Associate Strategist
+852 2822 4665 [email protected]
*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 & Disclosures.This report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, that form part of it.
Table 1: Key data and events
Date Data and events Notes
6 Jun VGB underwriting VND300-700bn11 Jun VGB auction VND300-700bn20 Jun VGB underwriting VND300-700bn21-25 Jun CPI (Jun) 7.3% y/y prior25 Jun VGB auction VND300-700bn25-29 Jun Retail sales (Jun) 22.6% y/y prior25-28 Jun IP (Jun) 17.1% y/y prior25-28 Jun Exports (Jun) 18.4% y/y prior
2-6 Jul GDP (Q2) 7.7% y/y prior24-27 Jul Retail sales (Jul) -24-27 Jul IP (Jul) -24-27 Jul Exports (Jul) -
Source: HSBC
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Key indicators
Chart 1: USD/VND Chart 2: FX reserves
15600
15700
15800
15900
1600016100
16200
Dec-04 Jun-05 Dec-05 Jun-06 Dec-06
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
USD/ VND ( lhs) Y -o -y change ( rhs)
0
5
10
15
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Foreign reserves (USDbn)
Source: HSBC Source: HSBC
Chart 3: Bond yields Chart 4: Headline inflation
6
6.5
7
7.5
8
8.5
9
Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May -07
5yr VGB y ields
0%
2%
4%
6%
8%
10%
12%
Jul-02
Jan-0
3
Jul-03
Jan-0
4
Jul-04
Jan-0
5
Jul-05
Jan-0
6
Jul-06
Jan-0
7
Headline CPI, y-o-y change
Source: HSBC Source: HSBC
Chart 5: HCMH Index Chart 6: GDP growth
0
200
400
600
800
1000
1200
1400
Dec-0
4
Apr-05
Aug-0
5
Dec-0
5
Apr-06
Aug-0
6
Dec-0
6
Apr-07
-50%
0%
50%
100%
150%
200%
HCMSI ( lhs) Y-o-y change (rhs)
4%
5%
6%
7%
8%
9%
10%
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
GDP y-o-y growth
Source: HSBC Source: HSBC
Indicators
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Panicking about prices?
The Vietnamese authorities have fired the first
meaningful shot in their battle against the tidal
wave of liquidity and the potential implications itmay have for inflation. By doubling the reserve
requirement on dong deposits from 5% to 10%
and on foreign currencies from 8% to 10% the
State Bank of Vietnam (SBV) has signalled its
intent to mop up excess funds in the banking
system before they add to lending growth. The
official deposit and lending numbers are a year
out of date, but one suspects they are expanding
well above desired rates at present.
The surprise 30 May move perhaps also points to
a change in the policy priorities of the central
bank, away from supporting economic growth
towards capping monetary growth and inflation.
The SBV officially operates twin objectives
firstly to keep inflation below GDP growth and
secondly to support economic growth. The first
of these is being met at present, while the
slowdown in first quarter GDP growth to 7.7%
from 8.9% would be of some concern.
In explaining the monetary tightening, Central
Bank Governor Thuy argued that monitoring and
constraining inflation is one of the State Banks
main tasks and we need to take some prompt and
intensive measures in order to get inflation under
control.
It is certainly true to say that inflation has moved
higher over recent months, rising from a low of
6.4% in January to 7.3% in May. But the question
is does this reflect a blip in the downward trend,
of the sort which occurred during the second half
of 2005 for example, or a reversal in the trend
itself. Clearly, the SBV fears the latter, given the
probable strength of money growth, although we
think the former is the more likely outcome.
There are several points to make:
Looking at the relationship between monetary
growth and inflation, there doesnt seem to
have been much, if any, link in the past. The
chart below uses quarterly M2 data, which is
available back to 1997 and extends to the
middle of last year. We also looked at the
annual money growth numbers, which we can
get back to 1991, although again there was no
obvious relationship. The same was also
true of M1.
Economics
The State Bank has raised reserve requirements aggressively to
stem money growth and get inflation under control
While inflation has moved higher this year we suspect it will prove
a blip in the downward trend and expect price rises to slow soon
There has been no obvious relationship between money growth
and Vietnamese inflation in the past
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Chart 7: No apparent relationship between money growth &inflation
0
10
20
30
40
50
60
70
Mar-99 Mar-01 Mar-03 Mar-05 Mar-07
% Yr
-4-2024681012
% Yr
M2 money supply growth (RHS)
Inflation (LHS)
Source: CEIC
The contribution from fresh food price
inflation to the headline rate, which amounted
to 1.1ppt in May, is unusually large at present
(see chart). With food price inflation
currently running close to 15% we suspect it
will turn lower fairly soon, particularly now
that the base effects are becoming easier.
Chart 8: Food is adding more than 1ppt to headline inflation
2
3
4
5
6
7
8
9
10
11
May-03 May-04 May-05 May-06 May-07
% Yr
2
4
6
8
10
12% Yr
Headl ine inflation rate Ex-food in flation rate
Source: HSBC, CEIC
The main contributor to the pick-up in
inflation this year has been housing and
construction materials, which has risen from
5.9% in January to 10.6% in May, adding
0.4ppts to the headline rate. This is a
potentially more worrying development,
although if history is any guide then it may be
close to peaking. As the chart below shows,
this component has shown a cyclical pattern
over recent years and is now close to the level
it has peaked at in the past.
Chart 9: Housing inflation close to a peak?
3
4
5
6
7
8
9
10
11
12
03 04 05 06 07
% Yr
Housing & construction material prices
Source: CEIC
Intense global competition has probably
helped drive the downward trend in inflation
seen since mid-2004 and there is little reason
to doubt that this remains a factor.
We have argued (see Vietnam: Going for the
next level, September 2006) that the
trend/sustainable rate of GDP growth in the
country is around 7.5-8%. Although GDP
growth exceeded this rate in 2005-06 the
difference was marginal and followed a
period of sub-trend growth.
Inflation to fall
With all this in mind, and notwithstanding the
strength of money growth, we expect inflation to
start falling again fairly soon. Our year average
CPI forecasts are 7% for 2007 and 6% for 2008.
This is not to say that the rise in the reserve ratio
was unwise but should probably be seen as a
precautionary step, helping to sterilise the huge
capital inflows and recent central bank
intervention in the currency market. In our view,
there remains little reason to panic about a strong,
sustained rise in inflation any time soon.
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On hold for the IPO rush
What has happened
Vietnamese equities have had a volatile ride of
late. The Vietnam index is up 38% y-t-d in USDterms. But, as shown in Chart 10, the market
corrected 23% between March 12 and April 24,
reaching a low of 906. It subsequently rebounded
23% to May 23, and has since shown some signs
of a further correction.
Chart 10: Vietnam stock index
200
400
600
800
1000
1200
1400
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
VNI
Source: Bloomberg
What happened is that foreign investors have
taken a realistic view about valuation, buying
between 900 and 1,000 and trimming positions
when the index rose much above that level. Most
overseas Vietnam country funds are sitting on
significant amounts of cash that they expect to use
in the privatisation IPOs due in the next six
months (see below for more on this); they are not
in a hurry to put the money to work when they see
the market looking too expensive. Domestic retail
investors have largely followed the foreigners
lead.
Table 2: Key stock market data
HCM Hanoi Total
Market cap (USDm) 15,188 4,566 19,754Number of stocks 110 87 197Foreign ownership 27% 14% 24%PE (2006) x 33.6 46.6 36.6PB (2006) x 7.9 6.5 7.5ROE 24.2% 14.8% 21.4%DY 0.9% 0.8% 0.9%
Source: Bloomberg, HCM STC, SSI, BVSC
At the current index level (1040), the PE for Ho
Chi Minh listed stocks based on 2006 earnings is
34x. Assuming 25% EPS growth this year (the
consensus among Vietnam-based fund managers)
and 15% next (roughly the rate of nominal GDP
Equity strategy
Even after its recent roller-coaster ride, the Vietnamese market
looks expensive on 25x this years earnings
We would not be aggressive buyers at this level, but would wait to
buy the big IPOs due over the next six months
Foreign investors should be aware of the new registration system
that will start in August or September
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growth), this equates to a PE of 25x 2007 earnings
and 21x 2008. We remain comfortable with our
target for the VN Index of 900 by end-2007,
based on 18x forward earnings at that time.
We would, therefore, not be aggressive buyers at
the current level even though the fundamental
long-term story for Vietnam is very much intact.
We see the index largely moving sideways, albeit
in a wide range, over the next few months. At the
right price, the IPO offerings would be of interest.
Recent developments
Regulatory issues
The authorities have released draft guidelines for
foreign investor registration. This will replace the
current dual system of (1) a securities trading
code for listed stocks, and (2) capital contribution
account for OTC stocks. The documents that will
be required for registration are not particularly
onerous (they seem to be based on Taiwans FII
system), and the unifying of the two systems will
simplify procedures somewhat.
The unknowns, however, are whether the
authorities will use the registration system to slow
inflows at times when they feel the market has
gotten overheated, and whether they will reject
applications from investors they see as
undesirable, such as hedge funds. The new system
will probably be implemented from August or
September.
Turnover and liquidity
The rally in the market in the past month has
taken daily trading value on the Ho Chi Minh
market back since the start of May to an average
of USD44m a day, although this is still well
below the heady levels of March (see Chart 11).
Over the past three months, 11 stocks have had an
average daily turnover of USD1m or more,
making them liquid enough for many foreigninvestors (see Table 5, for key data on the largest
stocks).
Chart 11: Daily trading on Ho Chi Minh (USDm)
0
10
20
30
40
50
60
70
80
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Daily traded value (USD mn)
Source: Bloomberg
Foreign investor buying has picked up since late
February/early March, when foreigners were
small net sellers for about three weeks. In May,
foreigners bought net USD150m, close to the
level of December-February (Chart 12). One
problem for foreign investors is that many of the
best-quality names have hit their foreign
ownership limits (49% for listed companies, 30%
for banks and OTC stocks). Of the 15 largest
stocks by market cap, five can no longer be
bought by foreigners (see Table 5 for details).
Chart 12: Foreign net buying of Vietnamese equities
0
50
100
150
200
250
300
350
400
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
USD
m
Source: Bloomberg
IPO timetable
Many overseas country funds are saving cash to
buy a skew of privatisation issues due over the
next few months.
The first major privatisation this year, for Bao
Viet Insurance, was completed successfully on
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June 4, raising USD271m, with 23% of the
offering going to foreign investors. The realised
price was twice the initial reserve price.
The timetable of major IPOs for the rest of the
year is shown in Table 3. A number of these will
have overseas tranches for the first time, and
foreign investment banks are widely expected to
be appointed as lead managers on the issues.
Table 3: Major IPO timetable
Company Possible IPO date
Vietcombank Aug-07Industrial & Commercial Bank Oct-07Mekong Housing Bank Oct-07Mobifone Q4BIDV Q4Saigon Beer ?Hanoi Beer ?Vinafone ?
Source: Media reports including Bloomberg, Vietnam Investment Review, Viet Nam News
Country funds
There continue to be a significant number of new
Vietnam country funds set up worldwide. We
count 13 funds launched since the start of April
this year, and 22 since the beginning of the year
(giving a total of 52 in existence). Not all the
funds report their NAV but, for those that do, total
assets now equal USD6bn. Given total foreign
ownership of listed companies on the two
exchanges of only USD4.8bn, this suggests that a
lot of the money raised is still held in cash
(although some, of course, is invested in OTC
stocks or other assets such as real estate).
A look at new country funds shows a number of
trends. Korea is a major source of inflows into
Vietnamese equities: since the start of the year
eight new funds there have raised well over
USD1bn. The number of countries with Vietnam
funds has increased: recently country funds have
been set up in Singapore, Malaysia, Japan and
Israel. The largest Vietnam-based money
managers, such as Dragon Capital, are
diversifying their product range as presumably
they see relatively little value in a balanced fund
of listed stocks. These managers have recently
launched specialist funds in resources, energy,
infrastructure and real estate.
With the Vietnamese market still somewhat small
for most institutional investors, country funds will
continue to be the major source of liquidity. That
provides significant downside support, since these
funds are unlikely to be sellers. It also guarantees
that the forthcoming IPOs will get a good
reception.
New index
Given the problem with trying to replicate the VN
Index (which is not free float adjusted), many
investors will be interested in the FTSE Vietnam
Index Series launched in May. The FTSE
Vietnam Index is adjusted for investibility and
stocks are screened for liquidity. It does not,
however, get over the problem of stocks that
foreigners can no longer buy since foreign
ceilings have been reached. It also has the snag
that it is limited to Ho Chi Minh listed stocks and
therefore misses a number of investible names
listed in Hanoi.
But now that FTSE has moved, does it suggest
that MSCI will have to consider including
Vietnam in its indexes over the next few months?
There are now four Vietnamese stocks with a
free-float adjusted market cap of greater than
USD500m. Add a couple more, once theforthcoming IPOs are complete, and Vietnam
would seem to fulfil MSCIs (undisclosed)
inclusion criteria.
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Table 4: Vietnam country funds set up since April 2007
BBG Code Name Fund Management Co Incept Date Location
VIETRES KY VIETNAM RESOURCE INV HLD LTD Dragon Capital Management Ltd/ 8/1/2007 CaymanSGVIEOP KY SGAM VIETNAM OPP FUND SG Asset Management Singapore 6/21/2007 CaymanTIMVIET LE T.I.M VIETNAM TIGER FUND IFM Independent Fund Management 6/4/2007 Liechtenstein3697677 KS KB VIETNAM FOCUS BALCND-FD-C Kookmin 6/1/2007 Korea3697685 KS KB VIETNAM FOCUS BALCND-A Kookmin 6/1/2007 Korea79212075 JN SUMI M VIETAM FUND 2007-5 Sumitomo Mitsui Asset Management 5/31/2007 JapanAMCFMVP LE AMCFM VIETNAM EQUITY FUND-P IFAG Institutionelle Fondsleit 5/31/2007 LiechtensteinMAXVIET KY MAXFORD GROWTH-VIETNAM FOCUS Maxford Investment Management 5/16/2007 Caymann/a VIETNAM AZALEA FUND Mekong Capital 5/1/2007 VietnamCAASCCA LX CAF-ASEAN NEW MARKETS-CA Credit Agricole Asset Management 4/30/2007 LuxembourgFULVIEA KY FULLERTON VIETNAM FUND - A Ful lerton Fund Management Co L 4/23/2007 CaymanHWAINCH MK HWANG-DBS INDOCHINA FUND Hwang-DBS Investment Management 4/12/2007 Malaysia7671343 KS TONGYANG VIETNAM PRIVATZN 1 Tong Yang Investment Trust Man 4/2/2007 Korea
Source: HSBC, Bloomberg
Table 5: Key valuation data for largest listed Vietnamese stocks
Code Company Exchange Mkt cap(USDm)
Ave dailyt/over
(USDm)
Foreignownership
Foreignlimit
Room forforeignbuying
(USDm)
PE (2006) Chg 3M
VNM Vinamilk HCM 2,048 2.62 44% 49% 103 42.0 -36%STB Sacombank HCM 2,026 8.35 30% 30% 0 53.8 -5%PPC Pha Lai Thermal Power JS Company HCM 1,371 1.26 6% 49% 588 16.9 -28%FPT FPT Corp. HCM 1,304 4.41 20% 49% 376 60.0 16%ACB AsiaCommercialBank Hanoi 1,105 1.03 30% 30% 0 n/a -22%PVD PVDrilling HCM 1,099 2.74 15% 49% 370 117.5 -13%
SSI Sai Gon Securities Investment Hanoi 545 4.46 12% 49% 202 n/a -5%ITA Tan Tao Industrial Park HCM 541 1.25 19% 49% 162 45.8 74%VSH VinhSon HydroPower HCM 541 0.82 23% 49% 142 31.8 4%GMD Gemadept HCM 440 1.51 49% 49% 0 38.4 -10%KDC South Kinh Do HCM 438 0.78 38% 49% 47 44.5 74%SAM Sacom Cable HCM 405 0.78 49% 49% 0 35.2 142%REE REE Corporation HCM 396 3.35 49% 49% 0 28.2 -13%BMI BaoMinh Insurance Hanoi 358 0.20 8% 49% 146 n/a 358%BVS Bao Viet Securities JS Company Hanoi 353 0.50 23% 49% 93 n/a -17%SJS Sudico HCM 277 3.19 11% 49% 106 52.9 -28%BTS But Son Cement Hanoi 250 0.09 6% 49% 107 n/a -17%VIP Vipco HCM 230 0.28 24% 49% 57 44.7 -35%TDH Thu Duc House HCM 222 0.88 49% 49% 0 23.4 -40%BCC Bim Son Cement Hanoi 217 0.27 10% 49% 84 n/a -19%MPC Minh Phu Seafood Joint stock Co Hanoi 208 0.34 2% 49% 97 n/a -16%VNR Vinare Hanoi 207 0.05 7% 49% 86 n/a 4%
Source: Bloomberg, HCM STC, BVSC, SSI
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Recent SBV measures to mop up excess liquidity
by raising (and equalising) reserve requirements
on VND and FX deposits to 10% for deposits
shorter than 12 months and 4% for 12-24month
deposits, and cap the amount of unlisted bank debt
that can be held by offshore investors to 50% have
had limited impact on Vietnamese government
and bank bonds.
Despite the absence of official data on bank
deposits, the reserve requirement hikes are
estimated to mop up approximately VND40-50trn
in bank liquidity out of total excess liquidity of
VND60-80trn. Excess liquidity will, however,
continue to rise sharply further given our estimate
for approximately USD15bn of foreign capital
inflows to enter Vietnam during 2007. In turn, the
reserve requirement hikes, which were effective 1
June, have only led to a modest 20bp rise in the
call money rate to 3.55-3.8% at present, and our
traders onshore do not expect the call money rate
to reach 5% anymore during Q3 despite an
expected pick-up in loan disbursements from July
onwards to finance infrastructure projects.
SBVs cap on the sale of unlisted bank debt to
offshore investors appears to have been included
in a clarification letter to a foreign bank, and is
therefore not a formal regulation. It is also
difficult to see how these regulations can be
enforced except perhaps by capping the amount ofdebt sold to offshore investors during primary
issuance. Hence, an extension and/or strict
enforcement of this regulation to corporate
bonds is unlikely, in our opinion.
That being said, the Vietnamese authorities will
continue to face a challenge on how to control
excess liquidity, while maintaining their stated 1%
annual depreciation path for the VND in the face
of rising inflation. Although our economist
believes that the recent rise in headline inflation is
temporary (please see Economics section), it is
unlikely that the SBV can control rising food and
energy prices through monetary sterilisation
measures. Nevertheless, recent SBV moves may
have been intended to show that they are doing
something about inflation and the Vietnamese
authorities may well follow up with further
mainly administrative measures in an attempt to
control excess liquidity and inflation before
allowing a strengthening of the VND in 2008.
Chart 13. Vietnam bond yields have risen sharply
6
6.5
7
7.5
8
8.5
9
Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May -07
5yr VGB yields
Source: Bloomberg
Fixed income strategy
Liquidity remains flush despite SBVs liquidity tightening measures
5yr VGBs likely to remain range-bound around 7%
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In the meantime, 5yr VGBs are expected to trade
range-bound around 7% with ample support from
onshore investors (given approximately 350bp
spread pick-up over the call money rate) and
offshore investors considering that Vietnamese
bonds provide an attractive call option on
medium-term VND appreciation.
Table 6. Vietnam bond yields
Tenor Yield Size
Vietnam Government Bond (VGB) 5yr 7.05% -10yr 7.50% -Electricity of Vietnam 10yr 8.60% 1 trnDevelopment Bank of Vietnam 5yr 7.15% 8trn
10yr 7.60% 0.6trn15yr 7.80% 0.1trn
Bank for Investment & Development 10nc5 7.70% 1.1trn15nc10 8.20% 1.1trn
Vinashin 10yr 8.65% 3trn
Source: HSBC Vietnam
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Since mid-May, USD/VND has rallied at a more
rapid rate. Market participants, however, should
not interpret this as a policy-shift towards an
increased pace of managed depreciation (beyond
the conventional 1% p.a. pace). Instead, an
examination of the SBVs daily band setting
against this movement in spot, suggests that the
SBV is repositioning USD/VND back into the
centre of the band. This is consistent with a view
of accelerated currency regime liberalization. We
continue to believe that SBV will allow medium-
term appreciation sooner than expected (see
VND appreciation coming soon, 21 May 2007).
We believe that upside to our view is largely
limited to the risk that SBV delivers on its implicit
policy of 1% annual depreciation. We continue to
advise gaining exposure to VND appreciation
risk. Now that intra-band repositioning has largely
been completed (chart below), entry into long
VND positions are more favourable now.
An evolving currency regime
Shifting balance-of-payments dynamics,
combined with a recent growing capital inflows is
necessitating an acceleration of currency regime
liberalization. In the past six months, the
oversupply of dollars and undersupply of VND
has led the USD/VND to pressure the floor of the
official trading band. These conditions have
proved problematic for the currency market, with
FX strategy
A recent acceleration in VND depreciation represents intra-band
repositioning, not a signal for faster depreciation
Liberalization of the currency regime is happening
Entry into long VND positions more favourable now
Chart 14: USD/VND
15900
15950
16000
16050
16100
16150
16200
16250
Oct-06 Dec-06 Feb-07 Apr-07 Jun-07Fix USD/VND Close Ceiling Floor
Band widening
Source: Reuters
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SBV purchasing insufficient USD to keep the
VND market from clearing properly (for details,
see VND appreciation coming soon, 21 May
2007).
It appears that the SBV has decided to address this
imbalance by buying USD more aggressively,
dragging the USD/VND rate away from the edge
of the band, back towards the centre (Chart 15).
From a policy standpoint, there are two
implications to this recent development. First,
shifting the burden of exchange rate management
from a reliance on trading band restrictions to
more direct intervention will give SBV a more
flexible and market-based method in guiding
exchange rates, while maintaining liquidity in the
market.
However, at the same time, increased selling ofVND will increase the liquidity management
burden for an SBV already struggling to manage
inflation risks. It is due to this last point, that we
believe VND appreciation may come about
sooner than expected.
Entry opportunity?
In repositioning USD/VND to the midpoint of the
band, besides more aggressive buying of USD to
push the USD/VND rate higher, the SBV has also
been modestly re-fixing the band lower (Chart
14). However, the end result is that, on the
surface, VND has still been depreciating more
rapidly against the USD in the past few weeks (at
around a 3.5% p.a. pace).
Investors should not extrapolate this into trend
that creates the expectation that USD/VND will
end the year much higher (Chart 16). With
repositioning now largely over (and USD/VND
already within 17pips of the band centre, from an
average 80pips three weeks ago), we feel the
further upside to USD/VND is limited to the
additional depreciation required to hit the impliedSBV policy target of 1% depreciation in 2007
(about 122pips more), implying a much slower
pace of USD/VND depreciation from here (Chart
16). As such, entry into long VND positions are
more favourable now for medium-term investors
looking to gain exposure to appreciation risk.
Chart 15: USD/VND Intra-band positioning Chart 16: USD/VND
-150
-100
-50
0
50
100
Jun-06 Sep-06 Dec-06 Mar-07 Jun-07
close - fix Band Band
15950
16050
16150
16250
16350
16450
16550
16650
Nov-06 Jan-07 Apr-07 Jul-07 Oct-07
USD/VND HSBC f'cst1% deprec trend Late may pace
Source: Reuters, HSBC Source: Reuters, HSBC
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Macro framework
2002 2003 2004 2005 2006 2007f 2008f
Production, demand and employmentGDP growth (% y-o-y) 7.1 7.3 7.8 8.4 8.2 7.8 8.0Nominal GDP (USDbn) 35.1 39.6 45.5 52.9 61.6 69.6 78.5GDP per capita (USD) 440 489 555 637 732 817 909Private consumption (% y-o-y) 7.6 8.0 7.1 7.5 7.0 6.5 6.7Government consumption (% y-o-y) 5.4 7.2 7.8 7.9 5.0 5.0 6.0Investment (% y-o-y) 12.9 11.9 10.4 11.0 12.0 10.0 12.0Industrial production (% y-o-y) 14.24 19.80 17.64 25.53 13.40 8.8 9.3Gross domestic saving (% GDP) 32.0 30.5 33.5 36.6 36.3 36.5 37.0Unemployment rate, end-year (%) 6.01 5.78 5.60 5.31 4.40 4.2 4.0PricesCPI, average (% y-o-y) 4.1 3.1 7.8 8.3 7.5 6.5 6.0CPI, end-year (% y-o-y) 4.0 2.9 9.7 8.8 6.6 6.3 5.8PPI (% y-o-y) -0.3 1.8 2.7 -1.9 3.0 0.6 0.1Money, FX & interest ratesBroad money supply M2, average (% y-o-y) 17.6 24.9 29.5 29.8 25.0 20.0 25.0Real private sector credit growth (% y-o-y) 22.2 28.4 41.7 40.0 35.0 25.0 30.0Prime lending rate, end-year (%) 9.48 9.52 9.90 11.33 11.00 10.50 10.505yr yield, end-year (%) -- 8.30 8.50 8.75 8.30 7.00 6.75VND /USD, end-year 15,363 15,615 15,738 15,878 16,052 16,237 16,399VND /USD, average 15,258 15,500 15,718 15,832 15,986 16,161 15,999VND /EUR, end-year 15,695 19,230 21,105 18,840 21,188 23,544 23,779VND /EUR, average 14,431 17,538 19,540 19,750 20,191 22,385 22,964
External sectorMerchandise exports (USDbn) 16.7 20.1 26.5 32.4 39.9 44.7 52.7Merchandise imports (USDbn) 17.8 22.7 28.8 33.3 40.1 46.1 54.8Trade balance (USDbn) -1.1 -2.6 -2.3 -0.8 -0.2 -1.4 -2.1Current account balance (USDbn) -0.7 -1.9 -1.6 0.2 0.4 -0.8 -1.5Current account balance (% GDP) -1.9 -4.9 -3.4 0.4 0.7 -1.2 -2.0Net FDI (USDbn) 2.0 1.9 1.9 2.0 3.0 3.0 3.0Net FDI (% GDP) 5.8 4.8 4.1 3.7 4.9 4.3 3.8Current account balance plus FDI (% GDP) 3.8 -0.1 0.7 4.1 5.5 3.1 1.9Exports (% y-o-y) 11.2 20.6 31.4 22.5 22.9 12.0 18.0Imports (% y-o-y) 23.3 28.0 26.6 15.7 20.4 15.0 19.0International FX reserves (USDbn) 4.2 6.4 7.2 9.2 15.0 20.0 25.0Import cover (months) 2.9 3.4 3.0 3.3 4.5 5.2 5.5
Public and external solvency indicatorsGross external debt (USDbn) 12.2 13.3 15.5 16.9 19.3 21.6 23.0Short term external debt (% of int'l reserves) 26.7 18.0 14.0 12.7 6.7 5.0 4.0Private sector external debt (USDbn) 2.5 2.7 3.1 2.9 3.3 3.6 4.0Consolidated government balance (% GDP) -3.9 -4.9 -3.3 -2.6 -2.0 -1.9 -1.7Central government balance (% GDP) -3.5 -6.1 -3.6 -3.0 -2.1 -2.1 -2.3
Gross public domestic debt (VND trn) 57 83 96 118 141 163 186Gross public domestic debt (% GDP) 10.6 13.5 13.4 14.1 14.3 14.5 14.5Gross public external debt (USDbn) 9.7 10.6 12.4 14.0 16.0 18.0 19.0Gross public external debt (% GDP) 27.6 26.8 27.2 26.5 26.0 25.9 24.2
Source: HSBC
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Disclosure appendix
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's
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For disclosures in respect of any company, please see the most recently published report on that company available at
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The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the views expressed herein
accurately reflect their personal view(s) about the subject security(ies) and issuer(s) and that no part of their compensation was,
is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report:
Garry Evans, Virgil Esguerra, Robert Prior-Wandesforde, Pieter Van Der Schaft and Daniel Hui
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 This report is dated as at 08 June 2007.2 All market data included in this report are dated as at close 06 June 2007, unless otherwise indicated in the report.3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Researchoperate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wallprocedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
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Disclaimer
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