Vietnam’s Riotous History Hump

Vietnamese shares remained up 10 percent through July after anti-Chinese riots over maritime conflict endangered mainland ties before compensation was offered, as Moody’s upgraded the sovereign to B-minus on “macroeconomic stability despite bank asset weakness.” The naval confrontation centered on South China Sea oil claims and followed worker unrest at Chinese-owned garment factories over poor wages and treatment. The government moved to arrest both the diplomatic and labor protestors as it pledged to maintain good foreign business relations heading into the last rounds of the free-trade Trans-Pacific Partnership negotiations. First half 5 percent GDP growth was led by 15 percent export improvement increasingly in electronics from $6 billion in FDI over the period, and the currency was devalued 2 percent to provide further support as the 1 percent trading band may be widened. Aid, remittances and portfolio inflows have contributed to the overall balance of payments surplus, with foreign reserves near $40 billion or over three months’ imports. Inflation has come down to low single digits on flat credit expansion despite recent central bank easing, but the budget deficit is still over 5 percent of GDP to cover state enterprise losses. A handful of equity stakes are again scheduled for exchange listing but foreign ownership and strategic company offerings will be limited. The ailing sector is the main NPL generator officially at 5 percent but estimated at 15-20 percent by international standards. With credit at 100 percent of output cleanup costs are in the $20-$30 billion range and a central asset disposal agency was launched last year to begin distressed debt swaps short of recapitalization. A July S&P report criticized delays in tighter classification rules and the Asset Management Company’s “limited success” with untested recovery ability and a small $25 million capital base. It added that consolidation aiming to halve the thirty active institutions was “slow” and that a 5 percent rise in the foreign access cap as of February was not enough to incite interest. The IMF’s latest Article IV consultation reinforced residual risks despite the “favorable near-term outlook.” It cited dangers in accommodative fiscal and monetary policies and urged greater exchange rate flexibility, targeted social spending, and faster state enterprise restructuring. TPP agreement could spur such reforms and deepen access to key export markets in its view.

With the ratings boost external bond issuance could resume to match new frontier entrants like Sri Lanka, which sold a combined $1.5 billion in January and April 5-year bonds with the latter yield falling to a record low 5 percent despite a coincident UN decision to investigate alleged civil war crimes. The MSCI component has held on to double digit gains in the aftermath of ethnic clashes against minority Muslims as 7.5 percent GDP growth continues in the face of weather-related crop damage. The central bank has paused on 3 percent inflation, and capital inflows have offset the trade deficit and kept the currency and reserves solid outside the strictures of an IMF program. However S&P Ratings recently cautioned about a new official guarantee scheme to backstop possible trouble in booming gold-backed pawn-broking loans at 15 percent of the private sector total outstanding as delinquencies tarnish the business.