Chapter 2:

Economic Outlook

SWOT Analysis
Strengths

BMI Economic Risk Ratings

Vietnams short-term economic risk rating of 53.8 reflects a deterioration of external conditions and the result of the government attempting

Vietnam has been one of the fastest-growing economies in Asia in

to supplant a sharp reduction in external demand with fiscal stimulus.

recent years, with GDP growth averaging 7.2% annually between

Vietnams chronic fiscal and current account deficits also weigh down

2000 and 2010.

our long-term economic risk ratings, where the fiscal and external

The economic boom has lifted many Vietnamese out of poverty,

components score 30.0 and 33.3 out of 100 respectively. However,

with the official poverty rate in the country falling from 58% in 1993

this is partly offset by a robust score of 85.0 in the growth component,

to 12.0% in 2010.

reflecting a strong potential for rapid economic expansion and bringing

Weaknesses

the overall rating to 54.5.

Vietnam still suffers from substantial trade, current account and

fiscal deficits, leaving the economy vulnerable to global economic
uncertainties in 2012. The fiscal deficit is dominated by substantial
spending on social subsidies that could be difficult to withdraw.
The heavily managed and weak dong reduces incentives to improve
quality of exports and keeps import costs high, contributing to inflationary pressures.

Opportunities
WTO membership has given Vietnam access to both foreign markets
and capital, while making Vietnamese enterprises stronger through
increased competition.
The government will, despite the current macroeconomic woes,
continue to move forward with market reforms, including privatisation of state-owned enterprises and the liberalisation of the banking
sector.
Urbanisation will continue to be a long-term growth driver. The UN
forecasts the urban population rising from 29% of the population to
more than 50% by the early 2040s.

Threats
Inflation and deficit concerns have caused some investors to re-assess
their hitherto upbeat view of Vietnam. If the government focuses too
much on stimulating growth and fails to root out inflationary pressure,
it risks prolonging macroeconomic instability, which could lead to a
crisis.
Prolonged macroeconomic instability could prompt the authorities
to put reforms on hold as they struggle to stabilise the economy.

Business Monitor International Ltd

S-T Economy

Rank

Trend

China
92.1
1
Taiwan
84.0
2
South Korea
81.7
3
Hong Kong
81.5
4
Singapore
79.4
5
Brunei Darussalam
74.2
6
Malaysia
73.3
7
Thailand
71.5
8
Myanmar
69.8
9
Indonesia
64.6
10
Philippines
64.6
10
India
62.7
12
Bangladesh
61.5
13
Vietnam
53.8
14
Laos
52.3
15
Pakistan
50.8
16
Sri Lanka
44.2
17
Papaua New Guinea
43.8
18
Bhutan
40.8
19
Cambodia
31.0
20
North Korea

Regional ave 61.9/ Global ave 53.8 / Emerging markets ave 52.5

L-T Economy

Rank

=
=
+
=
=
=
+
=
=
=
=
=
=
=
=
=
+
=
=
=

Trend

China
78.3
1
Hong Kong
77.6
2
Singapore
76.9
3
Malaysia
73.9
4
Taiwan
73.5
5
South Korea
72.1
6
Bangladesh
68.3
7
Thailand
66.6
8
Brunei Darussalam
65.2
9
India
61.9
10
Myanmar
59.3
11
Indonesia
54.7
12
Philippines
54.7
12
Vietnam
54.5
14
Sri Lanka
50.6
15
Papua New Guinea
50.4
16
Bhutan
45.6
17
Laos
45.1
18
Pakistan
43.1
19
Cambodia
37.2
20
North Korea

Regional ave 58.2 / Global ave 52.2 / Emerging markets ave 50.1

www.businessmonitor.com

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13

vietnam Q1 2012

Economic Activity
External Headwinds Prompt Downward
Growth Revision
BMI View
We expect Vietnams real GDP growth for 2011 and 2012 to be much
weaker than we previously forecast owing to escalating economic

the coming quarters. Meanwhile, downside risks to our outlook

on external demand a sputtering economic recovery in the
US, sovereign debt concerns in the eurozone and a potential
hard landing in China have escalated significantly in recent
months. Consequently, we have downgraded our real GDP
growth forecast from 6.3% to 6.0% for 2011. Looking to 2012,
we believe Vietnams real GDP growth will remain subdued by
historical standards at 6.5% as weak economic momentum
spills over into H112.

headwinds in the US, eurozone and China. We are increasingly con-

Industry And Construction Activity Cools

cerned that the slowdown in manufacturing sector growth, which in-

Real GDP Growth By Sector, % chg y-o-y

dicates weak demand for Vietnamese exports, will be sustained over

Agriculture, Forestry & Fishery
Industry and Construction
Services

the coming quarters, presenting significant downside risks to growth.

Consequently, we have downgraded our real GDP growth forecast

12
10

from 6.3% to 6.0% for 2011, and we expect growth to remain subdued
at 6.5% in 2012.

External Demand To Remain A Drag On Growth

Real GDP Growth By Expenditure, pp contribution

20

15

10

Q411

Q311

Q211

Q111

Q410

Q310

Q210

Q110

Q409

Q309

Q209

Q109

Q408

Q308

Q208

Q108

Q407

Q307

Source: General Statistics Office, BMI

-5
-10
-15

2012f

2011f

2010

2009

2008

2007

2006

Net Exports
Inventory Stocking
Gross Fixed Capital Formation
Private Consumption
Government Spending

Q207

Q107

Source: General Statistics Office, BMI

Vietnams real GDP growth figure came in at 6.1% year-on-year

(y-o-y) in Q311, in line with our view that monetary tightening by the State Bank of Vietnam (SBV) and a reduction in
public spending would continue to be a drag on growth over

Manufacturing Sector Activity Points To

Cooling External Demand
Looking at growth rates across the three broad classifications of
economic activity in Vietnam (see chart), we note that there is
a notable slowdown in industry and construction growth from
7.3% y-o-y in Q211 to 6.8% in Q311. This is largely due to a
slowdown in the manufacturing sector. According to figures
published by the General Statistics Office, the manufacturing
sector grew at a much slower pace of 7.1% y-o-y in Q311, compared with 9.1% in the previous quarter. To put into perspective
the critical role that the manufacturing sector plays in driving

table: ECONOMIC ACTIVITY

2011f

2012f

2013f

2014f

2015f

2016f

Nominal GDP, VNDbn [2]

2,512,057.4

3,038,152.9

3,459,309.7

3,892,844.8

4,360,657.2

4,885,479.5

Nominal GDP, US$bn [2]

121.9

149.1

174.7

202.2

232.6

267.7

6.0

6.5

6.9

7.3

7.3

7.4

1,373

1,662

1,927

2,209

2,516

2,869

Population, mn [3]

88.8

89.7

90.7

91.6

92.4

93.3

Industrial production index, % y-o-y, ave [1,4]

14.0

15.0

16.0

16.0

16.0

15.0

5.0

5.0

5.0

5.0

5.0

5.0

Real GDP growth, % change y-o-y [2]

GDP per capita, US$ [2]

Unemployment, % of labour force, eop [4]

Notes: f BMI forecasts. 1 at 1994 prices; Sources: 2 Asian Development Bank, General Statistics Office. 3 World Bank/UN/BMI; 4 General Statistics
Office.

14

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Business Monitor International Ltd

economic outlook

the economy, we highlight that the sector alone accounts for

around 22% of GDP, and manufactured goods make up slightly
more than 50% of total exports. Given that a large proportion
of the sectors output is exported, a slowdown in manufacturing activity suggests that producers are anticipating weaker
demand for Vietnamese exports over the coming months. We
are increasingly concerned that a sustained slowdown in the
manufacturing sector over the coming quarters would present
significant downside risks to our outlook on external demand
and, in turn, undermine the governments efforts to tackle a
stubborn trade deficit.
A Sign Of Resilience

Retail Sales, VNDbn (LHS) & % chg y-o-y (RHS)

200,000

60
Retail Sales, VND bn

180,000

% chg y-o-y RHS

160,000

50

140,000

40

result of the SBVs monetary tightening, have fallen to around

17.0-19.0% in October 2011. We believe that this is due to a
combination of a decline in demand for credit as well as easing
inflationary pressures. This is leading to a contraction in the
spread between lending rates and the SBVs current policy rate
of 15.00%. Although lending rates have fallen significantly, we
are sceptical that this will provide a boost to gross fixed capital
formation (GFCF) growth. Firstly, current lending rates are at
a historical highs, and credit growth in the first nine months of
the year remained low at 9.5%, below the governments target
of 17%. Secondly, we believe that deteriorating global economic
headwinds should have a negative impact on investor sentiment,
which should, in turn, depress foreign direct investment inflows
over the coming quarters. These negative factors should offset
any positive effects that lower lending rates would have on GFCF
growth. Accordingly, we expect GFCF growth to slow from
7.0% in 2010 to 5.0% and 5.3% in 2011 and 2012 respectively.

120,000
100,000

30

80,000
20

60,000
40,000

10

20,000

Apr-11

Sep-11

Jun-10

Nov-10

Jan-10

Aug-09

Oct-08

Mar-09

May-08

Jul-07

Dec-07

Feb-07

Apr-06

Sep-06

Jun-05

Nov-05

Jan-05

Source: General Statistics Office, BMI

Tight Labour Market To Support Private

Consumption Growth
Despite growing risks of a sustained slowdown in the manufacturing sector, our view that private consumption growth will
remain resilient continues to hold. The manufacturing sector
currently absorbs around 14% of the labour force. In contrast,
the agricultural sector remains the major source of employment,
absorbing an estimated 40% of the labour force. Given that the
agricultural sector is relatively more resilient during periods
of an economic slowdown, particularly one that is mainly
driven by external demand, we believe that the unemployment
rate will remain stable at historical lows of 2.5-3.0% over the
coming quarters. This, in turn, supports our view that resilient
private consumption growth will help to cushion a slowdown
in net exports (we are forecasting private consumption growth
to come in at 6.5% and 5.8% in 2011 and 2012 respectively).

Monetary Normalisation Could Come

Sooner
On a more positive note, there is growing evidence that inflation has peaked (consumer price inflation slowed to 22.4% in
September 2011 from 23.0% in August). Thus, should inflation
continue to ease over the coming months, we believe that the
SBV could embark on monetary normalisation much sooner
than we have previously forecast. Falling commodity prices
suggest that downside risks to economic growth could become
a greater concern for policymakers. Thus, we see upside risks
to our outlook on real GDP growth in 2012 (albeit this is not
our core view) that the SBV would ease monetary policy in
early-2012, providing a boost to economic growth.

Investments Likely To Remain

Depressed
Lending rates, which surged to around 25.0-27.0% in Q211 as a
Business Monitor International Ltd

www.businessmonitor.com

15

vietnam Q1 2012

ease on the back of falling commodity prices (headline CPI slowed

from 23.0% in August to 22.4% in September). Furthermore,
lending rates are at historical highs, and credit growth in the first
nine months of the year has remained low at 9.5%, compared
with the governments full-year target of 17%. Tight credit
conditions should act as a dampener on economic activity over
the coming months. From our perspective, aggressive monetary
tightening by the SBV prior to the latest rate hike the policy
rate was raised by 500bps from February to April 2011 should
be sufficient in bringing inflation under control. However, we
warn that the SBVs increasingly hawkish stance is presenting
significant downside risks to our real GDP growth outlook for
2012.Accordingly, we have downgraded our real GDP growth
forecast from 6.9% to 6.5% for 2012 to reflect the impact of
the latest rate hike. Ourforecast currentlystands at the lower
end of theVietnamese governmentsreal GDP growth target
of 6.5-7.5%for 2012.

Monetary Policy
SBV Rate Hike Presents Downside
Risks To Growth
BMI View
The State Bank of Vietnams decision to introduce another 100 basis points worth of rate hike to bring its policy rate from 14.00% to
15.00% has presented significant downside risks our growth outlook.
We havedowngraded our real GDP growth forecast from 6.9% to 6.5%
for 2012 to take into account theimpact of the latest rate hike. Consequently, we believe that monetary normalisation could come early in
Q112 as the bank reverses its stance on monetary policy in response
to a faster-than-expected slowdown in economic activity over the coming months.

Falling Behind The Curve Again?

Policy Rate, % & Headline CPI, % chg y-o-y

Inflation Still A Priority For The SBV

30

The latest rate hike suggests to us that inflation will remain a

focus for the central bank. We believe that the SBVs monetary policy stance may need to be reversed abruptly should
the slowdown in economic growth turn out to be more severe
than expected. We have previously highlighted that monetary
normalisation is likely to come in H112 (see our online service,
August 29 2011, Inflationary Pressures Remain Stubborn, But
Disinflation View Still In Play). However, as a result of the
latest rate hike, we believe that the SBV could start introducing
rate cuts as early as Q112. We have revised our 2011 year-end
policy rate forecast upward from 14.00% to 15.00% to reflect
the latest rate hike, and we continue to maintain our forecast
for 400bps worth of rate cuts in 2012, bringing the benchmark
policy to 11.00% by end-2012.

25
20
15
10
5

Policy Rate, %
Headline CPI, y-o-y % chg

Sep-11

May-11

Jan-11

Sep-10

Jan-10

May-10

Sep-09

Jan-09

May-09

Sep-08

May-08

Jan-08

Sep-07

Jan-07

May-07

Sep-06

Jan-06

May-06

Source: General Statistics Office, State Bank of Vietnam, BMI

The State Bank of Vietnam (SBV) in October 2011 hiked its

benchmark policy rate (refinancing rate) by 100 basis points
(bps) from 14.00% to 15.00%, a move that could pose further
downside risks to an already weak economic growth outlook over
the coming quarters. The decision was made despite growing
evidence that consumer price inflation (CPI) should continue to

Bolstering Confidence In The

Vietnamese Dong
On a more positive note, the SBVs decision to introduce
another rate hike could be aimed at bolstering confidence in
the Vietnamese dong, which has come under increased selling

table: MONETARY POLICY

Exchange rate VND/US$, ave [3]

2009

2010

2011f

2012f

2013f

2014f

2015f

2016f

17,800.79

19,133.98

20,600.00

20,375.00

19,800.00

19,250.00

18,750.00

18,250.00

Consumer prices, % y-o-y, ave [1,4]

7.0

9.2

18.9

14.0

7.0

5.5

5.0

5.0

Central Bank policy rate, % eop [5]

9.00

9.00

15.00

11.00

9.00

8.00

7.00

7.00

Lending rate, %, ave [6]

10.1

14.0

19.5

13.0

11.0

10.0

9.0

9.0

3.1

4.8

0.6

-1.0

4.0

4.5

4.0

4.0

Real lending rate, %, ave [2,7]

Notes: f BMI forecasts. 1 Base year 2000; 2 Real rate strips out the effects of inflation; Sources: 3 BMI. 4 General Statistics Office; 5 State Bank of
Vietnam; 6 IMF; 7 IMF/BMI.

16

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Business Monitor International Ltd

economic outlook

pressure as investors have flocked to the safety of the US dollar.

In this respect, the move could serve as a strong signal to currency speculators that the central bank is willing to defend its
exchange rate policy at the expense of slower economic growth.
This is in line with recent measures introduced by the central
bank to curb speculation on the Vietnamese dong (see VND:
Selling Pressures Set To Wane On SBV Intervention, May 3
2011). We are optimistic that these aggressive measures will
have a positive impact on efforts to de-dollarise the economy
and reduce the countrys reliance on alternative currencies such
as the US dollar and gold. Success in bringing down inflation
and keeping the currency stable should, in turn, provide a boost
to the SBVs credibility.

Banking Sector
SBV To Ease Rules To Allow Greater
Foreign Participation
BMI View
Rising debt-servicing costs are leading to an increase in non-performing loans as small businesses struggle to remain profitable in an uncertain economic environment. We are optimistic about the governments
efforts to consolidate small commercial banks, and we believe that
foreign ownership rules could be eased further to allow greater foreign participation in the banking sector. Although our long-term outlook
on Vietnamese banks remains positive, economic uncertainties in the

Greater Downside Risks To Growth

near term suggests that banking stocks should continue to underper-

Real GDP Growth, % chg y-o-y

10

form the broader equity index over the coming months.

Putting More Pressure On Businesses

Lending Rate & SBV Policy Rate, %

22
Lending Rate

20

Policy Rate

18

16

14

12
3

10

Jul-11

Oct-11

Apr-11

Jan-11

Jul-10

Oct-10

Apr-10

Jan-10

Jul-09

Oct-09

Apr-09

Jan-09

Jul-08

Oct-08

Apr-08

Jan-08

Jul-07

Oct-07

Apr-07

The recent rise in Vietnamese sovereign credit default swaps

suggests to us that investors are pricing in growing risks of a
sovereign debt default. We believe that deteriorating global economic headwinds and rising debt servicing costs are among the
key reasons behind growing pessimism about the governments
credit worthiness. Although the latest rate hike could put further
downward pressure on growth and raise debt servicing costs in
the near term, we are positive that higher interest rates will help
to attract more foreign capital into the country going forward.

Jan-07

Source: General Statistics Office, BMI

Business Monitor International Ltd

Q311

Q211

Q111

Q410

Q310

Q210

Q110

Q409

Q309

Q209

Q109

Q408

Q308

Q208

Q108

Q407

Q307

Q207

Q107

Source: State Bank of Vietnam, BMI

The State Bank of Vietnam (SBV)s decision to implement

another 100 basis points worth of rate hikes to bring its policy
rate from 14.00% to 15.00% should translate into higher debt
servicing costs for businesses. We see increasing risks that
profit margins for small and medium-sized enterprises could
be squeezed as production costs remain elevated on the back of
double-digit inflation. Furthermore, rising debt servicing costs
are likely to put further pressure on profits. Small businesses
that are operating on thin profit margins, and poor liquidity in
particular, could struggle to cope with higher interest rates and
risk defaulting on their debt payments. The Vietnamese government has warned that non-performing loans (NPL) could rise
significantly if economic conditions deteriorate over the coming
months, a threat that could in turn undermine the stability of
the banking system. As the accompanying chart shows, NPLs
www.businessmonitor.com

17

vietnam Q1 2012

across the four largest listed commercial banks in Vietnam

remain historically low. However, we believe that NPLs across
smaller commercial banks could be much higher.
No Warning Signs ... Yet

NPLs Of Selected Commercial Banks, %

16
14
12
10
8
6
4
2

Q211

Q111

Q410

Q310

Q210

Q110

Source: State Bank of Vietnam, BMI

Consolidation In The Banking Sector

In what we see as a move to recapitalise Vietnamese commercial
banks to strengthen their balance sheets and reduce the risk of
a banking crisis, the SBV is reviewing plans to consolidate
small ailing banks through mergers and acquisitions. Given
that Vietnamese banks remain undercapitalised in comparison
with regional banks, the move has attracted positive responses
from rating agencies and investors. From our standpoint, the
governments decision to consolidate small commercial banks
will be beneficial for the banking industrys development.
Firstly, it will provide economies of scale for these banks to
compete more effectively against their larger counterparts and
foreign banks. Secondly, we believe that consolidation of the
banking sector will serve as an effective way of eliminating
uncompetitive banks through an orderly process, compared
with allowing banks to exit the industry over time, which is a
slow and disruptive process.

Greater Foreign Participation By Easing

Foreign Ownership Rules
Early in 2011, we mentioned that increased foreign participation
in the banking sector could benefit the industry via the transfer
of skills and knowledge on international accounting and management practices (see Foreign Competition Forcing Banks
To Catch Up, February 15 2011). We believe that the SBV
may ease foreign ownership rules to allow foreign banks to take
a larger share in local commercial banks, a move that would
speed up the sectors development, in our view. According to

18

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We believe that easing foreign ownership rules further should

attract more foreign investors and pave the way for more deals
over the coming quarters. A lack of economies of scale owing
to a small market share mean that small commercial banks will
face significant difficulties in attracting foreign investors. Thus,
we see the Vietnamese governments decision to consolidate
small commercial banks as a positive move that will support
efforts to speed up the development of the banking sector. This
is a crucial element that will help local banks stay competitive
as Vietnam continues to open up its banking sector to foreign
competition over the coming years.
Still Lagging Behind The Rest

VSI Financial Index, Ho Chi Minh Index (VNI)

1,400
Ho Chi Minh Index (VNI) LHS
VSI Financial Index RHS

1,200

240

190

1,000
800

140

600
90
400
200

40

Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11

STB
VCB
CTG
EIB
Average

a report published by Fitch Ratings, deals that are currently in

consideration include the International Finance Corporations
proposed 10% stake in Vietnam Joint Stock Commercial Bank
for Industry and Trade (another 15% stake reportedly being
considered by Bank of Nova Scotia), and a 15% stake in Joint
Stock Commercial Bank for Foreign Trade of Vietnam by
Mizuho Corporate Bank. Other commercial banks are also
considering plans to raise more capital through issuing equity.

Source: Bloomberg, BMI

Banking Stocks Set To Underperform

Despite our positive long-term view on Vietnamese banks, we
warn that economic uncertainties in the near term continue to
present significant downside risks to the sectors performance
over the coming months. Risks of rising NPLs among smaller
commercial banks could have a ripple effect on the broader
banking sector. Thus, we believe that banking stocks will
continue to underperform the broader Ho Chi Minh Index over
the coming months (see chart). On the other hand, cheap valuations also suggest that banking stocks could outperform by a
significant margin when economic conditions in Vietnam start
Business Monitor International Ltd

economic outlook

to improve, and we would view any meaningful weakness as a

good long-term opportunity for investors.

selling pressure.
No Cause For Concern

Spot VND/US$ & 1-Month VND/US$ NDF Outright

22,000
21,500

Exchange Rate Policy

21,000
20,500

VND: Keeping A Stable Outlook, But

Risks Remain

20,000
19,500
19,000

BMI View

18,500

We are seeing encouraging evidence that inflationary pressures are

18,000

Spot VND/US$

starting to wane, and this should help to ease fears that the Vietnam-

1-Month VND/US$ NDF Outright

ese dong will come under further selling pressure.A narrowing trade

17,500

a potential devaluation in the currency are unwarranted, at least for

Sep-11

Jul-11

May-11

Mar-11

Jan-11

Nov-10

Sep-10

Jul-10

May-10

Mar-10

Jan-10

Sep-09

ing to instil investorconfidence in the currency. Thus, concerns over

Nov-09

17,000

deficit and government efforts to de-dollarise the economy are help-

Source: Bloomberg, BMI

now, andwe are happy to maintain our forecast for the exchange rate
to remain relatively stable at around VND20,650/US$ over the coming

As the accompanying chart shows, the 8.5% currency devaluation in February 2011 has helped to boost demand for exports,
resulting in a narrowing trade deficit. The trade deficit shrunk
to US$3.1 in Q211, compared with US$3.7bn and US$3.4bn in
Q410 and Q111 respectively. We believe that this has played a
key role in supporting the SBVs efforts to reinstall confidence
in the Vietnamese dong. We continue to believe that speculative selling pressures on the Vietnamese dong should remain
muted in the short-to-medium term, and we are maintaining
our end-2011 target for the Vietnamese dong to remain stable
at around VND20,650/US$, followed by a mild appreciation
towards VND20,100/US$ by end-2012.

months.

Waning Inflationary Pressures To Ease

Fears OfFurther Selloff
Early in 2011, we reiterated our concerns that failure by the
SBV to address mounting inflationary pressures and a persistent
trade deficit would risk further devaluations down the road (see
Dong Devaluation Call Plays Out, Further Weakness Possible, February 11 2011). However, we are seeing encouraging
evidence that inflationary pressures are starting to moderate,
and a soft landing for the economy is becoming increasingly
likely. Indeed, headline consumer price inflation (CPI) slowed
from 1.2% month-on-month (m-o-m) in July to 0.9% in August.
The spectacular bull run in commodity prices since early 2010
is running out of steam, as concerns over global economic
growth have resurfaced in recent months. This further supports
our view that inflationary pressures should continue to wane,
easing fears that the Vietnamese dong will come under further

The government has undertaken serious efforts to de-dollarise

the economy, and we believe that these structural reforms should
provide stability to the SBVs fixed exchange rate regime over
the longer term. The US dollar has traditionally been recognised
as a substitute for the Vietnamese dong and has been widely used
for transactions among businesses and individuals (according

table: EXCHANGE RATE

2009

2010

2011f

2012f

2013f

2014f

2015f

2016f

17,800.79

19,133.98

20,600.00

20,375.00

19,800.00

19,250.00

18,750.00

18,250.00

8.2

7.5

7.7

-1.1

-2.8

-2.8

-2.6

-2.7

Exchange rate VND/EUR, ave [1]

24,921.11

25,380.54

29,458.00

28,117.50

25,740.00

24,062.50

23,437.50

22,812.50

VND/GBP, ave [1]

27,591.23

29,657.67

33,578.00

33,822.50

33,660.00

33,687.50

32,812.50

31,937.50

VND/CHF, ave [1]

16,366.72

18,357.46

24,145.90

21,881.32

19,280.90

17,957.09

17,688.68

17,347.91

VND/AUD, ave [1]

14,122.38

17,584.13

21,568.20

18,337.50

14,850.00

14,437.50

14,062.50

13,687.50

JPY/VND, ave [1]

1,653,693

1,668,117

1,637,700

1,687,559

1,796,850

1,804,688

1,828,125

1,870,625

VND/CNY, ave 1

2,705.76

2,871.58

3,189.19

3,143.08

3,080.22

3,062.48

3,042.75

3,020.93

Exchange rate VND/US$, ave [1]

VND/US$, ave % change y-o-y [1]

Notes: f BMI forecasts. Sources: 1 BMI.

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vietnam Q1 2012

to the Asian Development Bank, the US dollar currently makes

up around 20% of total money supply). Meanwhile, gold is also
recognised as a substitute for the Vietnamese dong, mainly as a
hedge against inflation and protection against a depreciating currency. The ease of switching between these alternative currencies
has contributed to increased selling pressure on the Vietnamese
dong during periods of high inflation and economic uncertainty.
We believe that this phenomenon has been exacerbated by a
spectacular surge in gold prices in recent years, which has boosted
the metals attractiveness among Vietnamese investors. Being
fully aware that a dollarised economy could undermine the effectiveness of monetary policy, the SBV has taken aggressive
measures to discourage the use of the US dollar. The authorities
have also clamped down on black markets for trading currencies and gold. We remain optimistic that these measures to curb
currency speculation and de-dollarise the economy should help
limit selling pressures on the Vietnamese dong.

see a sustained improvement in the trade balance, we could see

the dong come under further selling pressure over the coming
months.

Encouraging Signs Of Improvement

Goods Exports & Imports & Trade Balance, US$mn

10,000

4,000
Trade Balance
Exports LHS
Imports LHS

9,000
8,000

3,000
2,000

7,000

1,000

6,000
5,000

4,000

-1,000

3,000

-2,000

2,000

-3,000

1,000

Apr-11

Jun-10

Nov-10

Jan-10

Aug-09

Oct-08

Mar-09

May-08

Jul-07

Dec-07

Feb-07

Apr-06

Sep-06

Jun-05

Nov-05

-4,000

Jan-05

Source: General Statistics Office, BMI

Risk To Outlook
Given that we are seeing evidence of moderating inflation, we
remain optimistic that the central bank could start to ease monetary policy next year. Thus, we are penciling in 400 basis points
worth of rate cuts for 2012. However, we note that Vietnam
remains heavily exposed to a slowdown in external demand.
The financial market remains unconvinced that recent measures
by the SBV will be sufficient to address the currencys decline.
The one-month non-deliverable forward (NDF outright) on the
Vietnamese dong continued to trade below the spot exchange
rate, effectively pricing in a depreciation of 1.0% over a onemonth period. This is not surprising given that the outlook on
exports remains cloudy in the medium term. Should we fail to

20

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