Thursday, July 29, 2010

Possible Problems From Fitch's Downgrade Of Vietnam?

The Vietnam stock market has NOT been doing well this year.

VN Index deeply declines to 491pts

  • The VN Index suddenly dropped during July 28 session, causing worries among the stock investors. Going against the uptrend of the global stock markets, the domestic stocks seemed to show no care to the movements of foreign stock exchanges.

    After the statement released by State Bank of Vietnam about maintaining the basic interest rates of 8 percent per year, it was considered as the mainstay of the market during the time the market showed no impacts to the released information sources.

    At closing time, the VN Index sharply slumped by 6.67 points or 1.34 percent to end at 491 points with the total matching order trade of over 39.6 million shares worth 1.136 trillion dong in value.

The following chart shows the performance of the VN Index this year to date.

And not helping is the news that Flitch has downgraded Vietnam Ratings!

Fitch Cuts Vietnam Ratings
    Fitch Ratings cut Vietnam's credit rating Thursday, citing a deterioration in its finances and a banking system increasingly vulnerable to systemic stress, and warned that the country could face economic and financial instability ahead.

    The ratings firm also slammed the country for
    poor management of its macroeconomic policies.

    "Vietnam's track record of stop-go policy tightening and easing has been ad-hoc, reactive and inconsistent," said Ai Ling Ngiam, director in Fitch's Asia Sovereign team.

    Fitch downgraded Vietnam's long-term foreign and local currency ratings to B+ from BB-. The outlooks on those ratings are stable. Fitch also cut Vietnam's Country Ceiling to B+ from BB- and affirmed the short-term foreign currency rating at B.

    Mrs. Ngiam said Vietnam's weaker external finances and rising external financing requirements amid an inconsistent macroeconomic policy framework, a highly dollarized economy and a weak banking system were behind the rating downgrade. Fitch also noted that while Vietnam's foreign exchange reserves increased in the second quarter, it doesn't believe the country's external finance position has stabilized yet.

    The ratings firm said net long-term capitals flows, including direct and portfolio investment, may fall short of covering Vietnam's current account deficit for a third straight year.
    Fitch estimates the deficit will amount to more than 10% of GDP in 2010.

    Fitch said the repatriation of external assets by state-owned firms suggests that the rise in foreign exchange reserves so far this year may not be sustainable. It forecasts Vietnam's gross external financing requirements will increase to 79% of forex reserves in 2010 from 37% in 2009, higher than the median of 55% for "B" ratings. "This would increase Vietnam's vulnerability to changing external financing conditions," Fitch said.

    Mrs. Ngiam said there is a risk that Vietnam may loosen its policies toward a pro-growth stance in the run-up to the January 2011 national congress of the ruling Communist Party.
    "Premature easing increases the risk of macroeconomic and financial instability," she said.

    Fitch said prolonged double-digit credit extension to state and private entities underlines rising sovereign contingent liability risks posed by the banking sector.
    It forecasts the stock of private credit to reach 116% of gross domestic product in 2010, the highest stock of private credit relative to output in the B-rated category.

    Vietnam also suffers from a large budget deficit, which Fitch expects will total 7.6% of GDP in 2010, only slightly narrower than 8.7% of GDP in 2009.

    "Financing deficits of this size has proved difficult, with the government resorting to domestically-issued foreign currency instruments, raising exposure to exchange rate risk," Fitch said.

    Fitch said Vietnam's public debt increased to 45% of GDP in 2009, "eroding what had traditionally been a key rating strength, while the risk of contingent liabilities migrating to the public sector's balance sheet is high."

    The ratings firm also said that according to its Macro Prudential Risk Monitor the vulnerability of Vietnam's banking system to potential systemic stress has increased to "high" from "moderate" and now ranks E3, the lowest point on the matrix.

    A preliminary Fitch analysis based on Vietnamese accounting standards estimates a possible banking sector recapitalisation bill for the top six systemically important banks, which represent 51% of total banking sector assets, would be at least 12% of GDP, should systemic risks materialise, the ratings firm said.

    Uncertainty surrounding the banking system's asset quality is underscored by the fact that non-performing loans based on Vietnam's accounting standards often fall short of that of international accounting standards by three to five times.

    "Furthermore, domestic confidence remains sensitive to shocks, leaving the Vietnamese dong vulnerable to renewed switches into foreign exchange and gold. Further rounds of currency pressure would be negative for financial stability given the highly dollarized banking system," Fitch said.

    Fitch said Vietnam's sovereign fundamentals remain supported by strong backing from multilateral and bilateral creditors as well as significant gains in income per capita following the introduction of the "doi moi" policy in 1986.

Here's the version published on the Edge Financial Daily: Fitch downgrades Vietnam to 'B+'; Outlook Stable

And here is the 5 year chart of the VN Index.


How serious is this downgrade? Could Vietnam's trouble escalate?

Now the concern for us is obviously the risks involved with our local company's exposure to Vietnam.

A couple years ago, iinm in June 2008, RHB did have a report listing out companies with exposure to Vietnam. But that might not be accurate as it's a long time ago.

ps... I am not a Sotong, so I am afraid I have zero answers to offer.


Richard Cranium said...

Do you get the distinct feeling that people are now taking down the markets?

Just, oh, not three five months ago, people talked about Vietnam become a new economic tiger, bla bla bla and we need to be exposed to this market.

Kris said...

wow..if trouble is brewing in the neighbourhood, then there is might be some risks that it might spill over to the rest of Asean countries.

But Vietnam, is has a very "young" populace. if you go to hanoi or saigon, you can hardly find ppl more than 40 years old on the street. Mostly around 20-30 year olds. Weird but true as i checked Wikipedia as Wiki states that around 80% of the populations fall in these categories.

bullbear said...

The Vietnam war took a heavy toll and changed the demographic of the Vietnamese society. What you observe is true.

Ze Moola,
Yes, you are not Paul the Sotong. Still its good to have your views.