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VAM: Vietnam Market Analysis May 2011

Interest rates the highlight of the month
With the aim of controlling inflation, the SBV tightened money supply, thereby increasing interest rates. Market interest rates are now averaging 19.86% for short term borrowing, and if including fees (which banks apply to get around the lending rate cap) the effective borrowing costs increased to 23%. On the other hand, the US$ cost of borrowing (approximately 3%) and the rate paid by SOEs is actually negative in real terms, due to a two-tier lending rate. Rates at these prohibitive levels in the private sector threaten to choke off any growth for the year; despite this, another 100 bps interest rate hike for the year is still a possibility.
Following Aprils introduction of USD-denominated deposit cap of 3% for individuals, domestic residents attracted by the large gap between USD and VDN deposit rates, opted to keep fewer dollar deposits, thereby contributing to 2.89% MoM decline in USD-denominated deposits. VND-denominated deposits increased by 1.27%. No slowdown in credit growth, as seen by M2 levels, is yet visible. With credit growth reaching 6.5% year-to-date (as of April), the annual target credit growth rate of 16  18% will likely be overshot. The SBV lifted Open Market Operations repo rates 100 bps to 15%, thus sending a message that tight monetary conditions will remain.
Inflation still very much a concern
Nationwide CPI rose 2.21% MoM (2.1% when seasonally adjusted) with the first five months of 2011 reaching 12.07%. Inflation in May continued to accelerate, approaching levels not seen since 2008 with no signs of easing. Three months into a shift in focus from growth to curbing inflation, monetary authorities have used both fiscal and monetary tools, tightening aggressively, yet little impact is invisible. Seasonally adjusted food prices were up 3% MoM in May, following a 3.8% increase in April. Prices in food and energy related items were most noticeably up, however, it should be noted that this was aided by double digit hikes in electricity and fuel prices in late February and later March. It is likely that inflation will surpass 20% in the coming months and further monetary tightening is to be expected.
Stability in the dong continues
Stability in the VND/USD exchange rate continued into the month of May. With the dong appreciating about 0.43% over the previous month, banks appear to have sufficient USD dollar supplies to meet importers needs. Although exact figures are difficult to come by, recent media reports have quoted a government minister as saying that reserves stood at $10bn (the equivalent to about 6 weeks of imports) in December 2010. Towards the end of May, the central bank announced that it has purchased USD 1.2bn with the aim of increasing international reserves. In this quest, the SBV outbid the market by 40  50 dong, to VND 20,600 per USD, indicating it exercises caution while added to reserves by striving to avoid furthering inflation through increased liquidity. 
Domestic indicators continued to show positive signals
Domestic indicators such as growth in exports and imports both continued to show increases for the month however, growth came at a decreasing pace than in April. Exports and imports, increased at 5.7% and 2.7% respectively for May. While Mays trade deficit came to US$1.7bn, the highest in 18 months, the drop in commodity export growth rates was a contributing factor. Domestic consumption remains strong with industrial production expanding by 14.4% YoY and retail sales growing by 23.7% YoY, FDI, overseas remittances and aid money remain important sources of exchange for Vietnam to offset its trade deficit. FDI figures for the first 5 months of the year totaled $4.7bn, or about 23.5% of the years target.
Equity markets 
Starting the month after a long holiday weekend, the VN-Index opened at 483.3 points and ended the month at 421.37, representing a 12.23% loss MoM. The VN-Index even plummeted to 386.36 points on 23 May 2011, its lowest level since 2009. May also saw dramatic downward trend in trading volume anda squeeze on liquidity on both bourses. Trading values for both bourses fell for yet another month, dropping to $27 million in May, down from $62 million and $42 million in March and April, respectively.
The massive sell-off from retail and even institutional investors resulted from investors low confidence which in turn was caused by the upward revision of inflation forecast and “persistently high interest rate”. Moreover, news about the banks deadline to reduce real-estate and non production loans to below 20% of total loans also ignited fears of margin calls and forced selling to recover bad debts on the banks part, leading to a 10 consecutive bear sessions on the market in spite of a strong rebound after hitting the record 2 year low bottom. Further contributing to downward pressure was many investors needing to meet margin calls by liquidating holdings at limit down prices in a period of low liquidity. The trading band further fueled negative sentiment by preventing the market from finding its true equilibrium.
Rounding out the month, the market saw an upturn with several large caps closing limit up. Many investors are abstaining from the market, choosing instead bank fixed term deposits as high bank interest rates provide a profitable, safe alternative.
To better reflect the true sentiment in the market, a senior official has called for the introduction of new indices. While the composition of the indices is yet to be determined, suggestions range from top 30 or top 50 large-market cap companies or dividing the market into business sectors. The poor equity market performance shows macroeconomic factors continue to impede recovery and outlook remains bearish.
Our ViewWe believe the market will continue to fluctuate within the wider range of the trading band in the short-term as investors key concerns, namely double-digit inflation and trade deficit are still prevalent. Economic recovery seems a distant prospect, and investors prefer the high fixed deposit rate to equity at this time. However, in term of valuations, we think Vietnamese equities are currently priced more cheaply than those of other regional markets.
In response to poor market sentiment, the Ministry of Finance recently announced their support to recover the equity market by allowing (1) investors to use more than one brokers; and (2) buying and selling the same securities within a trading day provided that investors securities for sales are available in their depository accounts, with effect from 1st August 2011. This news is considered good catalyst to regain the capital inflow into the system despite the current market instability. For investors with a medium- to long-term outlook, the current poor market is a great opportunity to increase their equity holdings at cheap valuations.  We maintain our picks of telecommunication, consumers and energy sectors with focus on strong fundamental resilient companies with little or no debts as most companies in the other industries are struggling hard with the high-interest rate environment.
Source:VAM, 14.06.2011

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