Vietnam’s currency controls are forcing foreign investors into the black market to obtain dollars, aggravating declines in the world’s worst-performing stock market and pushing benchmark bond yields above 20%.
Businesses that aren’t controlled by the government pay about 7% more than the official rate when using the dong to buy dollars because the state gives its trading companies priority access to the US currency, the World Bank said. The premium is reducing demand for the nation’s stocks and bonds, according to PXP Vietnam Asset Management.
“There is clearly a shortage of dollars,” said Kevin Snowball, a money manager at PXP Vietnam in HCM City, which oversees US$117 million. “If you have dollars and you want to buy dong, you will get the official rate, but if you have dong and you want to buy dollars it’s a completely different story.”
Vietnam’s financial markets are tumbling after the central bank raised interest rates three times this year to 14% to tame inflation that accelerated to a 16-year high of 26.8% in June. The economy expanded 6.5% in the first half, the slowest in at least seven-years, while the trade deficit more than doubled to US$14.8 billion.
The Vietnam Stock Index, which climbed 168% in the past two-years as prime minister Dung Nguyen Tan Dung encouraged state companies to raise cash and finance expansion, slumped 54% since December. Yields on five-year government bonds jumped to 20.53% on June 13, the highest since at least July 2006, from 8.71% on January 3.
The dong dropped 5% to 16,846 per dollar, its biggest decline since 1998. Traders are pricing in an 18% drop in the coming year to 20,600, according to offshore 12-month non-deliverable forwards. The contract was at 16,080 on December 31. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars.
The official rate will fall 6.4% to 18,000 by the end of the year, according to Calyon, the investment banking arm of Credit Agricole SA.
Vietnam may suffer a “currency crisis” similar to the slump in the Thai baht that triggered the regional collapse in 1997, Morgan Stanley analysts said in a report last month.
“The central bank is not providing dollars, except to some importers and some working capital for exporters,” said Noritaka Akamatsu, a Hanoi-based economist for the World Bank. “That’s why there is some depreciation pressure.”
The State Bank of Vietnam allows the currency to trade 2% either side of its daily reference rate. Gold shops and street money changers offer a black market rate of about 18,000, said Akamatsu. Banks offer a similar rate by adding fees to sell dollars, he said. The rate was as high as 19,500, he said.
The dong slumped in the forwards market in May as foreign investors trapped in the bond market bet against the currency to hedge against losses, Akamatsu said.
Rajeev De Mello, who helps oversee about US$600 billion as head of Asian bonds at Western Asset Management Co.’s Singapore office, sold Vietnamese bonds in April and says the market has frozen. Western Asset, part of Baltimore-based Legg Mason Inc., also couldn’t get a price for dong forwards, he said.
“Even when things were good, it was difficult to buy bonds in any size,” said De Mello. “Now when things are bad, it’s impossible to either buy or sell.”
Union Investment in Frankfurt, Germany’s third-biggest fund manager, forecasts a smaller decline in the dong than the forward market and is buying contracts, said Sergey Dergachev, the firm’s emerging-market investor, who helps oversee the equivalent of US$285 billion. Union Investment expects an 11% drop to 19,000 by December 31.
Risk of `overkill’
The risk is Vietnam exhausts its currency reserves of US$22 billion supplying dollars or that “overkill” in cooling growth causes losses at state banks, said the World Bank’s Akamatsu.
Pramerica Fixed Income Asia, a unit of Prudential Financial Inc., the second-biggest US life insurer, is staying away.
“It’s a shocking and timely reminder of problems that developing countries face,” said Clifford Lau, a Singapore-based portfolio manager at Pramerica that oversees US$7.6 billion in emerging-market debt. “Everyone is taking a step back.”