Vietnam passes policy test, fails credibility game
Source: 26-JUL-2008 Intellasia | Reuters
Jul 26, 2008 - 7:00:00 AM One of the final pieces of Vietnam's policy puzzle fell into place this week when it jacked up fuel prices to cut the fiscal subsidy bill.

The hike came on top of the steep rises in policy rates, strong defence of a tumbling currency and curbs on bank lending, meaning Vietnam has done almost exactly what the textbooks prescribe for an overheated economy.

Only, that failed to impress financial markets.

A series of conflicting messages and blunders has shaken investors' faith in the authorities' ability to manage the economy.

One barometer of investor sentiment, the Vietnam stock market lost more than half of its value this year and nearly 10% so far this week.

The dong is weaker, despite being heavily managed by the central bank. Bond yields jumped 200 basis points in a day.

"At the moment, we have a lot of concerned investors," said Pham Dang Truong, director of investment at Habubank Securities in Hanoi. "Our government can do better in terms of managing investors' expectations."

Take for instance the dong's 2% devaluation in June. It came as a shock to investors who had been led into thinking the central bank had no plans of weakening the currency.

Then, just two weeks before Monday's steep 31% rise in fuel prices, Vietnam's deputy Industry and Trade minister Bui Xuan Khu said the government would keep the prices of petrol, coal and power unchanged for the rest of this year.

"For several weeks we had heard that inflation is a priority. If inflation is a priority, why would you do something that hurts inflation?" said Matthew Hildebrandt, an economist with JPMorgan Chase.

"It does continually persist in the back of one's mind that the government says one thing but then has a tendency to do another."

By most estimates, the fuel price rise could push annual inflation, already in double digits for nine months, above 30%. Most economists expect the State Bank of Vietnam will soon announce another rate rise, the fourth this year.

So much for the views of one of the central bank directors, who was quoted as saying earlier this month the base rate may be cut in August.

Uneasy calm?

In spite of the gaffes in its communication, the Communist Party leadership has managed to crack the whip and bring a runaway economy back to some semblance of stability.

Immobile cranes scattered across the capital city Hanoi's skyline and bare construction sites stand testimony to that. By some estimates, projects worth US$1 billion have been halted across Vietnam to cool growth.

The dong has stabilised, trading closer to the central bank's set levels near 16,500 per dollar than the lows of 19,000 dealt in the black market in June.

Even the trade deficit, which tripled to nearly US$15 billion in the first half of 2008, looks set to improve albeit with some heavy-handed intervention by the central bank.

The authorities received off to a slow start, and the central bank has received a fair share of the blame for failing to halt excessive lending and investment.

But now the government has been candid about the price of its new policy course. It expects growth to slow to 7% this year from last year's 8.5% and inflation to double this year to 25%.

"They had to sacrifice economic growth for inflation to come off and the trade situation to improve. That was a hard decision but they took it," said Prakriti Sofat, an economist at HSBC.

At the same time, Sofat says the Vietnamese government has "never been clear in terms of direction."

Still, many in the market think the oil price rise was a huge blow, both to market sentiment and policy credibility.

"It may take some time for the situation to calm down," the Asian Development Bank's Vietnam country director Ayumi Konishi said. "That will again bring a negative impact on the stock market, worsen trade deficit situation and the currency can face another wave of pressure."

There are still some items on the policy wish-list. Analysts want policy to remain tight for some time. They also hope the central bank will come to the aid of smaller banks which could cave in under the pressure of the new stringent rules.

Transparency needs to improve too.

"Offshore investors and institutional players have concerns about non-performing loans, the true extent of which may not be revealed until the year end's reporting," said Truong.

Even retail investors are taking no chances. "I always keep some money in dollars, some in gold and some in the stock market," said Phuong, who works at a multinational firm. "But now the stock market is too risky."