Vietnam Economy On The Verge Of Collapse?

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Vietnam Economy May Improve, Stemming Concern, JPMorgan Says

By Jason Folkmanis

May 30 (Bloomberg) -- Vietnam's inflation may start to cool and the trade deficit could widen at a slower pace in the third quarter, stemming a plunge in confidence in the economy and the currency, JPMorgan Chase & Co. said.

``We expect to see modest improvement in the second half,'' Matthew Hildebrandt, an economist at JPMorgan Chase Bank in Singapore, said in a note today. ``The key in the near term is local depositor confidence. If this does not hold up, better data on the macro front will be too little, too late.''

The Southeast Asian country's inflation rate is the highest since at least 1992, while the trade deficit has more than tripled. Two credit-rating companies downgraded the outlook on Vietnam's debt this month, and Morgan Stanley has warned of a possible currency crisis.

An improvement in economic indicators is critical to preventing investors from fleeing Vietnamese dong-denominated assets, JPMorgan said.

Inflation, which reached 25.2 percent this month, and the widening trade gap have heightened investors' sense of perceived risk in Vietnam, Hildebrandt said.

Rice prices, one of the key drivers of Vietnamese inflation, have started to ease with expectations of a strong global harvest, he said. Inflation may slow after June, he added.

An increase in imports that pushed Vietnam's trade deficit to $14.4 billion in the first five months of the year should ease as higher borrowing costs, lower spending on public projects and surging prices curb demand, Hildebrandt said.

Dong Devaluation

Morgan Stanley said in a May 28 note the dong is poised to weaken in a manner similar to Thailand's baht in 1997 because Vietnam's current-account deficit may widen this year to an ``unsustainably large'' 7.5 percent of gross domestic product.

A large devaluation of the dong due to foreign capital flight is unlikely in part because Vietnam has negligible levels of short-term external debt, said Hildebrandt at JPMorgan.

``This is not 1997,'' he said. ``The quick and sharp retrenchment in credit from foreign banks that occurred in the 1997-1998 crisis is not a material risk in Vietnam today.''

Still, concern about a loss of stability in the economy may hurt local confidence in the dong and prompt Vietnamese residents to buy other currencies, reducing foreign-exchange reserves, Hildebrandt said. That may force Vietnam to look abroad for capital.

``The region's central banks are flush with reserves and the International Monetary Fund has been hard-pressed to find borrowers in recent years,'' Hildebrandt wrote. ``A $25 billion transfer from the IMF or another central bank in the region, or smaller contributions from several, is certainly a possibility.''

Bank Issues

Bad loans for equity and property investment have also caused ``issues at a handful of small domestic banks'', which account for about 1 percent of total banking assets, according to JPMorgan.

``Reportedly, a few banks have been brought under control of the central bank,'' Hildebrandt said. ``This action actually serves to instill confidence that banks will not be closed during a time of macroeconomic stress.''

To contact the reporter on this story: Jason Folkmanis in Ho Chi Minh City at [email protected]

Last Updated: May 30, 2008 02:42 EDT

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