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Economy weathers inflation, forex storms
November was characterised by positive economic development but accelerating inflation and a volatile foreign exchange market, according to a monthly report of the Viet Nam Asset Management Ltd (VAM).
VAM is a fund management company that engages in public and private equity investment and advisory services in Viet Nam.
The national Gross Domestic Product (GDP) in November was 7.24 per cent, resulting in a full-year growth of about 6.7 per cent, compared to last year's 5.23 per cent, according to the report.
Overseas remittances will likely reach US$7.2 billion in 2010 compared to $6.6 billion in 2009, while capital inflows from disbursed foreign direct investment and official development assistance were also improving.
The most significant factor was the country's full year of export growth reaching 23 per cent, nearly quadrupling the 6 per cent target set for the year by the Government.
Meanwhile, import growth dropped between 19 and 20 per cent.
VAM experts predicted the balance of payments would likely be a $2 billion deficit this year, down from last year's deficit of $8.8 billion.
In addition to such positive changes in the economy, policy markers and market participants were still concerned about increasing inflation and foreign currency fluctuations.
In November, the Consumer Price Index increased 1.86 per cent from October, marking a third month-to month increase above 1 per cent, after six months of being kept under this threshold.
The CPI increase in November brought the CPI index this year to 9.58 per cent and about 11 or 12 per cent by the year-end.
The foreign exchange market was volatile during November, with the greenback being offered at 21,500 dong per dollar in the unofficial market at the month-end, 10.25 per cent higher than the official ceiling band of VND19,500.
This occurred despite the Government's announcement early that month that it would allow the State Bank of Viet Nam (SBV) to use foreign reserves to inject dollars into the market. SBV said it had no plans to further depreciate the dong until the Lunar New Year.
Strong rallying in the local gold price in the past few months has been a major cause for the increasingly volatile forex situation, which led to panic in the market.
After the SBV's decision to allow gold imports early this November, local gold prices started to cool down to VND35.9 million per tael (a tael was equivalent to 1.2556 troy ounce) at the end of the month, compared to its all-time record at VND38.2 million per tael in mid-November.
As the GDP growth target for this year was achieved, VAM analysts said the Government's focus now would move to curbing inflation and cooling the forex and gold markets to stabilise the economy.
The Government implemented successive tightening monetary measures in November.
This included raising interest rates by 1 per cent annum (Vietnamese dong's base interest rate to 9 per cent per annum, refinancing interest rate to 9 per cent per annum, discount rate to 7 per cent per annum, and overnight rate to 9 per cent); and removing the cap on both deposit and lending rates for banks.
Toward the end of November, many banks increased the deposit rate for the dong to 13-14 per cent per year.
Some smaller commercial banks even offered borrowing rates of 14.5-15 per cent per annum in an attempt to retain their depositors and mobilise more capital for their increasing year-end lending demand.
However, the desired effects on inflation of these tightening policies would likely to be seen only from next year, they said.
Evaluating the local stock markets, VAM experts said the VN-Index ended November at 451.59, down 1.5 per cent compared with last month.
During the month, they saw a divergence in the market trend, hitting the trough at mid-month and then significantly picking up during the last week of the month.
Additionally, the low average liquidity rate might indicate that retail investors were still cautious about the recovery of the equity market over the short-term.
According to VAM, investors were not too bullish about the market in the short-term, but equities came down to an attractive level.
The negative macro-economic situation has mostly been priced in, so it might be a good time for investors to consider accumulating stocks.
VAM suggested that the Government be more transparent and proactive in implementing its monetary policies in order to restore investors' confidence and to help the equity market sentiment.
Stocks in consumer staples, oil&gas and materials, would continue to attract investors' attention. For the long term, materials, real estate and banking sectors would become preferred.
In this time of volatility, they advised investors to keep close tabs on macroeconomic developments for signs of recovery and stability before jumping in to the market.
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