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Global Research

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Economics:

GDP growth is on a steady path. Buttrade deficit and inflation problems will persist. Weexpect the central bank will tighten throughout 2010 todeliver total rate hikes of as much as 4%.

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Equity Strategy:

The HCM Index continues tounderperform. Although the foreign sell-off hasstabilized and valuation is cheap, it is still too early tocall it a turnaround yet due to falling liquidity.

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FX Strategy:

Illiquidity in the FX market and lack of confidence in VND will continue to exert depreciationpressure on VND. We expect VND will reach 18,400 atyear-end.

Trade deficit remains a gaping concern

-4-20246810200520062007200820092010

USD bn

Trade balanceExportImport

Source: HSBC, CEIC

Inflation pressures likely to intensify

-1001020304020032004200520062007200820092010

Year-on-Year3m-on-3m annualized

Source: HSBC, CEIC

VietnamEconomics & Strategy

Vietnam Monitor(Issue 27)

Inflation and trade deficit concernsovercast Vietnam

8 February 2010

Jacqueline Tse*

Equity StrategistThe Hongkong and Shanghai Banking Corporation Limited+852 2996 6602 jacquelinetse@hsbc.com.hk

Daniel Hui*

FX Strategist

The Hongkong and Shanghai Banking Corporation Limited+852 2822 4340 danielpyhui@hsbc.com.hk

Wellian Wiranto*

Economist

The Hongkong and Shanghai Banking Corporation Limited,Singapore Branch+65 6230 2879 wellianwiranto@hsbc.com.sgView HSBC Global Research at:http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to NYSE and/or NASDregulationsIssuer of report: The Hongkong and Shanghai BankingCorporation Limited

Disclaimer & Disclosures

This report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it

2VietnamEconomics & Strategy8 February 2010

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Growth spurt continues

The Vietnamese economy appears to haverecovered firmly throughout the course of 2009. Itfinished the year with a strong 7.7% year-on-yeargrowth in Q4. This growth rate is a huge upliftfrom the 3.1% increase registered at the beginningof the year and it is significantly stronger than the4.4% and 5.2% seen in Q2 and Q3.The construction sector – spurred on by thegovernment’s USD8bn stimulus package last yearthat is heavily tilted towards infrastructure spending– has contributed greatly to the turn in GDP growth.With an 8-9% share of the economy, constructiongrew by 14.0% y-o-y and contributed 1.6 percentagepoints to the overall GDP growth.Most of the other sectors within the economy arestarting to show some signs of recovery as well.The services sector, which accounts for over 40%of the economy, is starting to inch closer to itslong-term rate of contribution to overall growth.In Q4, the sector contributed 2.7ppt to growth –compared to its long-run average of around 3ppt.The manufacturing sector, which constitutes abouta quarter of the economy, has started to pick itself up from the doldrums it found itself in at thebeginning of the year. The sector posted 5.7%year-on-year growth in Q4, as compared to 0.5%in Q1 of 2009. Although there is still some way togo before Vietnam’s manufacturing returns to itslong-run average growth rate of 9.5%, its recenttrend is pointing towards the right direction.The recovery in manufacturing is tied to therecent uptick in the country’s exports, just as itsearlier slump corresponded to the decline inexports. In keeping with our pan-Asian view of avirtuous cycle of growth in the region wherebyexports pick up in response to a policy-led

Economics

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GDP growth is gathering pace and should remain strong in 2010

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However, the strong growth has translated into trade deficit andinflation problems

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More aggressive tightening actions are expected to rectify thesituation, but policymakers are likely to only act in March atthe earliest

1. Construction remains strong and manufacturing is turning

-4048121620200120022003200420052006200720082009

% YoY

ManufacturingConstruction

Source: CEIC

3VietnamEconomics & Strategy8 February 2010

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demand recovery, Vietnam’s exports are bouncingback substantially.

2. Vietnam's exports are recovering firmly

-40-200204060802001200220032004200520062007200820092010

% YoY

TotalEx-Oil

Source: CEIC

Apart from exports, we expect the economy to gainits strength from domestic consumption and animprovement in investments. Together, these factorsshould allow the GDP to grow by 6.8% in 2010.

Worry #1: Trade deficit

While the recovery in exports has only started togather pace near the end of 2009, imports startedgalloping rather earlier. This gap has resulted in awidening trade deficit of USD1-2bn per monthsince April and the trend has continued until thelast reading of USD1.3bn in January of this year.

3. Trade deficits remain a gaping concern

-4-20246810200520062007200820092010

USD bn

Trade balanceExportImport

Source: CEIC

To some extent, the deepening of the trade deficitrecently has to do with some one-off factorscaused indirectly by the government’s growth-boosting policies of 2009.Take automobile imports, for instance. Courtesyof the effects of a temporary VAT reduction aswell as the 4ppt interest subsidy scheme on loansthat was given by the government last year,automobile imports have skyrocketed, helping topush up the country’s import bills in 2009.

4. 2009: The best year ever - for car imports

03691215Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10

Unit th

0100200300400500

USD mn

VolumeValue - RHS

Source: CEIC

In fact, monthly car imports registered the highestlevel ever in both value and volume terms by the endof last year, as consumers rushed to procure theirchoice vehicles before the scheduled withdrawal of these friendly measures at the end of the year.It is no coincidence that a major vehicle supplierwe spoke to this week told us that 2009 was theirbest year ever in terms of sales. However, as thesetemporary measures are no longer applicable atthe start of this year, automobile imports havecome down dramatically.These temporary factors aside, there remains aninherent imbalance in the economy that willcontinue to result in strong imports which, moreoften than not, outpace exports.For one, a developing country like Vietnam requiresa higher level of infrastructure investments, whichare necessary to unlock the potential of the economyin the long term. In the immediate period, however,such investments translate into import bills for items