Vietnam: not the 1997 crisis redux
In 2007 when Vietnam was already overheating, a surge in capitalinflows led to a sharp acceleration in import growth and, togetherwith surging food prices, to a sharp acceleration in inflation. ButVND and USD liquidity has been tightened sharply , import growth isalready slowing and inflation is bound to follow suit over the nextfew months. Onshore rates appear set to rise further which suggestgoing long the forward points. At the same time, a sovereign defaultappears unlikely in the next year or so, and the economicstabilization we expect will see sovereign risk fall, which suggestsselling the 5 yr CDS.
Chart 1 : Headline inflation hasaccelerated on the back of foodprices (CPI, %, Y/Y)Chart 2 : A strong acceleration inimport growth suggests overheating(%, Y/Y)
0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%Jun-03Jun-04Jun-05Jun-06Jun-07Headline Food Non food CPI
J u n - 0 5 O c t - 0 5 F e b - 0 6 J u n - 0 6 O c t - 0 6 F e b - 0 7 J u n - 0 7 O c t - 0 7 F e b - 0 8
Source: ABN AMRO Source: ABN AMRO
Recent inflation and external trade data has generated market concerns over thepossible consequences of overheating and led Moody’s, S&P and Fitch to placeVietnam on negative outlook. Inflation has accelerated to 25.2% y/y in May 08,from 7.3% in May 07. However, this reflects largely an increase in food prices:food price inflation accelerated to 42.4% in May 08, against 9.2% in May 07 andthe weight of food and foodstuff in the CPI is .43 (.47 up to May 06). The nonfood CPI accelerated by 7.4% in May 08, from 4.8% in May 07.
Overheating and loss of monetary control
But the acceleration in food price inflation explains only about 80% of theacceleration in headline inflation over the past year, which suggests some spill-overs from food to the broader price index. Vietnam’s economy is experiencingresource pressures after years of fast growth: during 2003-07, Vietnam grew by8% a year on average, the fastest growing economy in Asia after China andIndia. And Vietnam’s current account deficit widened from nearly 0 to 10% of GDP in 2007.
Produced by: ABN AMROBank NV
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Local Markets Strategy - Asia