Posted by LeGianT on June 20, 2008
Jun 19th 2008 | BANGKOK
From The Economist print edition
Is dangerous overheating contagious?
EVEN by the standards of Asia’s booms and busts, the turnaround in Vietnamese investors’ sentiment has been remarkable, veering from wild optimism a few months ago to deep pessimism today. Surging inflation—it is now over 25% year-on-year—has aggravated a slump in the Ho Chi Minh City stockmarket, previously one of Asia’s most bracing (see chart). From worrying about upward pressure on the dong, the authorities now fear a currency collapse. Some economists worry this could spill over to other Asian countries where inflation is also reaching alarming levels.
The central bank has announced a 2% devaluation, hoping to relieve the pressures on the currency. It also raised its base interest rate from 12% to 14%. The moves, however meek, briefly supported the stockmarket, which had fallen for 25 trading days in a row. But offshore trading in dong futures is pricing in a further devaluation of around 30% within a year.
It has been clear for months that Vietnam’s economy is overheating. The trade deficit from January to May was over $14 billion, about the same as for all of 2007. Like the stockmarket, property prices have tumbled, leading to fears about the country’s banks, which lent heavily for speculation in both assets. The government is already thought to be providing discreet liquidity support to a dozen small banks. For all these concerns, foreign investors still see Vietnam as “the next China”. It is the Vietnamese who are gloomy, and fears of hyperinflation run deep after some bruising encounters in the past.
Already, there are signs that people are hoarding gold. Tim Condon, an economist at ING in Singapore, notes that although Vietnam imported 43 tonnes of gold in the first four months of this year, the precious metal is trading in Ho Chi Minh City at a big premium to the international price.
Meanwhile, the government is trying to curb currency speculation by restricting foreign-exchange booths from selling dollars. To reduce imports, it is said to be allowing the central bank to sell dollars only to businesses that have its approval for their foreign purchases (such as buying capital goods). This, however, may push others towards the black market or offshore, further undermining the credibility of the official exchange rate.
Despite the recent increases, real interest rates remain negative. Meanwhile, a daft law bans banks from pricing loans at more than 150% of the base rate and this has all but stopped lending. That, in turn, has increased the risk of a hard landing, says Dominique Dwor-Frecaut, an economist at ABN AMRO in Singapore: better to let the market set the price of credit.
To make matters worse, the government has stopped publishing timely figures on the banking system and foreign reserves. Word is that the reserves are not far short of the $23 billion-worth the country had in December, despite its efforts to shore up the currency. But the absence of official figures “makes people think the worst”, says Mr Condon.
Could Vietnam’s difficulties be a harbinger of trouble elsewhere in Asia? The optimists say no, arguing that inflation could peak later this year, the government’s measures could restore lending and imports to sensible levels and a moderate devaluation could relieve the pressure on the dong. Moreover, Vietnam’s current-account deficit—13% of GDP, according to the IMF—is one of the widest in Asia. Its currency problems are in a category of their own.
However, Vietnam serves as a timely reminder of how quickly inflation can get out of control, and the speed with which that can shatter confidence. Policymakers across Asia should be taking note.
The fall of Ho Chi Minh City
Apr 3rd 2008 | BANGKOK
From The Economist