Monday, June 23, 2008

Inflation juggernaut bears down on Vietnam bourse

By Amy Kazmin in Bangkok

Published: June 19 2008 03:00 | Last updated: June 19 2008 03:00

It has to be one of the worst ever stock market runs. Ho Chi Minh City fell every trading day in May and early June amid gloom over skyrocketing inflation and an economy seemingly going off the rails.

By the time the market had finished its 25-day slide last week, the index was down 60 per cent from the start of the year, making it the world's worst performer.

Vietnam's problems illustrate the difficulties of many emerging market countries as they struggle to keep a lid on inflation.

After years of growth, these economies are facing questions over how to contain rising prices, exacerbated by the soaring value of oil and food.

Inflation in the 20 largest emerging market economies rose to 6.9 per cent in March from 4.5 per cent in March last year, according to Fitch.

In Vietnam, inflation hit 25 per cent at the end of May, the highest level since 1993.

However, there are signs Vietnam's market may be at a turning point as Hanoi signals a growing determination to battle inflation even if it means sacrificing growth.

On four of the past five trading days, Ho Chi Minh City has risen, gaining nearly 4 per cent in total. Volumes have increased from $2.4m on June 10 - the day before it hit bottom - to $20m on Tuesday.

"I am not saying this is the end of the bear market," Kevin Snowball, a director at Ho Chi Minh City-based PXP Asset Management, said.

"It may be that it turns out to be the proverbial dead cat bounce. But for the time being, we are stepping back and having a look at whether there is any conviction on the upside."

Selling pressure seemed to ease after the State Bank of Vietnam raised an interest rate last week to 14 per cent from 12 per cent, its second rate rise in three weeks, as part of an increasingly aggressive monetary tightening.

Previously, it had relied on administrative edicts and mandatory bond purchases by banks to drain liquidity.

"The central bank is starting to develop a more sophisticated monetary policy framework, one which uses interest rates in a more transparent way," Benedict Bingham, the IMF's resident representative in Hanoi, said.

But many still worry over whether Hanoi is doing enough to curb its spending and spending by state-owned enterprises - a factor in the overheating.

"The fiscal stance for 2008 is not yet clear to investors," Mr Bingham said.

"The government needs to put the pieces together and answer the basic question that everyone is asking, which is: Is fiscal policy going to pull in the same direction as monetary policy?"

The jury is out on whether Vietnam, like the rest of the emerging market universe, will be able to tackle the serious problems that inflation is creating for its economy and markets.