Thursday, November 06, 2008

Vietnam external debt sustainable, JPMorgan Chase says

Vietnam’s external debt position appears sustainable, even as the cost of protecting from default increased, JPMorgan Chase & Co. said.

Spreads on credit-default swaps for Vietnam’s external debt almost quadrupled by early last week from August, before narrowing to about twice the August levels, Matt Hildebrandt, an economist at JPMorgan Chase in Singapore, wrote in a research note.

An increase in the price of credit-default swaps indicates deterioration in the perception of credit quality.

The country’s total external debt at the end of last year was about US$19.3 billion, of which about $2.6 billion was privately held, and annual debt-servicing costs were about $900 million, JPMorgan Chase said citing the country’s Ministry of Finance. The figures compare favorably to Vietnam’s foreign reserves of about $22 billion, Hildebrandt wrote.

The “rapid rise in spread levels appears to have reflected general investor sentiment toward emerging markets rather than specific concerns about Vietnam’s debt profile,” Hildebrandt wrote. “The government has successfully reestablished macroeconomic stability since concerns emerged earlier this year.”

The pace of growth in Vietnam’s trade deficit, which surged earlier this year and caused concern about a possible balance-of-payments crisis, has slowed along with the pace of import expansion, according to JPMorgan Chase. The trade deficit may narrow in 2009 from this year, Hildebrandt said in a telephone interview Monday.

Not Vietnam-specific

“When there were concerns about Vietnam earlier in the year, they were on fundamentals like the trade deficit,” Hildebrandt said. “But there’s nothing specific about Vietnam causing the rise in spreads on credit-default swaps.”

The chances of Vietnam defaulting on its debt or having to turn to the International Monetary Fund for assistance are “pretty slim,” he said. The IMF will this week consider loan applications from Hungary and Iceland, and is also looking at a request for assistance from Ukraine.

“Vietnam is relatively well-placed to weather the storm,” said VinaCapital Investment Management Ltd., in a report released on October 31, citing slowing inflation, rising foreign direct investment, and expectations that the Ho Chi Minh Stock Exchange’s VN-Index may rally next year.

The government has cut its growth forecast for the year to 6.7 percent from 7 percent, according to a statement on November 1. JPMorgan Chase expects growth of 6.3 percent this year, followed by 6.2 percent in 2009.

“The economy still faces notable headwinds from tight monetary and fiscal policies, slowing global demand, and negative wealth effects from falling equity and property prices,” Hildebrandt wrote in his note.