20110329155243Vietnam+Matters+a+Liquidity+Squeeze 28032011 BNP

8/3/2019 20110329155243Vietnam+Matters+a+Liquidity+Squeeze 28032011 BNP

1/24

www.GlobalMarkets.bnpparibas.comPlease refer to important information found at the end of the report

March 2011

Viet nam Mat t ers : A L iqu id i ty Squeeze

Just as the economy overheated through excessive capital inflows, the sharp drop in

the countrys foreign reserves is signalling that a liquidity squeeze is taking place.

While this will be negative for asset prices in the near term (especially when

combined with the restrictive administrative/monetary measures of the central bank

and a 400bp hike in interest rates), it is also the means by which the economy cools

and paves the way for a return to healthier growth in 2012.

The tightening measures introduced by the government in February appear to have

stabilised the dong as evidenced by the VND appreciation in the parallel market.

Nonetheless, inflation will remain elevated in 2011 on the back of 1) the lagged

effects of faster M2 growth 2) higher electricity charges and 3) weaker VND.

Vietnam will not escape the effects of the Japanese earthquake and the nuclear fall-

out. On a relative basis, it appears to be less affected, owing to: 1) limited capital

inflows 2) its exports are mainly primary goods and 3) it is not plugged in the regional

production network that dominates other Asian economies. The procurement ratio

from Japan is only 23% against Thailands 32%. Vietnams problems lie elsewhere.

Chan Kok Peng(65) 6210 1946

[email protected]

Kenneth Toh

(65) 6210 [email protected]


2/24

Chan Kok Peng / Kenneth Toh 22 March 2011

Vietnam Matters 2 www.GlobalMarkets.bnpparibas.com

Contents

Vietnam A Liquidity Squeeze ..............................................................................3-10

Starting point: excess capital 3

Adjusting through the BOP 5

Inflation matters in 2011 6

Money matters 7

Slower 2011 but with some bright spots 8

Not an Asian currency crisis like 1997 9

Appendix 1: Reform needed in the state owned enterprises 9

Financial TrendsChart Book ............................................................................................................11-20

Economic Basics 11-12

Latest Economic Data 13-14

Labour Market Trends 15

Financial Trends 16

Trade Trends 17

Inflation Trends 18

Fiscal Trends 19

Key Economic and Financial Forecasts, Sovereign Ratings 20


3/24



Vietnam A Liquidity Squeeze

Just as the economy overheated throughexcessive capital inflows, the sharp drop in thecountrys foreign reserves is signalling that aliquidity squeeze is taking place.

While this will be negative for asset prices inthe near term (especially when combinedwith the restrictive administrative/monetarymeasures of the central bank and a 400bp hikein interest rates), it is also the means by whichthe economy cools and paves the way for areturn to healthier growth in 2012.

The tightening measures introduced by thegovernment in February have stabilised thedong as evidenced by the appreciation of thecurrency in the parallel market.

In a nut-shell, the trigger for Vietnamsproblems today can be traced back to excesscapital inflows into the country, which wassubsequently made worse by inappropriate/loose monetary and fiscal policies.

For investors who went through the Asianfinancial crisis in 1997-98, this will look familiar.However, we do not believe Vietnam is heading

towards a repeat of the 1997 Asian-style crisis,owing to its lower short-term debt ratios and anet foreign asset position of its banking system.

Like other export-dependent economies inthe region, Vietnam will not escape the effectsof the Japanese earthquake and the nuclearcrisis. On a relative basis, it appears to be lessaffected, owing to: 1) limited capital inflows 2)its exports are mainly primary goods and 3) it isnot plugged in the global/regional productionnetwork that dominates other Asian economies.

According to Japanese METI figures, theprocurement ratio of Japanese factories inVietnam for intermediate goods from Japan is23%, sharply lower than the Philippines 50% andThailands 32%.

Starting point: excess capital

The economic problems in Vietnam today are notunique when judged from a regional perspective(except perhaps on scale). Indeed, in our view, theheadline problems of chronic trade and currentaccount deficits, a depreciating currency and rising

inflation are (arguably) almost similar to what someof its ASEAN counterparts experienced in the run-upto the Asian financial crisis in 1997. In a nut-shell, the

trigger for Vietnams problems today can be tracedback to excess capital inflows into the country, whichwas subsequently made worse by inappropriatelyloose monetary and fiscal policies. For investors whowent through the Asian financial crisis in 1997-98,this will look familiar.

Chart 1 shows that foreign direct investment inflow

into Vietnam reached a record USD 9.3bn in 2009 inthe aftermath of the countrys accession to the WorldTrade Organisation. As a share of its GDP, theseinflows amounted to a record 9% in 2007 and 10% in2008. As a comparison, this far exceeds the foreigndirect investment inflows of 6% to 8% (of GDP) forboth Malaysia and Thailand when they were thedarlings of such inflows in the 1990s. Investors maylike to know that as a share of GDP, Vietnamsfigures are more than double Chinas. In 2008, thelatter received USD 148bn or just 3.3% of its GDP(Chart 2).

Like its Malaysian counterpart in the 1990s, thesharp jump in FDI has major consequences. WhileFDI creates employment and increases exports, they

Chart 1: A record inflow of FDI (% of GDP)

0

2,000

4,000

6,000

8,000

10,000

12,000

98 99 00 01 02 03 04 05 06 07 08 09 10

0

2

4

6

8

10

12(USD mn) (% of GDP)

Source: BNP Paribas, CEIC

Chart 2: A regional FDI comparison (2008)

0

1

2

3

4

5

6

7

8

9

10

11

Korea

Philippines

Taiwan

Indonesia

Thailand

Malaysia

India

Singapore

Vietnam

(% of GDP)



4/24



inevitably lead to a current account deficit as suchinflows necessitated imported inputs and expertisethat cannot be sourced locally in the short term.

Chart 3 shows the impact of FDI inflows on

Malaysias current account deficit in the 1990s. It isno surprise that Vietnam is replicating Malaysiasexperience today (Chart 4). In particular the deficit inthe services account will remain large in Vietnam onthe back of payments of royalties, license fees andprofessional fees to foreign companies that oftencome in tandem with foreign direct investments.

When combined with portfolio and other investmentinflows, it is thus not difficult to see why the Vietnameconomy overheated (Chart 5). Flushed with suchliquidity inflows, banks also started on a credit binge;resulting in overall loan growth of 40% y/y in

December 2009, and still expanding by a buoyant30% y/y in December 2010 according to central bankdata (Chart 6). The result is that the loan-depositratio of the banking system went from 90.8% inDecember 2006 to 104% in December 2009(according to IMF data), and is likely to have reached109% in December 2010 (our estimates). Note thatthe central bank also made the decision to cut thebanking systems reserve requirement ratio fordomestic currency deposits with less than 1Ymaturity from 11% in October 2008 to 3% in March2009. Bank lending rates fell, and combined withinterest-rate subsidies introduced in February 2009

as part of the stimulus package, generated rapidcredit and money supply growth.

A huge fiscal stimulus programme to counteract theglobal financial crisis in 2008 only added further fuelto the fire (Chart 7). Expansionary fiscal measuresintroduced in 1H09 included tax deductions anddeferrals, additional financial assistance to low-income households, a 4% point interest-rate subsidyon short and medium-term bank loans for certainsectors of the economy and a hike in capitalexpenditure.

As pointed out in our previous report on Vietnamentitled current account matters, such a massiveinjection of funds inevitably found its way into thehands of the state-owned enterprises, which according to the World Bank ended up speculatingon the financial and real-estate sectors, therebyaggravating the asset bubble. The most widelypublicized of these is Vinashin, a state-ownedcompany involved in shipbuilding that ended upusing government guarantees to invest in non-coreactivities, manipulated its financial reports, andending up defaulting (see Appendix 1 for moredetails on the role of the state-owned enterprises).

The end-result is that the countrys public sector debtas a percentage of GDP shot up from 44% in 2008,

Chart 3: The Malaysian experience in the 1990s

0

1

2

3

4

5

6

7

8

9

10

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

-15

-10

-5

0

5

10

15

20

FDI (% of GDP, LHS)

Current Account (% of GDP, RHS)


Chart 4: Vietnam is repeating Malaysiasexperience today

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

0

2

4

6

8

10

12

Current Account (% of GDP, LHS)

Net Direct Investment(% of GDP, RHS)


Chart 5: Three years of huge capital inflows

-2000

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

96 97 98 99 00 01 02 03 04 05 06 07 08 09

0

5

10

15

20

25FDI (LHS) Portfolio (LHS)

Other (LHS) Total (RHS)

(% of GDP)(USD mn)


Chart 6: Credit growth surges in 2007-08

0

10

20

30

40

50

60

70

02 03 04 05 06 07 08 09 10

(% y/y)

Source: BNP Paribas, IMF


5/24



to 49% in 2009, and is estimated to hit 51% in 2010according to the World Bank.

Chart 8 shows the strong correlation betweenVietnams fiscal balance and the current account

balance. As the government spends more than itcollects in terms of taxes, there is excessgovernment demand, which translates into higherimports. A period of fiscal consolidation is, therefore,required before the current account deficit can showany signs of improvement.

Adjusting through the BOP

Just as the economy overheated through excessivecapital inflows, the sharp drop in the countrys foreignreserves is signalling that a liquidity squeeze istaking place. While this will be negative for assetprices in the near term (especially when combinedwith the restrictive policy stance of the central bank),it is also the means by which the economy coolsdown and paves the way for a return to healthiereconomic growth, with less risk of acceleratinginflation.

Chart 9 shows M2 growth leads inflation by about ayear and the fall in foreign reserves and thegovernments intention to: 1) reduce M2 growth in2011 to 15-16% (from 21-24% previously), 2) restrainlending growth to less than 20% (from 23%previously), and 3) cut the budget deficit to 5% ofGDP augurs well for Vietnams inflation outlook in2012.

According to the Minister of Planning and Investment,Vietnams foreign reserves were more than USD10bn at the end of 2010, down from USD 24bn in2008 and USD 16bn in 2009. No later figures areavailable at the time of writing, but given the USD1.8bn trade deficit in the first two months of the year,and the depreciation of the dong in the same period,foreign reserves are unlikely to have improved much.

That said, the exact level of foreign reserves is astate secret in Vietnam. We learned from a recent

visit to the State Bank of Vietnam in early March thatthe foreign reserve figures are reported (on amonthly basis) only to the IMF. The onus is now onthe IMF to ensure that Vietnam does not end up witha balance of payment crisis.

On paper, the devaluation of the dong should resultin Vietnamese exports becoming cheaper and hencemore competitive. In reality, many of Vietnamsexports have high import content, and the appareland electronics industry in Vietnam illustrates thisdilemma specifically. While the apparel industry isthe largest export commodity for Vietnam

(accounting for 18% of total exports in 2009), it hasto import more than 50% of its intermediate materials

as input. The production of vests, jackets and otherhigh-quality clothes is primarily dependent onimported materials.

More astounding is the electronics industry inVietnam. While it accounted for 4.9% of total exportsin 2009, a look at the trade statistics show that thisindustrys imported components actually exceed itsexports. Thus, in 2009, while total exports ofelectronics, TVs and computer parts amounted to

USD 2.8bn, their imported counterparts were USD3.9bn. In effect, for every dollar of these exports,

Chart 7: A bigger fiscal stimulus than China

0

2

4

6

8

10

1214

16

18

20

22

Vietnam

Thailand

China

Malaysia

Singapore

Korea

Taiwan

Philippines

India

Indonesia

% share of GDP

Source: BNP Paribas, United Nations

Chart 8: A strong correlation between fiscalspending and current account balance

-14

-12

-10

-8

-6

-4

-2

0

99 00 01 02 03 04 05 06 07 08 09 10

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

Fiscal balance (% of GDP, LHS)

Current account balance (% of GDP, RHS)


Chart 9: M2 leads Vietnams CPI by 1 year

0

5

10

15

20

25

02 03 04 05 06 07 08 09 10 11

15

20

25

30

35

40

45

50

CPI (% y/y, LHS)

M2 (% y/y, RHS)



6/24



Vietnam has to import USD 1.4 worth of components.We think a large percentage of these inputs aresourced from non-Japanese sources judging fromdata from the Japanese Ministry of Economy, Tradeand Industry (METI).

About the only (arguably) bright spots on the balanceof payments front are the countrys ability to attractFDI and its remittances. According to the World Bank,FDI into Vietnam is set to rebound to USD 7.6bn in2010 and USD 7.9bn in 2011. This follows a declineto USD 6.9bn in 2009 from a cyclical peak of USD9.3bn in 2008. We expect Vietnam to benefit from theongoing relocation of global manufacturing firmsaway from higher-wage countries and China. Indeed,it may come as a surprise to investors that accordingto the World Banks Doing Business survey,Vietnam is ranked one notch higher than China in the2010 report about what countries were best to dobusiness in.

Vietnam came in at position 78, which is aboveIndonesias 121, Russias 123 and Indias 134. Inparticular, we note the high literacy rates of theVietnamese, which are comparable to the rest of itsASEAN neighbours and far better than itscounterparts from India (Table 1).

A look at the export structure of Vietnam against itsChinese counterparts shows Vietnam does notcompete with China (Table 2): The lower (higher) the

figure, the more different (similar) the export structurewith its China counterparts. Put simply, Vietnamsexports do not compete head-on with the Chineseexport juggernaut and puts it in a favourable positionto continue to attract foreign direct investments.

On the remittances front, there is clearly a moreencouraging picture. Indeed, the amount flowing inthrough this channel has been rising in recent yearsas more Vietnamese workers venture abroad. Whilenot as well know as their Filipino counterparts, officialfigures show that they are likely to have amounted toUSD 8bn in 2010, an increase of over 26 percent

over 2009 and exceeds the central banks target ofUSD 6bn. Indeed, this puts it even bigger than theFDI inflows and official development assistance.

According to World Bank (WB), Vietnam has beenranked 16th amongst 30 countries receiving the mostremittances in the world. With Vietnamese banksoffering higher deposit rates of 4% for USD dollardeposits for Vietnamese individuals, we expect theseinflows to continue into 2011. The concern here isthe situation in the Middle East, where there is alarge number of Vietnamese workers involved inconstruction work. We do not know the exact number

of Vietnamese working in the region.

Inflation matters in 2011

For 2011, the inflation rate should remain elevatedon the back of the: 1) lagged effects of rapid moneysupply growth as pointed out in the above, 2)

governments hike in fuel and electricity prices, and3) lagged effects of a devalued dong.

In February, the government decided to raisedomestic fuel and electricity charges driven by thesharp jump in global oil prices. In Vietnam, petrolprices remained a little over USD 0.76 per litre for along time, due to heavy subsidies. As a comparison,this is about two-thirds the price in Thailand, Laosand China. This is clearly untenable andconsequently the government announced a 17%increase in petrol prices, 20% in average fuel pricesand 15% hike in electricity in February this year.

According to government figures, every 1% ofdecline in the VND leads to a 0.15% increase ininflation rate. Thus, the 9.3% devaluation of the dongin February alone would cause Vietnams CPI to rise1.4%, all other things being equal. Indeed, it is forthis reason that inflation in Vietnam today is farhigher than its regional counterparts where currencyappreciation (instead of depreciation as in the caseof Vietnam) has helped to cushion the impact ofhigher oil prices.

Compared to the rest of the region, rising food

inflation is always a major concern in Vietnam owingto its high rate of poverty. Food prices continue torise 16.6% y/y in January from 16.2% y/y in the

Table 1: Literacy rates (2005-2008)

Male Female

Vietnam 95 90

China 97 91

India 75 51Indonesia 95 89

Thailand 96 92

Philippines 93 94

Malaysia 94 90

Singapore 97 92

Source: BNP Paribas, World Bank

Table 2: Vietnam does not compete with China

2000 2006 2007 2008

Taiwan 0.53 0.4 0.38 0.37

Korea 0.43 0.54 0.51 0.51

Singapore 0.41 0.42 0.38 0.32

Malaysia 0.44 0.63 0.58 0.43

Thailand 0.51 0.66 0.64 0.58

Indonesia 0.36 0.16 0.11 0.07

Philippines 0.33 0.42 0.24 0.27

India 0.22 0.08 0.07 0.06

Source: BNP Paribas, UnComtrade


7/24



preceding month. Food inflation contributed 6.6% y/yin Januarys inflation, close to half that of the monthsinflation. Due to the larger component of food, upsiderisks include poor weather conditions, which coulddisrupt the ongoing harvest as Vietnam has thesecond largest food component in the CPI basket inAsia comprising 40%, next to a 47% share in thePhilippines.

From a fiscal perspective, the government is alsounlikely to be in a position to increase subsidies toshield its citizens from rising food and fuel prices. Aspointed out, the government intends to cut its budgetdeficit this year to 5% from an estimated 6.2% in2010 (both figures using the Vietnamese definition offiscal deficit).

For these reasons, we are forecasting inflation to

average 11% y/y in 2011, up from 9.2% y/y in 2010.For the first two months of the year, it averaged12.2% y/y.

Money matters

Table 3 shows the breakdown of the countrys moneysupply (M2) by determinants. As pointed out in theabove, we take comfort in the fact that thegovernment is aiming to slow down M2 growth tobetween 15%-16%n from the 21-24% previous target,through a cut in credit growth and fiscal consolidation.These two drivers are captured under the claims tothe government and credit to the private sector, withthe latter being the main determinant of M2 growth inthe past three years.

To this end, the government introduced a slew ofmeasures in February, including: 1) requiring banksto report to the central bank in the event they breachthe below 20% credit growth target, 2) adding to theirrisk provision funds, 3) monitoring bad debt ratios, 4)banning retail trade in gold bars, and 5) raisinginterest rates dramatically. Note that by banning theretail trade in gold bars, the central bank is aiming tostop gold exchanges from providing loans to fundgold investments that have clear monetary andinflationary consequences.

On the interest rate front, the refinancing rate hasalso been raised by 400bp since October 2010 to12% with the last 300bp coming in Q1 2011 (Chart11). The hike in re-financing rate will make it moreexpensive for banks to borrow from the central bankthereby dampening credit growth. Indeed, therediscount rate the rate the central bank payscommercial banks on their surplus funds wasraised by an dramatic 500bp to 12% on 9th March.The hike is aimed at encouraging banks to hold morefunds and thus discourage them from lending. Thebenchmark lending rate remains unchanged at 9%since November 2010. This rate is now less relevant

since the government has allowed commercial banksgreater flexibility in negotiating lending terms withcustomers rather than following the countrysbenchmark rate.

The governments and central banks words are thusbeing backed by concrete action. In Vietnam, state-owned banks still control about 45% of total bankingassets, implying the government has a higherlikelihood of ensuring implementation of its policiesby decree, compared to countries where their

banking system is dominated by private-ownedbanks.

Chart 10: The VND the only currency thathas weakened in the region

88

90

92

9496

98

100

102

104

106

108

110

112

114

116

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11

Depreciating

Vietnam

ASEAN ex VN

China

Korea


Table 3: Factors affecting M2

M2 NFA NDAClaims on

govt

Claims onprivatesector Others

2007 46.1 13.28 39.72 -0.81 40.52 -6.87

2008 20.3 1.37 22.54 2.40 20.14 -3.60

2009 29.0 -7.19 39.39 6.72 32.67 -3.21

2010 24.0 1.29 23.17 0.84 22.33 -0.48

2011F 15.0 0.42 14.98 -2.44 17.42 -0.39


Chart 11: SBV has raised the refinancingrate sharply

4

6

8

10

12

14

16

18

00 01 02 03 04 05 06 07 08 09 10 11

(%)

Policy rate

Refinancing rate

VNIBOR 3M



8/24



Slower 2011 but with some bright spots

Against this backdrop, we expect real GDP growth toslow to 6.5% in 2011 before picking up in 2012. Thisis slower than the governments projection of

between 7-7.5% y/y growth under its medium termplan for 2011-15. While policy tightening will play akey role in slowing the economy, the agriculturesector is expected to get a boost from the twin effectsof higher global commodity prices and thedevaluation of the dong. The latter provides a majorexchange rate gain to the countrys farmers involvedin the export sector. Vietnam is a major exporter ofrubber, rice, coffee, cashews and pepper, whereprices have been rising. As a sector, it employs 50%of the labour force and accounts for 21% of the GDP.

Benefiting from the dong devaluation is also the

tourism industry. According to the Vietnam NationalAdministration of Tourism, tourism revenues in 2010jumped 40% y/y to USD 5bn. To put it in perspective,it is slightly larger than the export earnings of oil(USD 4.9bn) the countrys number-one export item;and rice (USD 3.2bn), the number-two item. In 2010,tourist arrivals reached 5m, for a 35% y/y rise fromthe previous year. The main sources of arrivals arefrom China and the US, which account for 27% of thetotal (Chart 13). The devaluation of the dong willmake Vietnam an even cheaper place to visit in 2011.We note the foreign investors appear to have caughtthis emerging trend as about USD 10bn has been

earmarked for hotel investments in 2009, a sharp jump from the USD 1.3bn in 2008 and therebybecoming the biggest recipient of FDI in 2009 (Table4). As a comparison, it is even larger than FDIinvestments in the manufacturing and real estatesectors in 2009.

The key concern here is the extent of the earthquakeand nuclear fall-out on the Japanese economy. Likeits export-dependent counterparts in the region,Vietnam will be affected by a contraction in Japanesedemand. Our Japanese economist is forecastinggrowth to shrink by 1.2% y/y in 2011 with a q/q

(annualised) contraction of 4% in Q1 2011 and 10%in Q2 2011. These forecasts are predicated on theFukushima crisis being contained and the rollingblackouts in the Kanto region ending as planned. Ifnot, growth could well contract by a sharper 4.5% y/yin 2011 according to our Japanese economists.

On a relative basis, Vietnam may be less affected as,firstly, the country did not benefit from the resurgenceof international capital inflows in the past two years.The result is that a reversal/repatriation of funds byJapanese investors should likewise be limited.Secondly, Vietnams exports are mainly primary

products, such as low-end textiles and food items,which tend to be less cyclical and less dependent onfinancial conditions. Thirdly, Vietnams economy is

not plugged into the global supply chain thatdominates the regions trade, especially in theelectronics and automotive parts. Such export itemsmake up less than 5% of Vietnams total exports.Under the global supply-chain system, a disruption inthe output of a major supplier (in this case, Japan)can cause production bottlenecks along the chain.

According to Japanese MITI figures, the procurementratio of Japanese factories in Vietnam forintermediate goods from Japan is 23%, sharply lowerthan the Philippines 50% and Thailands 32%.

Chart 12: Bright spot in tourist arrivals

-20

-10

0

10

20

30

40

50

60

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

0

1000

2000

3000

4000

5000

6000

Visitor arrivals (thousands, RHS)

Visitor growth rate (% y/y, LHS)


Chart 13: Tourist arrivals by source

Taiwan7%

Thailand4%

UK2%

Others41%

China18%

Cambodia5%

US9%

Laos1%

Japan9%

France4%


Table 4: FDI by sector

Manufacturing Construction Hotels TransportReal

Estate

2003 1,401 25 140 15 184

2004 3,110 213 141 56 201

2005 4,818 171 62 684 461

2006 8,271 641 498 52 1,819

2007 10,883 993 1,968 357 6,115

2008 28,902 492 1,350 1,882 23,703

2009 3,943 652 9,157 300 7,808

08-09 32,845 1,144 10,507 2,182 31,511



9/24



Not an Asian currency crisis like 1997

The third (and largest) currency devaluation in a yearin February, by 8.5%, adds to a growing list of factorsshaking investors confidence in Vietnam. Already

the country has seen three rating downgrades withnegative outlook from the rating agencies in the pastyear. The move is an attempt to address the gapbetween official and black market exchange rates,which was roughly 8.5 percent on the day before thedevaluation.

Although confidence on the VND has been shakenand the level of foreign reserves has been falling, it isnot right to conclude that the Vietnamese economy isheading towards a 1997 style Asian currency crisis.Although Vietnams current account deficit in 2010and 2011 is similar to what Thailand and Malaysia

experienced in 1996, the saving grace for Vietnam isits capital controls and size of the banking systemsnet foreign assets.

Prior to the crisis, Thailands commercial banksforeign liabilities rose from 2.8% of GDP to 27% ofGDP in 1996, one year before the 1997 crisis. In theprocess, banks in Thailand over-borrowed, resultingin a net foreign liability position for the industry to thetune of THB 1.25tn (USD 49bn) or 27% of GDP. Bycontrast, Vietnams banking system today is sittingon net foreign asset position of USD 19bn (accordingto IMF figures). This is equivalent to 20% of GDP.

Although external debt has been rising in the pastthree years, we note short-term debt appears to bemanageable. According to BIS data, short-term debtamounted to USD 6.9bn in Q3 2010. Experiencefrom the crisis-hit Asian economies in 1997 showsthat the short-term debt must exceed its foreignreserves for several years before it triggers a crisis.Indeed, in Thailand and Indonesia, the ratio offoreign reserves to short-term debt was between 0.6-0.9 and 0.5-0.6 for three to four years prior to 1997.In Vietnam, the ratio is 1.5 as of end 2010 accordingto our estimates.

Chart 14 shows that the tightening measuresintroduced by the government appear to be having itsdesired effect of stabilising the dong.

Appendix 1Reform needed in the state owned enterprises

According to the Enterprise Law of 2005, stateowned enterprises (SOEs) are defined asenterprises where the State owns more than 50percent of their charter capital. By this definition,there are about 5,970 SOEs in Vietnam, of which,according to Vice Chairman and Standing Vice-

Chairman of the National Steering Committee forEnterprise Reform and Development, 1200 are fullSOEs. That is: 100 percent of their charter capital is

funded by the government and they belong to the12 state-owned economic groups and 87corporations.

Among the 12 groups, Vinashin is regarded as

medium-sized, and ranks 6th in terms of registeredcapital of USD 730mn. The biggest is PetroVietnamwith USD 8.89bn, followed by Vietnam ElectricityGroup (USD 5.5bn), Vietnam Post andTelecommunications (USD 3.61bn), Viettel (USD2.5bn), Vietnam Rubber Group (USD 0.92bn) andVietnam National Coal and Mineral Industries (USD0.74bn).

Like its counterparts in China, the Vietnamesegovernment view the SOEs as key players in theeconomy and, as such, are given special incentivesand privileges. Unfortunately, more perks and

privileges do not translate into greater profitability orefficiency for the SOEs in Vietnam. According toofficial figures, while SOEs accounted for 45% oftotal business sector capital, they contributed only31% of revenue, 35% of profits and 24% ofemployment. The private and foreign investmentsectors created more jobs with much less capitalthan the state sector (Table 5).

Table 6 shows the breakdown of the debt that hasbeen undertaken by the SOEs in Vietnam. ThatVinashin has defaulted is not surprising in the light ofits massive debt-equity ratio, which is significantly

larger than its other counterparts. We believe thedebt levels taken on by Vinashin is symptomatic ofwhat has taken place in Vietnam over the past three

Chart 14: VND in the parallel market

15000

16000

17000

18000

19000

20000

21000

22000

23000

Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11

Black market exchange rate

State Bank Ref rate

Commercial bank Ref rate

Depreciating

(VND/USD)

Source: BNP Paribas, Reuters Ecowin

Table 5: Corporate performance by enterprise

State Non-state

Foreign

investedCapital resources 45 37 18

Revenue 31 48 20

Profit before tax 35 16 48

Employment 24 54 22

Source: BNP Paribas, Vietnam National Assembly


10/24



years, that is: That there has been excessinvestment driven by inappropriately loose fiscal andmonetary policies and it is now time for the economyto cool down.

Over-expansion took Vinashin to the brink ofbankruptcy and it is now being restructured. Thecountrys sovereign credit rating was downgraded,partly because of Vinashin's troubles. On 20December last year it missed the first repayment of a$600m loan in 2007. It is reportedly seeking a one-year delay in repayments. The Vietnamesegovernment has said it will not bail out theshipbuilder, which employs tens of thousands ofworkers. But the interest-free loans from the state-owned Development Bank of Vietnam will paysalaries and workers' insurance for now. By choosingnot to bail out the company, Vietnam's government issending a message to other large state-ownedenterprises to put their own houses in order and toroot out the inefficiency that plagues the state sectorhere.

One of the key reasons for the misallocation ofresources within the SOEs is the lack oftransparency. Bureaucracy forms the other barrier toreforming the SOEs and enabling them to becomemore profitable. For those that are already profitable,greater transparency and less bureaucracy couldwell boost their bottom lines further.

Table 6: Reform needed in the State OwnedEnterprises (Debt to equity ratio)

2006 2007 2008

Major economic groups 1.0 1.1 1.2

EVN (Electricity) 1.6 1.4 1.8PETROVN (Petroleum and Gas) 0.5 0.5 0.7

VNPT (Post and telecommunications) 0.3 0.3 0.4

VINASHIN (shipping/ship-building) 18.0 12.4 11.4

VINACOMIN(Coal and minerals) 1.4 1.7 2.1

VINARUBBER (Rubber) 0.9 0.8 0.5

VINATEX (textiles) 2.0 2.3 2.5

Other EG's/special general corp 1.5 1.8

Other general corporations 2.3 1.9

All EG's and general corporations 1.3 1.3


Table 7: State-owned enterprises profitabilityindicators (Pre-tax Profit Rate)

2006 2007 2008

Major economic groups 20.2 21.0 14.9

EVN (Electricity) 5.8 7.4 2.8

PETROVN (Petroleum and Gas) 36.0 32.2 24.7

VNPT (Post and telecommunications) 27.9 38.5 24.7

VINASHIN (shipping/ship-building) 4.1 3.9 2.7

VINACOMIN(Coal and minerals) 8.9 7.9 11.2

VINARUBBER (Rubber) 39.2 32.2 29.8

VINATEX (textiles) 1.6 2.2 3.3

Other EG's/special general corp 3.0 3.3

Other general corporations 4.6 6.0

All EG's and general corporations 11.3 10.9



11/24



Vietnam: Economic Basics I

GDP by output (2010)

Construction

9%

Utilities

3%

Agriculture

16%Mining and

Quarrying

4%

Manufacturing

26%

Trade

18%

Other Services

11%Hotels and

Restaurants

4%

Transport,

Storage,

Communication

4%

Financial and

Business

5%


Vietnams GDP is largely comprised of manufacturing (26%),trade (18%) and agriculture (16%).

GDP by expenditure

0

10

20

30

40

50

60

70

80

90

100

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

(% of GDP)

Gross Capital Formation

Government Consumption

Exports

Imports

Private Consumption

Source: BNP Paribas, ADB, CEIC

The Vietnamese economy has become increasingly exportorientated over the past decades, rising from 55% of GDP to78% at its peak in 2008.

Major import sources (2010)

Singapore

4.9%

Indonesia2.3%

Other11.0%

Taiwan8.3%

South Korea

11.6%Hong Kong

1.0%Japan10.7%

China

23.8%

Europe

11.1%

USA

4.5%

Malaysia4.1%

Thailand

6.7%


Vietnam imports largely from China (28%), followed by Japan

(13%) and Europe and Taiwan (12%).

GDP by expenditure (2009)

44%

7%

-18%

67%

-30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70%

Gross Capital

Formation

Government

Consumption

Private Consumption

Net exports


Similar to Indonesia, Vietnam has a large private consumptionsector (67%). However, the countrys gross capital formation ishuge (44% of GDP), contributing to the countrys chronic currentaccount deficit.

Exports by major destination (2010)

Europe

24%

China

13%

Japan

14%

USA

24%

Taiwan 3%

Cambodia

3%Malaysia

4%

Philippines 3%

Singapore 4%

Thailand 2%

South Korea

6%


Vietnams major exports markets are Europe (24%) and the USA(24%). Within Asia, Vietnam exports the most to Japan (14%),with China (13%) next on the list.

Composition of exports (2009)

Apparels

18%

Footwear

7% Electronics

5%

Other

35%

Rubber

2%

Rice

5%

Wood

5%

Fishery

Products7%

Crude Oil

11%Coal

2%

Coffee

3%


The bulk of Vietnams exports is made up of textiles from the

apparel and footwear industry (25%) and crude oil (11%). Keyagricultural and fishery products when combined make up asignificant portion of exports (22%).


12/24



Vietnam: Economic Basics II

Composition of imports (2009)

Production:

Machinery,

Instrument and

Accessories

29%

Production:

Fuel and Raw

Materials

61%

Consumer:

Foodstuffs

4%

Consumer:

Intermediate

Goods

2%

Consumer:

Others

4%


Vietnam imports a large amount of fuel and raw materials (61%),followed by machinery, instrument and accessories, both forproduction purposes (29%). A large share of imports is made upof intermediate products used for assembly purposes.

CPI weights (2009)

Health and

Personal

Care

6%

Transportation

9%

Food

39%

Drinking

and

Smoking

4%

Apparels

7%Housing and

Construction

Materials

10%

Household

Equipment and

Appliances

9%

Others

6%

Culture,

Sport and

Entertainment

4%

Education

6%


Cost of living in Vietnam is strongly affected by food (39%),followed by housing and construction materials (10%).

Gross domestic capital formation (% GDP)

10

15

20

25

30

35

40

45

50

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

China

Vietnam

India

Source: BNP Paribas, ADB

Vietnams obsession with investments has led it to achieve gross

capital formation level amounting to 43.1% of GDP, at one pointsurpassing China. Investment ratios in Thailand, Indonesia andMalaysia are 22%, 31% and 14% respectively.

Employment by sector (2009)

Education& Training

3%

Manufacturing

15% Fishing

4%

Construction

6%

Wholesale &

Retail Trade

12%

Public

Adminstration

& Defence 4%Hotels &

Restaurants 2%

Transport,

Storage & Tele-

communication

3%Agriculture

51%


The bulk of Vietnams employment remains in the agriculturalindustry (51%). However, this sector contributes only 16% to thecountrys GDP, indicating huge excess workers and lowproductivity.

Accelerating GDP per capita

0

200

400

600

800

1000

1200

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09


Vietnams GDP per capita reached USD 1,064 in 2009, stayingabove USD1,000 in spite of a severe global recession in 2008. Withan accelerating GDP per capita and a youthful population, Vietnamhas the power of demographics behind it in the next decade.

Gross national saving (% GDP)

5

10

15

20

25

30

35

40

45

50

55

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

China

Vietnam

India

Source: BNP Paribas, ADB

However, gross national savings are similar to Indias.


13/24



Vietnam: Latest Economic Data I

Real GDP growth (% y/y)

2

3

4

5

6

7

8

9

10

Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10


Vietnams GDP growth hit 6.7% y/y in 2010, surpassing thetarget of 6.5% y/y growth set by the government. With thegovernments tougher monetary stance to tackle inflation, hittingthe growth target of 7.0-7.5% y/y this year might prove harder.

GDP growth by expenditure (% y/y)

0

5

10

15

20

25

30

00 01 02 03 04 05 06 07 08 09

Gross Capital

Formation

Government

Consumption

Private

Consumption


All demand components contributed to fall in real GDP growthfrom 2008-2009, but the huge slowdown in GCF is evident as y/ygrowth rates plummeted from 27% to just 4% in 2009, evidenceof an investment binge during the boom years of 2006- 2007.

Top foreign direct investment by country (2010)

1.2

1.82.0 2.0

2.4

4.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Taiwan US Japan Korea Netherlands Singapore

(USD bn)


Among top investors into Vietnam (exceeding USD 1bn last

year), 4 out of 6 countries of originated from Asia, amounting toalmost USD 9.6bn. The combined amount of investment fromthese 6 countries made up 83% of total FDI into Vietnam.

Real GDP growth by industry (% y/y)

-2

0

2

4

6

8

10

12

14

01 02 03 04 05 06 07 08 09 10

Agriculture

Manufacturing

Construction

Trade


Despite growth in the manufacturing and trade sectors, overallGDP growth was bogged down by the fall in agriculturalproduction. This highlights the importance of agriculture in theVietnamese economy.

Investment overhang

10

15

20

25

30

35

40

45

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

(% of GDP)

Gross national savings

Gross domestic capital formation


Vietnams rate of capital formation exceeds its savings rateresulting in a current account deficit for the past ten years.

Unprecedented surge in inventories

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.55.0

5.5

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

(% of GDP)


Vietnams inventories (as % of GDP) reached a peak of 5.1% in

2008, as compared to a much lower level of 2.7% in 2005. This isevidence of over-investment in Vietnam and it coincides with the2007-2008 real estate boom.


14/24



Vietnam: Latest Economic Data II

Persistent current account deficits

-24

-21

-18

-15

-12

-9

-6

-3

0

3

6

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F

-12000

-10500

-9000

-7500

-6000

-4500

-3000

-1500

0

1500

3000Current account (RHS) Current account % of GDP


The widening trade deficit and strong credit growth has resultedin the countrys current account deficits remaining persistent, buthaving worsened tremendously in years 2007 onwards.

Export growth to go through a soft patch

0

10

20

30

40

50

60

70

80

03 04 05 06 07 08 09 10 11

-30

-20

-10

0

10

20

30

40

50

VN: Exports (3MMA, % y/y, RHS)

US: New Orders Index

(6-month lead, LHS)


Exports momentum is expected to slow in line with the rest of theregion for the first half of 2011. The correlation coefficient of theUS ISM manufacturing new orders is 0.68% with Vietnamsexports (data from 2000-2011).

Industrial production growth

6

8

10

12

14

16

18

20

00 01 02 03 04 05 06 07 08 09 10

(% y/y)


Vietnams industrial production expanded 14% in 2010, a huge

rebound from 6.78% in 2009. In order to achieve its target ofbecoming an industrialized nation by 2020, industrial productionhas to accelerate through improved productivity.

A lesson from history Asian financial crisis

-20

-15

-10

-5

0

5

10

15

80 83 86 89 92 95 98 01 04 07 Q3 10

(% of GDP)

Asian Financial Crisis

Korea

Greece

ASEAN-4

Vietnam


Vietnams current account balance is in stark contrast to itsASEAN-4 counterparts. ASEAN-4 countries have been havingcurrent account surpluses while Vietnam has been faced withrelatively huge current account deficits, especially since 2006.

Largest fiscal stimulus In Asia

0 2 4 6 8 10 12 14 16 18 20 22

Vietnam

Thailand

China

Malaysia

Singapore

Korea

Taiwan

Philippines

India

Indonesia(% share of GDP)


Among the Asian economies, Vietnam implemented the largestfiscal stimulus package (23% of GDP). The failure to withdrawthis stimulus from the economy has resulted in surging inflationand rampant credit growth.

Visitor arrivals (000s, 12mmt)

12000

14000

16000

18000

20000

22000

24000

26000

28000

3000032000

34000

02 03 04 05 06 07 08 09 10


Visitor arrivals in Vietnam have been steadily increasing in the

last 10 years, reaching a new peak in December 2010 at 5.1m.This is an industry which will benefit from the VND devaluation.


15/24



Vietnam: Labour Market Trends

Unemployment rate (%)

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

98 99 00 01 02 03 04 05 06 07 08 09 10


Unemployment rate has been falling trend since 1998, with asmall rise in 2009-2010. The low official unemployment rate forthe country may be masking under-employment.

Widening income gap

0

500

1000

1500

2000

2500

94 95 96 99 02 04 06 08

increasing

income gap

Whole country

Lowest 20% household

Highest 20% household


The income level of Vietnam as a whole has increasedexponentially since 1994. The ratio of income from the top 20%of households over the bottom 20% of households has beenrising from 6.5x to 8.9x in 2008 since 1994.

Adult literacy rate (% ages 15 and older)

Male Female

Vietnam 95 90

China 97 91

Indonesia 95 89

India 75 51

Thailand 96 92

Malaysia 94 90

Philippines 93 94

Source: BNP Paribas, World Bank

Among its neighbours, Vietnam has the 4th highest adult literacy

rate for males, and 5th highest for females. The gaps betweenVietnam and the top countries are relatively insignificant a 2%difference for males and 4% difference for females.

Employment by sectors

0

10

20

30

40

50

60

70

80

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

(% of total employment)

Agriculture

Others

Manufacturing


Employment in the agricultural industry has fallen since 1990,while that in manufacturing increased sharply in 2003. The latteris due to Vietnams ability to attract FDI into the manufacturingsector and a more active role by private sector companies.

Population age composition (% share)

Ages 0-14 Ages 15-64 Ages 65+

Vietnam 27 67 6

China 21 72 8

Indonesia 27 67 6

India 32 63 5

Thailand 22 71 7

Malaysia 30 65 5

Philippines 34 62 4


Vietnam has the third largest portion of its population betweenthe ages of 0-14 indicating ensuring its favourable demographicsa longer period. Notably, its population composition shares manysimilarities to Indonesia.

Youth literacy rate (% ages 15-24)

Male Female

Vietnam 97 96

China 99 99

Indonesia 97 96

India 88 74

Thailand 98 98

Malaysia 98 99

Philippines 94 96


Vietnams youthful population is highly literate considering they

are at a stage of development where their GDP per capita issignificantly below that of the other developing countries in thetable above.


16/24



Vietnam: Financial Trends

Equity market index lagging regional peers

0

200

400

600

800

1000

1200

01 02 03 04 05 06 07 08 09 10 11


Unlike the rest of the other ASEAN economies, Vietnams indexhas done comparatively poorly in 2010, plagued bymacroeconomic issues such as surging inflation and adepreciating dong.

Domestic credit in Asia (% of GDP)

30 40 50 60 70 80 90 100 110 120 130 140 150 160

China

Hong Kong

Taiwan

Korea

Singapore

Malaysia

Thailand

Indonesia

Philippines

India

Vietnam

2002

2008


Vietnam has had the largest expansion of domestic credit from2002-2008 of 64.4%, which contributed to the overheating of theVietnamese economy.

Refinancing rate up sharply

4

6

8

10

12

14

16

18

00 01 02 03 04 05 06 07 08 09 10 11

(%)

Policy rate

Refinancing rate

VNIBOR 3M


The refinancing rate has also been raised by 400bp since Oct

2010 to 12% with the latest 300bp hike in March 2011. The hikein the re-finance rate will make it more expensive for banks toborrow from the central bank thus dampening credit growth.

Largest dong devaluation yet

15,000

16,000

17,000

18,000

19,000

20,000

21,000

Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10

(VND/USD)


Vietnams foreign exchange rate has been devalued 6 timessince 2008. The recent devaluation of 8.5% is its largest yet andhas undermined investor confidence in the country.

Credit growth must come down further

0

10

20

30

40

50

60

70

02 03 04 05 06 07 08 09 10

(% y/y)


Rampant credit growth fuelled by loose policy has led toinflationary spikes. The central bank has since cut its creditgrowth target of 23% to less than 20% in February in a bid tostabilize the economy.

Surge in capital flows

-2000

0

2000

4000

6000

8000

10000

12000

14000

16000

96 97 98 99 00 01 02 03 04 05 06 07 08 09

FDI Portfolio Other(USD mn)

The surge in capital flows in 2007 is in line with the real estate

boom in 2007 that was mostly made up of FDI and overseasremittances.


17/24



Vietnam: Trade Trends

Rising trade dependence

25

35

45

55

65

75

85

95

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

(% of GDP)

Exports

Imports


With the Vietnamese economy more dependent on imports, adepreciating dong will result in an increased inflationaryenvironment. We estimate a 1% fall in the dong will result in apass through of 0.15% rise in CPI.

Persistent trade deficit

-20000

-15000

-10000

-5000

0

5000

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

10000

11000

12000

13000

14000

15000

16000

17000

18000

19000

20000(USDVND)(USD mn)

Trade Balance

USDVND X-rate


Despite a depreciation of the VND against the USD, Vietnamstrade deficit still has not seen any significant improvements. Thisis partly attributed to the high imported content in the countrysexports.

Becoming more export dependent

20

30

40

50

60

70

80

90

100

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

(% of GDP)

ExportsConsumption


Over the last 2 decades, exports (as a % of GDP) have climbed

up to overtake consumption (as a % of GDP). Vietnam hasincreasingly become more export-oriented, in line with the rest ofthe region.

Confidence in the dong shaken

15000

16000

17000

18000

19000

20000

21000

22000

23000

Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11

Black market exchange rate

State Bank Ref rate

Commercial bank Ref rate

Depreciating

(VND/USD)


The recent further devaluation of the dong by 8.5% adds to thegrowing list of factors shaking investors confidence. On the tradefront however, this further worsens the trade balance situation asthe imported content of production remains high in Vietnam.

Exporter to the developed markets

0

4

8

12

16

20

24

28

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

% share

US

JP

EU

CH


Vietnam has the largest share of its exports to the OECDeconomies with the US beginning to recover stronger thanexpected, this bodes well for Vietnam on the trade front althoughthe Japanese earthquake may act as a dampener.

High import content in manufacturing

-25000

-20000

-15000

-10000

-5000

0

5000

10000

95 96 97 98 99 00 01 02 03 04 05 06 07 08

(USD mn)

Primary products net exports

Manufactured products net exports


The divergence between primary and manufactured goods trade

balance points to a high imported content in Vietnamsmanufactured exports.


18/24



Vietnam: Inflation Trends

CPI breakdown

-10

0

10

20

30

40

50

Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10

CPI

Apparels

Education

Food

Housing and

Construction

(% y/y)


Vietnams inflation is broad-based unlike some of its ASEANcounterparts. Combined with a current account deficit, it is clearthat the economy is over-heating and is in need of majortightening by the central bank.

Policy rate vs. CPI

0

5

10

15

20

25

30

06 07 08 09 10 11

CPI (% y/y)

Policy rate (% pa)


In response to the rising CPI (% y/y), Vietnams has finally raisedits policy rate in March by 300bp following an earlier hike of therefinance rate of 200bp in February. This proves that the centralbank has finally begun to get tough overly slack monetary policy.

Change in inflation weights

Group 2000=100 2005=100 2009=100

Food 47.09 42.85 39.93Beverage and cigarette 4.5 4.56 4.03

Garment, footwear, hat 7.63 7.21 7.28

Housing & material construction 8.23 9.99 10.01

Household equipment & good 9.2 8.62 8.65

Medicaments, health 2.41 5.42 5.61

transport & communication 10.07 9.04 8.87

Post and communication 2.73

Education 2.89 5.41 5.72

Culture, sport, entertainment 3.81 3.59 3.83

Other consumer 3.36 3.31 3.34

Excluding food 52.91 57.15 60.07


Vietnam has changed its food weighting in the CPI basket twice

in a decade to account for the decreasing share of consumerincomes spent on food. Nevertheless, food weighting in the CPIbasket is still the second largest in Asia, after Philippines.

Both core and headline rate rising

0

5

10

15

20

25

30

Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10

CPI

Core CPI

(% y/y)


Demand side pressures have risen along with headline inflation,unlike its ASEAN neighbours such as Thailand and Indonesiawhich still maintain modest core inflation. A large part is due toVietnam overheating on a credit and investment binge.

Industrial output driving up electricity costs

4

6

8

10

12

14

16

18

20

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1 0E

(% y/y)

Industrial production

Electricity production


With industrial output rebounding in 2010, this has added upwardpressures on electricity costs as production increased. Electricityprices are set to rise 15.3% in March, adding to inflationarypressures in 2011.

Money supply leads inflation (% y/y)

0

5

10

15

20

25

02 03 04 05 06 07 08 09 10 11

15

20

25

30

35

40

45

50

M2 (RHS)

CPI (LHS)


Historically, M2 has led inflation by one year and with the latest

measures to reduce M2 growth in 2011 to 15-16% (from 21-24%)this should put a dampener on inflation in the second half of2011, as the effects of rapid money supply dissipate gradually.


19/24



Vietnam: Fiscal Trends

Budget balance (% GDP)

-7

-6

-5

-4

-3

-2

-1

090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10


Vietnam budget balance remains at a persistent deficit.

Budget spending components

0

5

10

15

20

25

30

35

97 98 99 00 01 02 03 04 05 06 07 08 09

Social subsidies

Investment development


Vietnam has significantly raised its budget spending forinvestment development, alongside with a less thanproportionate increase in subsidies.

Fiscal spending and current account

-14

-12

-10

-8

-6

-4

-2

0

99 00 01 02 03 04 05 06 07 08 09 10

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

Fiscal balance (LHS)

Current account balance (RHS)


Excessive government demand increases imports which worsens

the current account deficit. A period of fiscal consolidation isrequired before the current account can show any improvement.

Regional comparison of subsidies

0

1

2

3

4

5

6

01 02 03 04 05 06 07 08 09

(% of GDP)

Vietnam

Malaysia

Indonesia

Philippines


While neighbouring countries has been trying to reduce subsidiesVietnam was increasing subsidies since 2008 despite persistentgovernment deficit. No surprises then that rating agencies havedowngraded the countrys sovereign rating.

Foreign reserves vs. imports

0

5000

10000

15000

20000

25000

30000

97 98 99 00 01 02 03 04 05 06 07 08 09 10

0

1

2

3

4

5

6

7

8

Foreign reserves in monthsof imports (x, RHS)

Foreign reserves (LHS)

Imports (LHS)

(USD mn)


Foreign reserves in Vietnam reached a peak in January 2009 buthave been worsening since. The ten year average as atSeptember 2010 (last known official reserves) stands at 3.21months of imports, considered a low level of import cover.

Highest taxes

8

10

12

14

16

18

20

22

24

26

99 00 01 02 03 04 05 06 07 08 09

Vietnam

ThailandMalaysia

Philippines

Indonesia

Singapore

(% GDP)


Vietnam has historically had a high level of taxes (% GDP) as

compared to its ASEAN counterparts. However, its lack of fiscalprudence arising from over investment has led to a persistentbudget deficit.


20/24



Vietnam: Key Economic and Financial Forecasts

2009 2010 2011E 2012E

Nominal GDP (USD bn) 93.4 97.4 96.9 111.9Real GDP 5.3 6.8 6.5 7.4Private consumption 3.7 6.5 7.0 6.8

Public consumption 7.7 6.5 3.0 6.1Gross fixed capital formation 8.7 7.5 5.8 9.5Net exports (8.3) 3.1 4.3 5.2

SectorAgriculture 1.8 2.8 4.5 5.1Manufacturing 9.0 11.3 8.0 10.1Construction 7.6 (3.7) 5.0 10.0Finance 8.7 8.3 7.0 7.0Trade 7.7 8.1 7.9 9.9

External tradeExport growth (USD term) (8.9) 25.5 18.0 20.9Import growth (USD term) (13.3) 20.1 13.7 16.5Trade balance (USD bn) (12.9) (12.4) (11.0) (9.1)

Current account (USD bn) (7.2) (9.6) (7.9) (7.1)As % of GDP (7.7) (9.9) (8.2) (6.3)

Foreign reserves (USD bn) 17.5 11.0 13.1 15.0

Credit growth 39.6 28.7 18.0 20.0Money supply (M2) 26.2 22.0 16.0 20.0

Inflation 6.7 9.2 11.0 10.0

Refinancing Rate 8.00 9.00 12.00 10.00

Fiscal balance* (11.8) (10.0) (7.0) (5.0)As % of GDP (6.2) (4.6) (3.2) (2.0)

Foreign debt (% of GDP) 39.2 40.3 41.3 42.5

VND/USD (End of period) 17,942 18,932 20,500 20,500

Source: BNP Paribas. * ADB definition

Vietnam: Sovereign Ratings

Moodys S&P Fitch

Outlook Negative 15-Dec-10 Negative 23-Dec-10 Stable 28-Jul-10

Long-term foreign currency B1 BB- B+

Long-term local currency B1 BB- B+

Short-term foreign currency B B

Short-term local currency B

Source: Bloomberg


21/24



NOTES


22/24



NOTES


23/24



RESEARCH DISCLAIMERS:

IMPORTANT DISCLOSURES: Please see important disclosures in the text of this report.

The information and opinions contained in this report have been obtained from, or are based on, public sources believed to bereliable, but no representation or warranty, express or implied, is made that such information is accurate, complete or up to dateand it should not be relied upon as such. This report does not constitute an offer or solicitation to buy or sell any securities orother investment. Information and opinions contained in the report are published for the assistance of recipients, but are not to berelied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, are subject to change withoutnotice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to pastperformance should not be taken as an indication of future performance. To the fullest extent permitted by law, no BNP Paribasgroup company accepts any liability whatsoever (including in negligence) for any direct or consequential loss arising from anyuse of or reliance on material contained in this report. All estimates and opinions included in this report are made as of the dateof this report. Unless otherwise indicated in this report there is no intention to update this report. BNP Paribas SA and itsaffiliates (collectively BNP Paribas) may make a market in, or may, as principal or agent, buy or sell securities of any issuer orperson mentioned in this report or derivatives thereon. BNP Paribas may have a financial interest in any issuer or personmentioned in this report, including a long or short position in their securities and/or options, futures or other derivativeinstruments based thereon, or vice versa. BNP Paribas, including its officers and employees may serve or have served as an

officer, director or in an advisory capacity for any person mentioned in this report. BNP Paribas may, from time to time, solicit,perform or have performed investment banking, underwriting or other services (including acting as adviser, manager, underwriteror lender) within the last 12 months for any person referred to in this report. BNP Paribas may be a party to an agreement withany person relating to the production of this report. BNP Paribas, may to the extent permitted by law, have acted upon or usedthe information contained herein, or the research or analysis on which it was based, before its publication. BNP Paribas mayreceive or intend to seek compensation for investment banking services in the next three months from or in relation to anyperson mentioned in this report. Any person mentioned in this report may have been provided with sections of this report prior toits publication in order to verify its factual accuracy.

BNP Paribas is incorporated in France with limited liability. Registered Office 16 Boulevard des Italiens, 75009 Paris. This reportwas produced by a BNP Paribas group company. This report is for the use of intended recipients and may not be reproduced (inwhole or in part) or delivered or transmitted to any other person without the prior written consent of BNP Paribas. By acceptingthis document you agree to be bound by the foregoing limitations.

Certain countries within the European Economic Area:

This report is solely prepared for professional clients. It is not intended for retail clients and should not be passed on to any suchpersons.

This report has been approved for publication in the United Kingdom by BNP Paribas London Branch. BNP Paribas LondonBranch is authorised and supervised by the Autorit de Contrle Prudentiel and authorised and subject to limited regulation bythe Financial Services Authority. Details of the extent of our authorisation and regulation by the Financial Services Authority areavailable from us on request.

This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment servicesprovider by the Autorit de Contrle Prudentiel whose head office is 16, Boulevard des Italiens 75009 Paris, France.

This report is being distributed in Germany either by BNP Paribas London Branch or by BNP Paribas Niederlassung Frankfurtam Main, regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin).

United States: This report is being distributed to US persons by BNP Paribas Securities Corp., or by a subsidiary or affiliate ofBNP Paribas that is not registered as a US broker-dealer to US major institutional investors only. BNP Paribas Securities Corp.,a subsidiary of BNP Paribas, is a broker-dealer registered with the Securities and Exchange Commission and a member of the

National Association of Securities Dealers, the New York Stock Exchange and other principal exchanges. BNP ParibasSecurities Corp. accepts responsibility for the content of a report prepared by another non-US affiliate only when distributed toUS persons by BNP Paribas Securities Corp.

Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch, or bya subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutionsdefined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities(Japan) Limited, Tokyo Branch, a subsidiary of BNP Paribas, is a financial instruments firm registered according to the FinancialInstruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association. BNP Paribas Securities(Japan) Limited, Tokyo Branch accepts responsibility for the content of a report prepared by another non-Japan affiliate onlywhen distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited, Tokyo Branch. Some of the foreignsecurities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan.

Hong Kong: This report is being distributed in Hong Kong by BNP Paribas Hong Kong Branch, a branch of BNP Paribas whosehead office is in Paris, France. BNP Paribas Hong Kong Branch is regulated as a Registered Institution by Hong Kong Monetary

Authority for the conduct of Advising on Securities [Regulated Activity Type 4] under the Securities and Futures Ordinance. BNP Paribas (2011). All rights reserved.


24/24

EUROPE

AmsterdamHerengracht 477Amsterdam 1017 BSNetherlandsTelephone: +31 20 550 1212

Athens94 Vassilissis Sofias Avenue&Kerasountos1Athens 11528,GreeceTelephone: +30 210 74 68 000

BrusselsAvenue Louise 489Brussels 1050, BelgiumTelephone: +32 2 518 08 11

BudapestRoosevelt ter 7-8H-1051, BudapestHungaryTelephone: +36 1 374 63 00

Dublin5 Georges Dock IFSCDublin 1, IrelandTelephone: +353 1 612 5000

FrankfurtGrneburgweg 14Frankfurt 60322GermanyTelephone: +49 69 71930

Geneva2 Place de Hollande1211 Geneva 11SwitzerlandTelephone: +41 22 787 7111

London10 Harewood AvenueLondon NW1 6AAUnited KingdomTelephone: +44 20 7595 2000

LuganoRiva A, Caccia 1ALugano 6907

SwitzerlandTelephone: +41 91 985 5111

Luxembourg10A Boulevard Royal

New YorkThe Equitable Building787 Seventh AvenueNew York, NY 10019, USATelephone: +1 212 841 2000

San FranciscoOne Front Street,23rd Floor, San Francisco,CA 94111, USATelephone: +1 415 772 1300

So PauloAv. Pres. Juscelino Kubitschek510, 12 andar, So Paulo 04543-906,

BrazilTelephone: +55 11 3841 3100

ASIA-PACIFIC

Bangkok29th Floor, Abdulrahim Place990 Rama IV RoadBangrak, Bangkok 10500ThailandTelephone: +66 2 636 1900

Beijing19/F China World Tower 1C.W.T.C.1 Jianguomenwai AvenueBeijing 100004Peoples Republic of China

Telephone: +8610 6535 0888

Ho Chi Minh CitySaigon Tower, 29 Le Duan,Suite 504, Dist. 1,Ho Chi Minh City, VietnamTelephone: +848 823 1265

Hong Kong63/F Two InternationalFinance Centre,8 Finance Street, Hong KongTelephone: +852 2909 8888

JakartaMenara BCA, 35th FloorGrand Indonesia, Jl. MH. Thamrin No. 1Jakarta 10310, Indonesia

+62 21 2358 6262

Manila30th Floor Philamlife Tower8767 Paseo de Roxas AveMakati City, Metro Manila

MadridCalle Ribera del Loira 28Apartado de Correos 28046Madrid 28042, SpainTelephone: +34 91 388 8300

MilanPiazza San Fedele 2Milan 20121, ItalyTelephone: +39 02 72471

Moscow1-2 BolshoyGnezdnikovsky, Pereoulok125009 Moscow, Russia

Telephone: +7 095 785 6000

Paris3 rue dAntinParis 75002, FranceTelephone: +33 1 42 98 12 34

Sofia2 Tzar Osvoboditel BlvdSofia 1000,BulgariaTelephone: +359 2 9218 640

WarsawPl. Pilsudskiego 1Warsaw 00-078, PolandTelephone: +48 22 697 2300

ZurichSelnaustrasse 16Zurich 8022,SwitzerlandTelephone: +41 58 212 6868

AMERICAS

Buenos Aires25 de Mayo 471Buenos Aires 1002ArgentinaTelephone: +54 11 4318 0318

Chicago209 South La Salle StreetSuite 500Chicago IL 60604, USA

Telephone: +1 312 977 2200

Montreal1981 McGill College AvenueMontreal, Quebec H3A 2W8

Mumbai1 Forbes, 6th floor1 Dr.V.B.Gandhi Marg,Mumbai 400 023, IndiaTelephone: +91 22 6618 2500

Seoul23rd &24th Floor,Taepyeongno Building310 Taepyeongno 2-ga,Jung-gu, Seoul 100-767KoreaTelephone: +82 2 317 1700

Shanghai

25F Shanghai WorldFinance Centre,100 Century AvenueShanghai 200120Peoples Republic of ChinaTelephone: +86 21 2896 2888

Singapore20 Collyer Quay#05-01 Tung CentreSingapore 049319Telephone: +65 6210 1288

Sydney60 Castlereagh StreetSydney, NSW 2000, AustraliaTelephone: +61 2 9216 8633

Taipei72F, Taipei 101No.7 Xin Yi Road Sec.5,Taipei 110, TaiwanTelephone: +886 2 8758 3101

TokyoGranTokyo North Tower1-9-1 Marunouchi, Chiyoda-kuTokyo 100-6740, JapanTelephone: +81 3 6377 2000

MIDDLE EAST & ASIA

ManamaBahrain Financial Harbour,Financial Center - West TowerPO Box 5253, Manama, BahrainTelephone: +973 1786 6666

Documents

20110329155243Vietnam+Matters+a+Liquidity+Squeeze 28032011 BNP