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COLUMN

Vietnam: From Asia's FDI champ to 2008 stockmarket chump

IFTY ISLAM
In an earlier Daily Star column titled, 'The plus one strategy and other lessons from Asia's FDI champion', published on May 8 2008, I discussed the lessons for Bangladesh from Vietnam's impressive tenfold increase in FDI. What a difference a year makes!
Early last year, a spate of stories appeared in the international press proclaiming Vietnam as 'the new Asian miracle' and 'the next Asian tiger'. The country joined the World Trade Organisation (WTO) in January 2007, prompting a surge in annual foreign direct investment approvals to more than $20 billion or around 30 percent of GDP
The Ho Chi Minh City Stock market was at a similar size to the Dhaka Stock Exchange (DSE) at around $11 billion. It was Asia’s stellar performer, with the index reaching a peak of 1,170 in March 2007, up by 140 percent, year on year. Rising global commodity prices drove export revenues to nearly $50 billion, an increase of more than 20 percent over 2006. For the year as a whole, the economy grew by an impressive 8.5 percent, the fastest pace since 1996.
Lets cut to 2008. While the pace of Foreign Direct Investments (FDI) commitments in Jan-May 2008 remained strong at $15 billion, the Vietnamese equity market has fallen by 60 percent with volumes down by
more than 90 percent.
The extent of the Vietnamese authorities' shellshock was their decision in March to cancel a major investors' conference, marketed under the title 'Sustaining Growth and Reform in Asia's Next Tiger'. This step was owed to 'pressing macro-and microeconomic concerns'. The government later claimed that the organiser's permits were not in order.
The May inflation rate has jumped to 25.4 percent and the trade gap in the first five months of 2008 was $14.4 billion versus $4.25 billion, just a year ago. Credit growth was also running at 50 percent annum while the budget deficit was 7 percent of GDP The government has also banned the import of gold with hoarding by locals to hedge against inflation risks,'adding to the trade problems.
The causes of the Vietnamese 2008 stock market crash was that while the authorities were the champions of attracting FDI, they were ill prepared to receive the flood of foreign capital when it arrived. The failure to sterilise the inflow by offsetting a withdrawal of liquidity by the central bank saw a huge growth in bank lending, which primarily found itself fuelling both equity and property price bubbles.
In an effort to slow the market's decline, daily tradingband limits of 1 percent were imposed on all stocks of this
year. This was the wrong step by a government that knows little about markets. Those limits were raised to 2 percent in April.
But what really happened? The market opens and the price of virtually every security traded on the exchange opens down the daily 2 percent limit. Trading essentially stops at that level, and the next day the market opens limit-down again in a perfect lock-step fashion. This was repeated for 23 days in a row.
The volatility in the stock market and domestic macro environment also threatens to end the FDI fairytale. The head of Vietnam Amcham and Ford Vietnam, noted that Vietnam's success in attracting foreign investment has largely been built on the expectation of economic and political stability, Hanoi now needs to take 'urgent and decisive action' to curb a speculative real estate bubble. It not only threatens the financial sector, but is also undermining Vietnam's longterm competitiveness as it is challenged for foreign investment by neighbouring countries.
Rising labour costs are also a significant concern to US business operating in Vietnam and labour unrest is directly related to the macro-economic problems.
The policy response by the Vietnamese authorities has been confused at best and reflects the complex allocation
of economic policymaking responsibilities with the central bank responsible for monetary policy but the finance ministry for inflation. The Planning Ministry is responsible for investment spending and several State Owned Enterprises report directly to the Prime Minister's Office.
There are concerns about whether further policy confusion and missteps might see a repeat of the 85 percent decline in Thai stocks in the period, Jan 1996 - Aug 1998, or indeed the collapse in the Bangladesh stock market index in Nov 1996 - Decl997 from 3649 to 711.
The Bangladesh and Vietnam's stock market differs in terms of the level of foreign participation with 25 percent for the latter. By contrast in 2007 foreign portfolio flows were $200 million in Bangladesh versus a market cap of $10 billion. This explains why the DSE has been less sensitive to moves in global markets than Vietnamese, Indian or indeed Chinese equities.
However, both Bangladesh and Vietnam has a relatively large retail investor base and an underdeveloped domestic institutional sector. This may explain the extreme moves in the market as household investors in a news-driven rather than fundamentally driven market are more likely to adopt a 'herd mentality'. Hence. Bangladesh equities
might be vulnerable to extreme moves unless the authorities can help build an institutional client base by insurance and pension fund reforms.
The Vietnamese experience also underlines the fact that foreign investment is not a panacea for all Bangladesh's economic problems. But I would still maintain that in a growth capital constrained economy like Bangladesh, FDI holds the key to a lift off in growth from 6 percent to (+) 8 percent.
However, the process needs to be managed carefully with sufficient attention spent not only on developing a fundamentally driven professional investor base but also more effective monetary policy tools. The ineffectiveness of curbs on trading in Vietnam
and/or government offers to buy in the market directly underlines the unsustainability of market manipulation by the authorities.
Even still, the 2008 Vietnamese market meltdown will likely act as a catalyst for global corporates and investors to seek an alternative Asian investment destination. We believe the prospects for a move to an elected democracy in 2009, coupled with an effective Brand Bangladesh campaign and a focused 'India plus one' economic vision, will leave us well positioned to benefit from the problems elsewhere in the region.
The writer is the managing partner of Asian Tiger Capital Partners and welcomes feedback at rfty.islam@at-capital.com.