Bespoke Investment Group show the reductions in sovereign default risk that have occurred over the last month. This highlights the fact that, for one country in particular, the opposite has happened.
Bespoke’s first table shows the change over the last month, as measured by CDS prices, with Vietnam standing out as the exception:
(Click to enlarge)
Their second table shows the CDS price in basis points:
Vietnam is near the bottom of this table too, along with the likes of Greece and Iceland. So what’s going on in Vietnam?
The country is facing multiple problems. Government debt is forecast to be 52% of GDP and they have recently stepped up sales of dollar denominated bonds. Given that the currency, the Dong, is semi fixed to the dollar, that should be manageable. However, Vietnam also faces a budget deficit of 9%, a current account deficit of 10% and persistent inflation. The inflation rate was over 28% in 2008, but fell to 7.3% last year due to the downturn.
Global recession has hit Vietnam as hard as the rest of the world. After averaging 7% growth in the good years, exports fell almost 10% in 2009. Committed foreign direct investment fell by 70%.
Weak exports and falling foreign investment meant that the currency peg came under pressure. On 26 November 2009 the State Bank of Vietnam devalued the dong by about 5%. Then last month, the central bank devalued it again by a further 3.3%.
These devaluations potentially help exports, but they put more pressure on government finances and inflation.
A further problem for the Vietnamese is the performance of the dollar itself.
Because of the currency peg, significant movements in the dollar potentially have a significant impact on their non-US exports, which are 81% of the total. The recent strength in the dollar partially explains their second devaluation in the space of 3 months.
Longer term, the opportunities in Vietnam look promising. Strong demographics, agriculture, oil and low cost production all add to the attraction. Funds such as the Market Vectors Vietnam (VNM),
or the VinaCapital Opportunity Fund (VCVOF.PK), provide easy access to the stock market. These stocks stand to benefit from the investment that has been taking place. If the global recovery gathers pace, they are well placed to capitalize on the opportunities.
Currently the data looks good for them. The JPMorgan Global All-Industry Output Index rose to 53.6 in February, its highest level since October 2009. As the report says:
The headline index has now remained above the neutral 50.0 mark for seven successive months, with its latest reading consistent with annualized growth of global GDP of around 3% to 4%.
That would be great news for Vietnam. It would mean a strong recovery in export markets and would allow them to service their debt. The key issue is whether the recovery holds. Will the momentum be self sustaining or will the need to start tackling deficits drag down the recovery?
Any sign of a global double dip would be very damaging for Vietnam. A further downturn will give them problems with exports, painfully high interest payments and potentially more currency devaluation.
Vietnam is highly geared to the global recover