JP- morgan: Vietnam Economy May Improve, Stemming Concern

By Jason Folkmanis
May 30 (Bloomberg) -- Vietnam''s inflation may start to
cool and the trade deficit could widen at a slower pace in the
third quarter, stemming a plunge in confidence in the economy
and the currency, JPMorgan Chase & Co. said.
``We expect to see modest improvement in the second half,''''
Matthew Hildebrandt, an economist at JPMorgan Chase Bank in
Singapore, said in a note today. ``The key in the near term is
local depositor confidence. If this does not hold up, better data
on the macro front will be too little, too late.''''
The Southeast Asian country''s inflation rate is the highest
since at least 1992, while the trade deficit has more than
tripled. Two credit-rating companies downgraded the outlook on
Vietnam''s debt this month, and Morgan Stanley has warned of a
possible currency crisis.
An improvement in economic indicators is critical to
preventing investors from fleeing Vietnamese dong-denominated
assets, JPMorgan said.
Inflation, which reached 25.2 percent this month, and the
widening trade gap have heightened investors'' sense of perceived
risk in Vietnam, Hildebrandt said.
Rice prices, one of the key drivers of Vietnamese inflation,
have started to ease with expectations of a strong global harvest,
he said. Inflation may slow after June, he added.
An increase in imports that pushed Vietnam''s trade deficit
to $14.4 billion in the first five months of the year should ease
as higher borrowing costs, lower spending on public projects and
surging prices curb demand, Hildebrandt said.

Dong Devaluation

Morgan Stanley said in a May 28 note the dong is poised to
weaken in a manner similar to Thailand''s baht in 1997 because
Vietnam''s current-account deficit may widen this year to an
``unsustainably large'''' 7.5 percent of gross domestic product.
A large devaluation of the dong due to foreign capital
flight is unlikely in part because Vietnam has negligible levels
of short-term external debt, said Hildebrandt at JPMorgan.
``This is not 1997,'''' he said. ``The quick and sharp
retrenchment in credit from foreign banks that occurred in the
1997-1998 crisis is not a material risk in Vietnam today.''''
Still, concern about a loss of stability in the economy may
hurt local confidence in the dong and prompt Vietnamese residents
to buy other currencies, reducing foreign-exchange reserves,
Hildebrandt said. That may force Vietnam to look abroad for
capital.
``The region''s central banks are flush with reserves and the
International Monetary Fund has been hard-pressed to find
borrowers in recent years,'''' Hildebrandt wrote. ``A $25 billion
transfer from the IMF or another central bank in the region, or
smaller contributions from several, is certainly a possibility.''''

Bank Issues

Bad loans for equity and property investment have also
caused ``issues at a handful of small domestic banks'''', which
account for about 1 percent of total banking assets, according to
JPMorgan.
``Reportedly, a few banks have been brought under control
of the central bank,'''' Hildebrandt said. ``This action actually
serves to instill confidence that banks will not be closed during
a time of macroeconomic stress.''''

For related news:
On banking: STNI BNKLOSSES <GO>
On financial services companies: STNI FINCUTS <GO>
On inflation: STNI STAGFLATION <GO>

--Editors: Stephanie Phang, Russell Ward

To contact the reporter on this story:
Jason Folkmanis in Ho Chi Minh City at +84-91-205-3237 or
folkmanis@bloomberg.net

To contact the editor responsible for this story:
Tony Jordan at +65-6212-1150 or tjordan3@bloomberg.net.

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