VietNam to Face `Turbulence' Until Inflation Slows, Fund Says

Recent market ``turbulence'''' in Viet Nam that has included rising bond yields, tumbling stocks, and a fluctuating currency is unlikely to ease until inflation slows, according to an investment fund focused on the country.

Viet Nam''s five-year local-currency bonds have faced ``continued selling pressure'''' while the nation''s currency market is ``in upheaval,'''' Indochina Capital Vietnam Holdings Ltd. said, in a note posted on its Web site.

Ho Chi Minh City gold shops are refusing to sell dollars or to quote dong/dollar exchange rates amid central bank moves to control so-called black-market foreign-exchange transactions, the Saigon Times Daily reported today.

``The turbulence will continue until the banking system has stabilized, the currency reaches consensus level, and the government''s inflation-fighting policies have proven their efficacy,'''' said Indochina Capital, a U.K.-listed fund.

Viet Nam''s inflation rate accelerated to 25.2% in May, the highest since at least 1992, according to figures from the General Statistics Office in Hanoi.

While inflation in Viet Nam has been driven by economic growth and rising global commodity prices, the situation has been worsened by ``the government''s ham-fisted approach to monetary and fiscal policy,'''' which has led to a loss of confidence demonstrated by higher bond yields, Indochina Capital said.

Inflation is also expected to hurt corporate earnings growth for the rest of 2008, the fund said.

`Conspicuously Silent''

``The market regulator has remained conspicuously silent as the markets continued to tumble,'''' Indochina Capital said. ``Little news has been forthcoming and authorities appear to be willing to let the market find its natural floor.''''

The Ho Chi Minh City Stock Exchange''s VN Index has lost 60% this year and is at the lowest level since February 2006.

``Absent some type of intervention there is no end in sight for the misery,'''' wrote Kevin Snowball, a director of PXP Viet Nam Asset Management in Ho Chi Minh City, in a note sent to investors yesterday, arguing that daily trading band limits should be temporarily eased and foreigners allowed to buy 100 percent of companies in some industries.

``Reports calling for currency devaluation only exacerbate the problem,'''' Snowball wrote.

Morgan Stanley said in May that the dong is poised to weaken because Viet Nam''s current-account deficit may widen this year to an ``unsustainably large'''' level. Viet Nam will need an International Monetary Fund-style assistance program in coming months that may include a dong devaluation, a Deutsche Bank AG unit predicted on June 2.

``As long as inflation is high, then people will lose their faith in the dong and buy dollars on the black market and the exchange-rate will go crazy,'''' said Roberto Santurbano, general manager of steel distributor Italinox Viet Nam Co. Ltd. in Hanoi. ``The biggest issue facing Viet Nam is whether or not inflation will come down.''''
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