2010-02-10

These countries fall like dominoes...

Vietnam as Asia's first domino
The disconnect between central command and peripheral resistance was made apparent last year when many export-oriented industries refused to cash in their export receipts at the official exchange rate for the dong against the US dollar. As of October, there was a 9% spread between the official and black market rates, and that gap drove the government's decision in November to devalue the dong by 5% by expanding its permissible trading band. Even with that depreciation, financial analysts monitoring the situation say there is still a 5% spread between the official and black market rates.

One factor driving the distortion is the government's interest rate subsidies, which were implemented last year as part of the stimulus package to encourage more local lending. The policy effectively reduced lending rates from 10% to 6.5% and drove huge new lending worth around $24 billion, or nearly 23% of GDP. According to Standard & Poor's, a credit rating agency, Vietnam's year-on-year loan growth was up 37%.

Financial analysts say that because there was virtually no underlying demand for working capital among state-owned enterprises (SOEs) and export-oriented private companies that received the bulk of the new credits, much of the money was recycled into the local stock market. The footloose liquidity contributed to making Vietnam's stock market one of the world's best performers during the first half of 2009; it then fell dramatically in the second half.

It's unclear to financial and sovereign analysts how much of last year's US$24 billion in new lending was lost to stock market speculation. Kim Eng Tan, a sovereign and public finance analyst at Standard & Poor's, expressed his preliminary concerns about last year's 37% loan growth rate. He said that the balance sheets of major Vietnamese banks were in "reasonable shape" at the end of 2008, but that "we'll need to see what has changed after the new surge in lending".
Market Vectors Vietnam (VNM) would suffer from troubled in Vietnam. SPDR Gold Shares (GLD) may do relatively well if investors buy gold in response to currency crises, but in the short-run, PowerShares DB U.S. Dollar Index Bullish Fund (UUP) may see larger gains.

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