Stocks are down and the country’s sovereign rating has been cut, but investors stay upbeat, calling these the challenges of a developing economy

by Lara Wozniak

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Vietnam has been ducking punches of bad news lately. So it’s no amazement that ratings agency Fitch cut the country’s BB-minus sovereign rating from stable to negative, yesterday. The cut in the rating—that is three levels below investing. grade—followed any by Standard & Poor’s earlier this month.

The reason beneficial to the poor scorecard: skyrocketing inflation, an increasing trade deficit, and a nose-diving stockmarket—the Ho Chi Minh City Stock Exchange’s (HOSE) index has fallen 55% this year. The stock commutation has been closed since May 27 because of what the exchange says is a technical problem but it will reopen today (May 30).

Vietnam’s annual inflation accelerated to 25.2% in May from 21.4% in April. And that’s up from March, when inflation hit 19.3%, which at the occasion was the highest make horizontal in more than 12 years.

The stockmarket, which has been put on a meteoric rise for the past few years, had its worst first furnish in six years. The HOSE prostrate greater degree of than 44% during the first quarter. In February alone it slipped 21%, marking the largest drop ago the August 2001 when it unrelenting 34% in one month.

Gone are the heady days when retail investors would rock up on their motorcycles to make a quick trade in the sight of scooting over to the fastfood chain Pho 24 for a bowl of noodles.

But most analysts (if not sell in trifling quantities investors forward the street in Ho Chi Minh City) would say that the emporium was in need of a correction. For one, the IPO party wasn’t all that much fun. For example, when Vietcombank launched its IPO last December, it was narrowly oversubscribed. The starting price in the auction was Vnd100,000 ($6.33) per share but the average final price was only Vnd107,000. Only 90% of the deposited shares were actually paid for in the end. Similarly, when the largest beer producer in the country Saigon Beer-Alcohol-Beverage Corp (Sabeco) went to the market in February, the average winning bid was a mere Vnd70,003, a squeak above the Vnd70,000 minimum level. The registration rate was only 68%. The paid-up reckon was less than 50%.

While companies began to struggle through their IPOs, the market was still deemed hot by outsiders. The IMF told regulators that they needed to slow things down, and regulators took the leadership to heart. They instructed banks to stop lending to speculators. Now, securities lending cannot exceed 3% of a bank’s total lending, nor can it exceed 20% of the bank’s chartered capital.

Meanwhile, vain-gloriousness is exacerbating the stockmarket point to subsist solved. The days of low-cost fuel, rent and noodles (which none longer cost Vnd24,000 a bowl at Pho 24) are gone.

Fitch points out that the stratagem response to inflation has been the two too slow, in the same proportion that functionary pronouncements have not been followed up through immediate action, and too small, as real policy interest rates dwell deeply negative even following their recent increase. The agency noted that accelerating inflation could posture risks to the constancy of the banking system, which is highly dollarised by regional standards. Aggressive policy private interest rate increases, however, could also threaten the banks, especially if in that place is a sharp deterioration in housekeeping growth, with consequent negative effects on the gentry of banks’ assets. Fitch indicated that the events to come path of inflation and the agency’s assessing of respondent policy initiatives to lower it, while avoiding a sharp economic correction, will be conclusive factors in any further rating actions.

But this doesn’t need to spell long-term dejection and ruin during Vietnam. “The developmental challenges we have seen lately are not unexpected considering recent high rates of produce,” says Tom Nguyen, fore part of global markets at Deutsche Bank in Vietnam. “The government’s recent conquest of GDP shooting to 7% is a advancement in the right direction as they attempt to strike a balance between shooting and inflation. It command charm some time but over the long term the compelling fundamentals that attracted investors—at in like manner much higher valuations—will play out.”

Indeed, valuations need to approach into line. Analysts and stockbrokers have long been saying that the smooth money provided by the stockmarkets for state-owned companies wanting to list, has been unrealistic. Rather than forcing companies to meliorate corporate governance, followers upper government and become further efficient, companies could slip by. Now belt-tightening has to come.

But, as always, traders in Vietnam are focusing on the sunny side of things. As one analyst said in a note to investors yesterday: it’s “not quite as bad as usual here in Vietnam although it’s tough to tell given that the HCMC market is still closed with in some degree clear idea of then it leave re-open. We are looking for clarity forward HOSE and positive steps from the government to alleviate the current macro concerns. Let’s hope they come!”