The Vietnamese Economy Is Moving Towards Soft Landing: in This Issue

Monthly Economics Update
Vietnam Macroeconomics research
Monthly update on Vietnam macro-economics
May 13th 2011
The Vietnamese economy is moving towards soft landing

Executive summary
In this issue
Domestic demand remains the main catalyst for growth
Retails sales and the industrial output both showed robustness in April, driven by a resilient fast-growing domestic consumption. Vietnams total retail sales and services revenue, a good indicator of the level of domestic consumption, rose by 22.7% yoy to VND605.6tn in Jan-April. All in all, the volume of retail sales registered an 8% growth (excluding price effect) which is fairly good given the sharp rise in prices. In the meantime, Industrial Production (IP) reported a 14.3% growth yoy, Aprils IP amounting to VND71.6tn (US$3.5bn). Here again, the growth in consumption (+13.4% mom, +12.7% yoy) and manufacturing (+3.5% mom, +10.1% yoy) have spurred the IP, amongst which, the dimension of the non-state sector remained predominant. Page 1-3 Executive summary Page 4 Vietnam real economy: both supply and demand side performing well Page 7 CPI: output prices surged in April Page 11 Trade balance is still worrying Page 15 Firsts improvement on the financial economy Page 18 Forex: GoV tackled USD and Gold as hedges against inflation
Despite higher input costs which are driving output prices higher
The higher energy and global commodity prices are directly impacting input costs which are fueling domestic prices. This has been one of the explanations for the 4.5% mom rise in food prices, whose contribution to the CPI remained elevated (9.8 ppts Jan-Apr). This has made the inflation gauge literally rise sky-high in April, soaring by +3.32% mom, or the third largest monthly increase of the past six years. On a year-on-year basis, Vietnam CPI is now standing at 17.51%, level which, in our view, is still far from its potential peak. SBS still expects inflation to reach its peak trend somewhere end of Q3, possibly breaching the 20% zone just like in 08. All in all, this raises the question of whether strength of domestic consumption amid fast-rising price environment and whether the domestic demand will remain robust enough to offset the expected steady decline in investment and GoVs spending. Research & Investment Advisory
Sacombank Securities Company278 Nam Ky Khoi Nghia, District 3 Ho Chi Minh City Vietnam Tel: +84-8-6268 6868 Fax: +84-8-6268 6868 Email: sbs.research@sbsc.com.vn
Contact Chief Economist Le Ba Hoang Quang (Mr.), MBA quang.lbh@sbsc.com.vn Nguyen Thi Tuyet (Ms), ACCA Do Lenh Tri (Mr) Francois Chavasseau
1|Monthly V ie tnam Update

Investment and GoV spending to wane progressively making the real economy more and more dependent on domestic consumption
According to our calculations, the total investment for social development initially targeted by the GoV in 2011 was VND969tn (+17% vs. 2010), from which the investment imputed to the State sector was planned to amount to VND375tn (+18% vs. 2010). However, the seriousness of officials to achieve macroeconomic stability (as highlighted by the implementation of resolution 11/NQ-CP) has motivated the GoV to slash total investments by 10%. Moreover, the total investment from state sector in 2011 is will not benefit, unlike 2010, from either capital advance or carrying forward from the previous year as mentioned in resolution 11/NQ-CP. Thus, all in all, we shall witness a sharp drop in investment, starting from this quarter, possibly dropping by as much as 25% of the initial plan which confirms our view of a slowing down in GDP growth in the coming quarters. Whereas the GoV has already started to cut investment at the state level (VND436bn of cutbacks yoy), investments at provincial level do not follow this trajectory as 9 provinces out of the 24 still show a 30% or more growth in investments.
Weakening of external demand

Vietnam's trade deficit narrowed slightly to $1.40 billion in April from a revised $1.41 billion deficit a month earlier, according to GSO. The trade deficit slightly dropped 0.6% in comparison with the previous month but soared 20.4% versus that of last year. In the first 4 months of 2011, the accumulated trade deficit was USD 4.9Bil, up 6% versus that of 2010, and equivalent to 18.2% total export. The slight drop in export value combined with decline seen in activities of foreign freight (-1% yoy) could point out to a weakening of the foreign contribution to growth.
Glimpse of improvement is seen on the financial economy

We noticed in April the first early signs of improvement amid a new tightening round from the SBV which chose, a few days ago, to raise its key policy rates by 100bps from 13% to 14%. First, the credit growth decelerated sharply in April, its lowest monthly increase over the last 15 months , only growing by +0.11% mom or +5.01% ytd (vs. +5.5% in 2010). SBS expects a very low credit growth in Q2, possibly falling much below the target set by the SBV. The consequence would then be for banks to see an increase in their amount of loanable funds, eventually pushing them to lower interest rates to stimulate the demand for loans. However banks will still have to cope with a relatively tight liquidity in VND as long as the SBV will decide to squeeze liquidity

Second, the unprecedented series of measures undertaken by the GoV have been followed by an appreciation of the Dong vs. the Dollar, the local currency benefiting from the fact that the SBV tackled the ability and/or the attractiveness of using gold and dollar assets as natural hedges against inflation.

Growth on the demand side remains robust, retail sales rose by 22.7% yoy to VND605.6tn for 4M2011 or +8% if excluding price factor. External demand however, slight drops. On the supply side, industrial output also showed strength, Aprils IP amounting to VND71.6tn (US$3.5bn) +14.3% yoy. Vietnam's trade deficit narrowed slightly to $1.40 billion in April from a revised $1.41 billion deficit a month earlier, according to GSO. The trade deficit slightly dropped 0.6% in comparison with the previous month but soared 20.4% versus that of last year. In the first 4 months of 2011, the accumulated trade deficit was USD 4.9Bil, up 6% versus that of 2010, and equivalent to 18.2% total export. Consumer price index jumped to 17.51% yoy in April, compared to 13.89% yoy in March 2011. On a monthly basis, inflation probably reached its peak, soaring by 3.32%, compared to 2.17% mom in March. Besides food prices resumed their upward trend (+4.5% mom, March: +1.98%), we witnessed an upsurge for the second consecutive month in transportation (+6.04% mom, March: +6.69%) and housing & construction materials prices (+4.38% mom, March: +3.68%). M2 is standing as low as 2% after the first four months of 2011. Credit growth trend decelerated sharply in April to reach +5.29% ytd. State investment last month amounted to VND16.4tn, +18.1% yoy of which central investments, on a declining trend, accounted for 20% (+9.8% yoy) while investment at provincial level showed a stronger growth (+20.3% yoy). With public investment being slashed, the demandside growth now relies on domestic consumption.
Vietnam real economy: both supply and demand side performing well
Supply-side is doing fine even if we expect some slowing down
Vietnam reported April IP amounting to VND71.6tn (US$3.5bn), up 14.3% yoy (Mar 2011: 14.2%) which mainly driven by non-state sectors. In the first four months of the year, IP reached VND270.5tn, +14.2% YoY of which private sector (accounts for 37%, rose by 16.8% YoY) and FIE sector (42%, +16.7% YoY) continue to lead the growth. In order to provide the reader with a more complete picture triad consumption-inventory-manufacturing, which analysis can of manufacturing sector, we noticed that the consumption was still rising (+13.4% mom, +12.7% yoy) whereas manufacturing rose by 3.5% mom (+10.1% yoy) and inventories dropped by 11.9% mom (+5% yoy). The combined indices suggest us that manufacturers do not refill their stock levels as much as they usually did which probably caused by high costs of financing for working capital. This is positive sign in short term view (it is often nice to have low inventory, isnt it?) but not nice in longer term because the

stock replenishment is currently expensive and with pass-through mechanism, it will translate into more inflationary pressure in next year. All in all, the fact that Vietnams Industrial production maintained a growth rate of 14% in April as well as the moderate level of consumption are still pointing out positive signs of solid growth. However, SBS would expect a slight decrease of the IP throughout the second quarter given the relatively tough economic conditions combined with reducing inventory level mentioned in preceding paragraph. The current monetary policy tightening implemented by the SBV shall impact businesses ability to take loans in order to modernize/develop/invest in their factories, hence impeding the potential increase of their production capacities. In this context, it came to us as no surprise that the World Bank cut its forecast for Vietnams industrial output growth from 14.5% to 13%. The weight of the industrial sector in Vietnams GDP is currently 43% and remains mainly driven by nonstate sector. We anticipate that the contribution of the State sector to the IP output shall further decline progressively as the GoV is currently cutting credit to its SOEs in an attempt to curb the credit growth and is expecting to reallocate some of these funds from the public to the private sector.
Inventories dropped sharply

25.00% February-11 20.00% 15.00% 10.00% 5.00% 0.00% consumption manufacturing inventory March-11
Non-state sector remained the main driver of IP

18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% State Private FIE Q1 April-11
Source: GSO, SBS
Source: GSO, SBS To detail the IP index, we notice that non-alcohol drink, paints, brick-tile-ceramic manufacture, milling industry, airy products and footwear products have performed well in both manufacturing and consumption in March 11. In the meantime, Motor and motorbike manufacture, pharmaceuticals, Electric cables were industries that scaled down and which will show risks of high inventory in the coming months. Moreover, we noticed that paints and brick-tile-ceramic manufacture did very well, performance which is clearly contrasting with cement, iron and steel and electric cable industries which experienced a growth in

inventories and a drop in consumption. We believe that paints and brick-tile-ceramic manufacture benefited from the numerous on-going projects while the brutal halt in consumption is due to (i) the fact that a lot of real estate projects in their early stage are on hold or postponed (ii) the recent surge in iron & steel prices (+15 to 20% ytd). We believe that those industries shall continue to underperform in the coming months. Manufacturing by sub-sector
% growth yoy
Manufacturing sub-industry 1554 2422 Industries performing well in both manufacturing and consumption 2693 1531 1520 1810 1920 2520 2412 Industries possibly scaling-down 1711 2694 1512 1513 2710 2102 Industries showing risks of high inventory in coming months 1600 3130 3610 1553 2423 3591 Non-Alcoholics Paints, varnishes, ink and mastic manufacture Brick, tile and ceramic manufacture Milling and producing flour industry Dairy products Footwear Garments & Textiles Plastic products manufacture Fertilizers & nitrogen compounds manufacture Yarn & fabrics Cement, lime and mortar manufacture Processing and preserving fisheries Industry Processing and preserving vegetables Industry Iron & Steel Papers Tobacco Electric cable and insulated wire manufacture Furniture Beer and malt Pharmaceuticals, medicinal chemical and botanical products manufacture Motor and Motorbike manufacture
Manufacturing Inventory Consumption 105.0 112.7 113.1

139.0 118.0 111.2 124.3 116.3 121.6 116.5 115.5 118.1 116.9 111.0 105.6 93.4 120.8 117.2 109.5 78.5 103.9 112.4 92.3 110.1 180.4 119.5 79.5 74.2 114.0 115.5 144.7 72.0 88.8 118.8 126.8 109.1 97.6 136.4 142.5 72.3 131.9 129.3 162.0 95.8 414.2 157.0 141.8 132.1 118.6 118.1 115.6 113.8 112.7 111.3 111.2 110.7 107.7 107.7 105.0 104.8 104.3 101.5 101.5 100.2 95.3 88.3
Source: GSO, SBS
Retail sales grows moderately but shows signal of weakening

Vietnams total retail sales and service revenue are estimated to accelerate by 22.7% yoy to VND605.6tn in Jan-April. All in all, the volume of retail sales registered an 8% growth (excluding price effect) which is fairly good. Higher input costs lead to higher output prices but had apparently not impacted the level of domestic consumption which is still the key driver of the growth at the moment (last year retails sales accounted for 14.6% of GDP). However, we noticed a deceleration in of the trend in retail sales over the last three month, pointing out the fact that after deflating inflation, retail sales are in fact barely increasing. Surging prices may have started to erode peoples purchasing power. In details, the commerce sector rose by 22.7% onyear to VND478 trillion. Meanwhile, the service revenue increased by 18.5% on-year to VND53.2 trillion, the hospitality sector and the tourism posted an increase of 25.7% on-year to VND68.27 trillion and 20.5% onyear to VND6.1 trillion, respectively. Monthly retail sales Retails sales by sub-sectors

1400 1200 1000 VND bn 800 600 400 200 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Growth Jan-11 Commerce 3m MA (LHS) Tourism Hospitality Services 10% 8% 6% 4% 2% 0% -2% -4% -6%
160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Apr-07 Sep-07 Feb-08 May-09 Mar-10 Aug-10 Jun-06 Jan-06 Jul-08 Nov-06 Dec-08 Oct-09 Jan-11
Source: GSO, SBS
despite output prices which surged in April

The higher energy and global commodity prices are directly impacting input costs which are fueling domestic prices. This has been one of the explanations for the 4.5% mom rise in food prices, whose contribution to the CPI remained elevated (9.8 ppts Jan-Apr). Therefore, it came as no surprise to see Vietnam inflation soar in April, jumping by 3.32% mom or the third largest monthly increase of the past six years. In the wake of following recent adjustments in electricity by 17.68% and fuel prices by 15.28% and 10.36%, housing and construction material prices jumped for a second consecutive month by 4.38% while transportation prices soared by 6.04%. The new increase in fuel prices, a few days after the first one, has once again widely contributed to the surge seen in transportation prices. Given current energy shortages and the growing trend on domestic demand, it wont be surprising to see new price adjustments in the coming months.

Apr-10 % MoM 100.14 99.37 100.37 100.35 102.51 100.45 100.32 100.12 99.94 100.12 100.25 100.33 Mar-11 % MoM 102.17 101.98 100.88 101.00 103.67 101.22 100.71 106.69 100.02 100.90 100.98 101.39 Apr-11 % MoM 103.32 104.50 101.01 101.63 104.38 101.38 101.03 106.04 100.02 100.29 101.31 101.02
Figure 3: CPI weighting for product groups

CPI 1. Food and foodstuff 2. Beverage and cigarette 3. Garment, footwear, hat 4. Housing and construction materials 5. Household appliances and goods 6. Medicine and health care 7. Traffic 8. Postal services and Telecommunication 9. Education 10. Culture. entertainment and tourism 11. Other goods and services Source: GSO
Weight
39.93% 4.03% 7.28% 10.01% 8.65% 5.61% 8.87% 2.73% 5.72% 3.83% 3.34%
index 112.24 116.91 110.07 108.99 114.85 106.65 104.19 103.81 94.72 122.97 105.52 109.89
% Yo 117 124 111 111 119 108 105 115 95 124 107 110
ADB estimates that the recent increases in global food prices would lead to higher inflation and slower economic expansion in developing Asia. This is all the more true that the weight of food in its consumer price index is important. Weighting of food and energy in CPIs massive in Asia
The Phillipines Vietnam Thailand Indonesia 99 China Malaysia 0 10 20 Food 30 40 Energy 50 60 70 98 97 96 02/2009 04/2009 06/2009 08/2009 10/2009 12/2009 02/2010 04/2010 06/2010 08/2010 10/2010 12/2010 02/2011 04/2011
VN food price index outpaced headline on higher input costs

105 104 103 102 101 100 Headline CPI Food index
Source: SBS Source: GSO, SBS Vietnam inflationary pressure has probably reached its peak on a monthly basis. Nevertheless, due to base

effects, we still expect Vietnam yoy CPI to push higher into the early 20s by this summer.. Moreover, global commodity prices volatility as well as further possible adjustment in electricity and gasoline prices could also continue to fuel inflation. Therefore, one can reasonably expect further monetary policy tightening to tame inflationary pressures. However, two things make us believe that the SBV may think twice before hiking rates again: (i) The SBV already raised in a six months time the reverse-repo and the discount rates by 700bps, the refinancing rate by 600bps and then might want to see how inflation reacts before making further move. (ii) An additional rate hike will have an impact on the domestic part of the inflation but wont prevent the overall CPI to rise in case of higher global commodity and energy prices. (iii) Hiking again to reduce even further the excessive money into circulation as well as the level of credit-growth may not be necessary in regards to the latest figures releases by the SBV pointing out the quick deceleration in both M2 and credit growth. (iv) Amid the shortage of liquidity in Dong, a higher rate will worsen the competition between private and public sectors to get funds. Government bond issuance did not do well so far and investors are calling for higher yield which burdens the state budget. Global commodities are still exposed to a very high volatility as we saw in early May with a huge 5 to 10% weekly drop in prices. This largest plunge since 2009 could signal the beginning of a long-lasting pause in global agricultural commodity prices which would be very positive news for Vietnam. Thus, as long as food prices do not continue to increase drastically like it has been the case since the beginning of the year or geopolitical uncertainty doesnt lead to another surge in oil prices, inflation should start to decline in the coming months. Thereby, if we take into consideration the scenario of decreasing food and energy prices and associate it with the positive effects of monetary policy tightening, Vietnam shall experience a quick drop of inflation starting by the end of Q3.
A pause in global agricultural commodity prices

FAO Food index 250 200 150 100 50 0 01/2005 06/2005 11/2005 04/2006 09/2006 02/2007 07/2007 12/2007 05/2008 10/2008 03/2009 08/2009 01/2010 06/2010 11/2010 04/2011 FAOFOOD INDEX VN FOOD INDEX VN 160 140 120 100 80 60 40 20 0
Brent price dropped by 10%

130 120 110 100 90 80 70 01/2010 02/2010 03/2010 04/2010 05/2010 06/2010 07/2010 08/2010 09/2010 10/2010 11/2010 12/2010 01/2011 02/2011 03/2011 04/2011 05/2011
Source: SBS, Bloomberg
Source: SBS, Bloomberg

The real economy looks more dependent on domestic consumption than before as the consequence of the GoVs decisions to reduce investment and cut spending. Thereby, domestic consumption shall become the main driver of growth in the coming quarters and this raises the question whether the real economy can rely on domestic consumption amid a fast-growing prices environment or not.
Investment and GoV spending expected to decline sharply

The ratio of State sector investment to GDP in Vietnam was close to 16% (could rise to 17.5% of GDP according to 2011 investment plan), level which is considered by many as too high. Therefore, the GoV decided to initiate severe cutbacks in its spending as well as in public investment. The GoV has then submitted a plan to cut public sector investments which have gradually pick up over the last few years, rising from 29% in 2008 to 38% of the total investments in 2010. In the meantime, one of the GoVs challenges will lie in its ability to improve the efficiency of these investments, especially the State credit granted to SOEs. Four sources will be concern by these public investment cuts as the GoV has decided to reallocate the capital to the private sector: (i) The State budget whose expenditures have been revised down by 10%, the new budget deficit for 2011 being now estimated to stand at VND58tn vs. the VND130tn deficit previously target. (ii) The Government bond whose sales target has also been brought down from VND56tn in 2010 to VND45tn this year. (iii) The State credit which is expected to be reduced by 10% in 2011. (iv) The State credit to SOEs which is also targeted at -10% in 2011 forcing the major SOEs (EVN, PetroVietnam and VNPT) to slash investments in 907 projects, expecting to save up to VND39tn. According to the GoV, VND3.4tn of cutbacks in public expenditure have been recorded during the first quarter, as ministries, cities and provinces have been asked to cut public expenditure by 10% (including energy saving and public investment cutting in 1,387 projects). Whereas the GoV has already started to cut investment at the state level (VND436bn of cutbacks yoy), investments at provincial level do not follow this trajectory as 9 provinces out of the 24 still show a 30% or more growth in investments. Therefore, the GoV legitimately complained that many organizations, state companies and provinces had not pulled their weight in national efforts of investment cutback. The Ministry of Planning and Investment recently supported the GoV to withdraw the capital granted to any cities and provinces failing to revise and slash their level investments by May 31st. All in all, total investment in 2011 should drop sharply from the VND830tn figure of last year. Given current level of investment after 4M2011 and regarding the trend seen on investment from the private sector, we estimate that the total amount could drop by 25% from 2011 target. We noticed over the last months a sharp decline in the amount of investment stemming from the private sector (-50% from initial plan) which, in our view, is reflecting the current difficulties businesses to grow amid actual tough economic environment. Moreover, the total investment from state sector in 2011 is will not benefit, unlike 2010, from either
10 | M o n t h l y V i e t n a m U p d a t e

capital advance or carrying forward from the previous year as mentioned in resolution 11/NQ-CP.
Trade deficit is still worrying

Vietnam's trade deficit narrowed slightly to $1.40 billion in April from a revised $1.41 billion deficit a month earlier, according to GSO. The trade deficit slightly dropped 0.6% in comparison with the previous month but soared 20.4% versus that of last year. In the first 4 months of 2011, the accumulated trade deficit was USD 4.9Bil, up 6% versus that of 2010, and equivalent to 18.2% total export. Q1 Vietnam trade gap was negative USD3.13bn, +3% YoY. Export increased to USD18.9bn +33.7% YoY in nominal term. The rise in export was mainly driven by the rising trend in agro-related commodity price and if taking out price factor, export rosy by 21.7. Import on the other hand, continues to surge to USD2.1bn +38% YoY and impacted by both volume surging and price factor.
USD4.9bn trade deficit after 4M2011, up 20.4% YoY, import growth still outpaces export
10,000 8,000 6,000 4,000 2,000 (2,000) Feb-10 Apr-10 Jun-10 Aug-10 Sep-10 Feb-11 May-10 Mar-10 Mar-11 Nov-10 Dec-10 Apr-11 Jan-10 Jul-10 Oct-10 Jan-11
Import Source: GSO, SBS
Export
Trade balance
Export in the first 4 months strongly soared versus that of the previous year in term of both unit price and volume.
The total export in April reached US$7.3bn, slightly plunged US$147m, or 2% versus that of March. In term of volume, except the gain of crude oil (+61%), coal (+19%), cashew (+18%) and rubber (+7%), other export products witnessed quite a drop as steel (-42%), rice (-27%), and coffee (-19%) However, 4 months export accumulation reached US$26.bn, up 35.7% versus that of 2010 mostly due to the surge of both price and volume. In the first 4 months, Vietnam exported 4.03m tons crude oil with the total value of US$2.53bn

(ranked 2nd right after value of textile & garment export US$3.93bn). With the current upward trend of crude oil, (up 32.5% since the beginning of the year), SBS estimates the surplus from budget revenue as following:
Based on the historical data, the price of crude oil Brent has increased 32.5% since the beginning of 2011, and up 35.4% versus that of the previous year
130 120 110 100 90 80 70 01/2010 02/2010 03/2010 04/2010 05/2010 06/2010 07/2010 08/2010 09/2010 10/2010 11/2010 12/2010 01/2011 02/2011 03/2011 04/2011 05/2011
Source: Bloomberg According to the target budget revenue in 2011, revenue from crude oil will reach VND 69,300bn (approx. US$3.32bn) based on the expected export volume of 8 million tons and the export price of USD 77/barrel. With the actual first 4 months reached US$2.43bn and the average price of USD 105/barrel (Source: Revenue from crude oil export in 2011 was predicted to be US$7.56bn). SBS assumes that 74.2% revenue from total export of crude oil will be transferred to the State budget. Assuming the volume will stay the same (8million tons), and the export price will be in the range of USD 95-100/ barrel, the total crude oil export will be US$5.32Bn US$5.6bn and the revenue from crude oil will be US$3.95bn US$4.16bn. In comparison with the prediction, surplus from oil export will be VND 15,634bn VND 19,977 Bbn Estimated surplus from GoVs buget revenue
Crude oil price ( USD/barrel) 7 barrel = 1 ton Total export volume (tons) 77 7 8,000,000 80 7 8,000,000 90 7 8,000,000 95 7 8,000,000 100 7 8,000,000 105 7 8,000,000 110 7 8,000,000 Total value Budget revenue Surplus (USD) 4,312,000,000 3,200,000,000 4,480,000,000 3,324,675,325 124,675,325 5,040,000,000 3,740,259,740 540,259,740 5,320,000,000 3,948,051,948 748,051,948 5,600,000,000 4,155,844,156 955,844,156 5,880,000,000 4,363,636,364 1,163,636,364 6,160,000,000 4,571,428,571 1,371,428,571 Surplus (VND) 2,605,714,285,714 11,291,428,571,429 15,634,285,714,286 19,977,142,857,143 24,320,000,000,000 28,662,857,142,857
Source: SBS

Exports: a deeper analysis
Export goods Compared with the previous month Volume (thousand Value (USD'Mil) tons) M.o.M (%) -4% 73% 0% -4% -3% -31% M.o.M (%) Compared with the same period of last 4/2011 vs 4/2010 Volume (%) NOTE
3/2011 Textile & garment Crude oil Seafood Shoes & sandal Wood & products Rice Coffee
4/2011
3/2011
4/2011
Value (%) 36% 130% 23% 14% 27% -14%

Eventhough volume only surged 11% versus that of the previous year, value soared 93% thanks to the rise in global price. Ministry of Agriculture and Rural Development forecasted the export voume of 2011 will be 1.2 million tons with the value of VND USD 2.6 Bil.
1,089 521 461 447 330 448
1,050 900 460 430 320 310
590
950
61%
66%
896
650
-27%
-10%
365
Machinery tools & spare parts
307
-16%
160.6
130
-19%
11%
93%
317
Electronics , computers Rubber
290 260
-9% -9%
22% 4%
Rubber export also show a significant rise (41% in term of volume and 103% in term of value ) versus that of the previous year thanks to the great demand from China amid the drop of supply of such top suppliers as Thailand, Indonesia, and Malaysia. In addition, the statistics showed that demand for rubber in 2011 will reach 11.15 million tons versus the world supply of 10..97 million tons. Thus, the uptrend of natural rubber price will be form. In the first 4 months, Vietnam exported 4.03 million tons crude oil with the total value of USD 2.53 Bil (ranked 2nd right after value of textile & garment export USD 3.93Bil). Based on statistics, the current upward trend of crude oil (up 32.5% since the beginning of the year, and 35.4% versus that of the previous year) will continue
285
175
Crude oil
191
9%
42
45
7%
41%
103%
Coal Cassava & products Had bags. wallets. suitcases. Means of transport & spare parts Plastic products Steel
158 135 165 107
150 135 130 115
-5% 0% -21% 8%
171 1426 494
150 1700 350
-12% 19% -29%
-34% -10% 88%
1% -6% 145% 34%
230 114 169
110 110 97
-52% -4% -43%
41% 33% -17%
172
100
-42%
-35%
Source: GSO, SBS

Import of the first 4 months witnessed a strong surge due to the raw material demand and the impact of exchange rate
April import value reached US$8.7bn, dropped 1.8% versus that of the previous month, or US$156m. Raw material price increased, pushing the April import up US$2.4bn. In term of volume, even if some products witnessed growth such as wheat (+27%), gasoline (+4%), paper (+10%), steel (+10%), we also noticed that several products volume dropped versus that of the previous month such as LPG (-42%), motorcycle (-40%), cotton (-9%). The group accounted for the biggest portion of April (17%) is machinery & equipment (US$ 4.68bn). Import accumulation in the first 4 months was US$31.83bn, up 29.1% versus that of the previous year. Particularly, in term of value, import of gasoline reached US$3.665bn, up 63% versus that of 2010 and up 12% versus that of the previous year. The value of crude oil export has strongly surged thanks to the soar of world crude oil; however, it did increase the pressure to gasoline import (Running full capacity, Dung Quat oil factory can self-supply approx. 33% of the domestic demand). In the first 4 months, oil deficit was US$1.20bn (US$2.458bn for export and US$3.665bn for import). With the processing industry like textile & garments, the import value of fabric and raw material, leather soared 178% and 83% respectively versus that of the previous year. Even though we do not have the data of import volume, in term of price those material has increased an average of 50% to 200% (versus that of the previous year) which is the main reason making import value strongly surged. (The cotton price soared to US$ 5-5.2/ kg, meanwhile the average price in 2010 was just about USD 3.2 USD 3.3). Main import and export partners of Vietnam
Trade balance with key partners (USD 000') Export to EU US ASEAN Africa Total Q1 Q1 2010 2,650,762 3,354,633 7,217,391 291,333 13,514,119 Q1 2011 4,000,000 4,200,000 9,960,000 400,000 18,560,000 Change (%) 50.9% 25.2% 38.0% 37.3% 37.3% Q1 2010 2,182,952 1,386,623 13,844,996 135,410 17,549,981 Import from Q1 2011 2,100,000 1,700,000 18,400,000 200,000 22,400,000 Change (%) -3.8% 22.6% 32.9% 47.7% 27.6% Trade balance 1,900,000 2,500,000 (8,440,000) 200,000 (3,840,000)
Source: SBS According to GSOs figures, the export of goods into markets abroad has grown significantly, especially Asia market (including China and Japan) with the total value of US$9.96bn, up 38% versus that of the previous year, followed by the United States (US$4.2bn, up 25.2% compared to 2010), EU (US$4bn, up 50.9%) and Africa (USD400m, up 37.3%). Export in the first quarter of 2011 witnessed an average growth of 37.3% in most of the main export partners.

Main export partners
Korea China Japan EU U.S 0 500 1000 1500 2000 Coal Wood & prodcuts Seafood Shoes & sandals Textile
Main import partners

Singapore Taiwan Korea Japan China 0 500 1000 1500 Raw material for processing textiles Electronics components, computers parts Gasoline
Source: GSO, SBS
Source: GSO, SBS
In term of import, except EU, the region witnessed a slight drop of 3.8%, import from other regions substantially surged, especially Asia. In the first quarter, this region provided the total value of import goods that amounted to US$18.4bn, up 32.9% versus that of the previous year. Amongst that, the import value from China was US$5bn, Korea US$2.8bn and Taiwan US$1.93bn. Surprisingly, import from the United States, one of the biggest export partners of Vietnam, was just about US$1.7bn. Even though Vietnam saw trade surplus with the U.S and EU, it still has to face with the trade deficit from Asia, especially such consumption goods as gasoline or capital goods and raw material. In the first quarter of 2011, trade deficit from Asia amounted to US$8.4bn which China accounted for roughly 34% (US$2.86bn), up 9.6%, Korea (US$1.6bn, up 18.5%), Taiwan US$1.54bn, up 27.6% versus that of the previous year.]
Firsts improvement on the financial economy

The lower demand for Dong to reduce pressure on interest rates
We noticed in April the first early signs of improvement amid a new tightening round from the SBV which chose, a few days ago, to raise its key policy rates by 100bps from 13% to 14%. This new tightening round was highly expected, not to say overdue, as inflation continued to accelerate sharply in April. The Vietnamese central bank is trying to lower the level money supply in the economy which we believe is still higher than the current demand for VND. SBV key policy rates

16 14 12 10 8 6 4 04/2008 06/2008 08/2008 10/2008 12/2008 02/2009 04/2009 06/2009 08/2009 10/2009 12/2009 02/2010 04/2010 06/2010 08/2010 10/2010 12/2010 02/2011 04/2011
OMO rate
Base Rate
Refi Rate
Discount Rate
Source: Bloomberg, SBS
To our view, several factors are calling for a continuation in the drop of the demand for Dongs hence contributing to improve VND balances at banks: (i) The decision taken by the GoV to cut investments and spending (ii) The current level of lending rates still hovering around 25-28% which is still preventing businesses or individuals to take out loans (iii) The level deposit rates offered by commercial banks, up to 1819% which is pushing businesses and people to deposit VND at banks. Credit growth decelerated sharply in April, its lowest monthly increase over the last 15 months, only growing by +5.01% ytd or +29.2% yoy (vs. +5.5% in 2010). SBS expects a very low credit growth in Q2, possibly falling much below the target set by the SBV. The consequence would then be for banks to see an increase in their amount of funds available to loan out, eventually pushing them to lower interest rates to stimulate the demand for loans. If banks balance in Dong are improving then money market rate should start to fall as banks liquidity needs shall decline accordingly. The timing and magnitude will depend on how far the SBV is ready to go in terms of liquidity squeeze. M2 growth which is standing around 2% together with the CG standing at 5.29% appears as contained so that we are starting to wonder whether the SBV will need to continue its monetary policy tightening further or not. Moreover, any additional rate hike will have an impact on the domestic part of the inflation equation but on the domestic part only with a current inflation mostly driven by external factors. Thus, shall the SBV take the risk to jeopardize the frail banking system by tightening liquidity conditions even further? The ADB for which some of the current inflationary pressures are clearly supply-driven, doubt in the effectiveness of MP tightening to control inflation. All in all, the GoV could try to adopt new measures, such as the

extension of prices control on essential goods or extend measures to stimulate production. HCMC credit growth (Base 2009=100)
200 190 180 170 160 150 140 130 120 110 100 Sep-09 May-09 May-10 Mar-09 Nov-09 Mar-10 Sep-10 Jul-09 Jan-09 Jan-10 Jul-10 Nov-10 Jan-11 Mar-11
Credit Growth and inflation (yoy %)

30 25 20 15 10 5 0 03/2006 08/2006 01/2007 06/2007 11/2007 04/2008 09/2008 02/2009 07/2009 12/2009 05/2010 10/2010 03/2011 60 50 40 30 20 10 0
HCMC VND loans Source: HCMC GSO, SBS
HCMC $ loans
CPI YoY% (RHS) M2 growth YoY% (LHS)
Credit growth YoY% (LHS)
Source: SBV, SBS
The current level of the demand for bonds is still very low, many banks and funds still keeping an eye on the bond market at the moment, trying to determine the right time to re-open long positions. With most of bond players still expecting yields to push higher, it comes as no surprise to see them adopting a wait-andsee position, mostly trading repo transactions on the secondary market. Thus, with an actual low appetite from banks for G-bonds, the fact of witnessing the State Treasury going from bad to worse auctions after auctions is not really surprising. Bid-to-cover ratio at ST auctions
6.0
1/26/2011 5,000 4,000 3,000 2,000 1,000 Jan week 1 Jan week 2 Jan week 3 Jan week 4 Feb week 2 Feb week 3 Feb week 4 Mar week 1 Mar week 2 Mar week 3 Mar week 4 Mar week 5 Apr week 1 Apr week 2 Apr week 3 Apr week 4 May week 1 Secondary market Total Vol. Source: HNX, SBS
Turnover on the secondary market

6,000
5.0 4.0 3.0 2.0 1.0 0.0 2Y 3Y 5Y 10Y
2/11/2011 2/18/2011 2/24/2011 3/3/2011 3/10/2011 3/17/2011 3/24/2011 3/31/2011 4/21/2011 4/28/2011
Source: HNX, SBS

We noticed that, over the last few weeks, the shape of the time deposit rate curve was an inverted, banks being ready to offer bonuses on deposit rates on the shorter terms only (1 to 3 months). This is clearly pointing out markets expectation of lower interest rates at a 6-month horizon. As soon as the demand for bonds will pick-up for a speculation motive (because the market value of interest-rate bearing bonds is inversely related to interest rate, investors may wish to hold bonds when yields are high with the hope of selling them when interest rates fall), it will an early sign that interest rates will actually go down. We believe that banks will eye GVB 2-3 months before the peak in yoy inflation is reached, somewhere near the end of Q2.
GoV tackled USD and Gold as hedges against inflation due to the unprecedented series of measures taken by the SBV
In April, the GoV published Circular 09/2011/TT-NHNN to set the maximum USD deposit interest rate for entities and individuals at commercial banks. By capping USD mobilizing interest rate for resident and nonresident entities (excluding credit institutions) at 1.0% p.a. and at 3% p.a. for resident and non-resident individuals, the SBV is expecting to see businesses and people selling Dollars which shall benefit the Dong. The GoV also took the decision to ban gold deposit and lending activities at banks. The new decree stipulates that all financial institutions will be banned from gold deposits, and from providing lending services in gold from May 1st By taking measures to curb the use of Dollar and Gold in the Vietnamese economy, the SBV in fact tackled the ability and/or the attractiveness of using those assets as natural hedges against inflation. Lets remind the reader that it was in peoples mentality here to quickly switch between assets in gold, dollar or property. The unprecedented series of measures undertaken by the GoV have almost immediately been followed by the appreciation of the Dong vs. the Dollar, the local currency benefiting from a strong selling pressure on the Dollar. The VND strengthened by almost 2% over the last week of April, quickly dropping from VND21,000 to VN20,600. The USD/VND is therefore trading below the reference midpoint with current offered rates at commercial banks were still trading VND250 to VND300 below the official ceiling rate set by the SBV. We observed the same trend on domestic gold prices which fell below world prices which is rare enough to be mentioned. FX: the VND is strengthening Gold: Domestic fell below world prices

23,000 22,000 21,000 20,000 19,000 18,000 17,000 16,000 01/2011 02/2011 03/2011 04/2011
39,000,000 38,000,000 37,000,000 36,000,000 35,000,000 34,000,000 33,000,000 32,000,000 10/28/ 8:00 11/5/ 9:30 11/10/ 11:00 11/19/ 8:00 12/1/ 7:30 12/13/ 13:00 12/27/ 10:30 1/12/ 8:00 1/21/ 11:30 2/9/ 14:00 2/18/ 8:00 3/1/ 8:00 3/11/ 15:30 3/29/ 8:00 4/21/ 8:00 Gold SJC World Gold in VND
Unofficial rate SBV rate lower band
Spot rate upper band
Source: SBV, SBS
Source: Bloomberg, SBS
The Vietnamese Central Bank is mulling over further dollar deposit rate cut (could cut the current cap on dollar deposit rate for entities from 1% to 0%). To our view, another way to encourage people to switch to Dongs would be to remove the 14% cap on Dong deposit. As a matter of fact, commercial banks are already in breach of SBVs cap, offering 17-18% on time deposits. Nevertheless, by fear of seeing an even more disrupted financial sector with banks raising even higher lending rates in Dong, such a cap is unfortunately very likely to persist.

In 2011, the GoV undertakes an unprecedented series of drastic measures
April Feb January Governor confirmed no devaluatio n before Tet Governor paved the way to "Forex clearing" asking SOEs "not to hoard dollars" Hike compulsory reserve by 2 ppts. Impose a cap at 3% to dollar deposit from individuals and to 1% to deposit from corporates May The SBV is mulling over disclosing FX reserves on a regular basis + potentially raise the cap onVND deposit rates
March SBV decided of a sevenfold increase in FX violations (up to VND500m)
April Second admin fine: withdraw USD100,00 0 from civil transaction
Feb SBV devalued the Dong by raising midpoint + narrowing trading band. FX Policy changed to semi peg
March (i) force big SOE to sell USD to commercial banks (ii) Close the black market (iii) first admin fine: withdraw USD390,000 from civil transaction
April SBV issued resolution 11 applying restrictive rules on dollar sales/loans (i) prove FCY revenues (ii) sign written commitment (iii) sell back the amount of the borrowed foreign currency to their lenders
April First banks fined by SBV for not posting USD/VND selling and buying prices
April The SBV is mulling over lowering banks FCY positions from 30% to 20% of their chartered capital
Source: SBS
Sacombank Securities Company

Head office
278 Nam Ky Khoi Nghia street, District 3 Ho Chi Minh City Vietnam Tel: +84 (8) 6268 6868 Fax: +84 (8) 6255 5957 www.sbsc.com.vn
Singapore
SBS Global Investment Pte Ltd. No 3 Shenton Way, #24-03 Shenton House, Singapore 068805 Tel: +65-6592-5709 Fax: +65-6592-5700 www.sbsglobalinvest.com
Cambodia
Sacombank Securities (Cambodia) PLC 56 Preah Norodom Blvd Sangkat CheyChumneas, Khan Daun Penh, Cambodia Tel: +855 23 999 890 Fax: +855 23 999 891
Laos
Lanexang Securities Public Company 5th Floor, LSX Building, Ban Phonthan Vientiane Capital The Lao P.D.R
Saigon Branch
63B Calmette Street Nguyen Thai Binh Ward, District 1, Ho Chi Minh City Vietnam Tel: +84 (8) 3821 4888 Fax: +84 (8) 3821 3015
Hanoi Branch
6 -7th Floor, 88 Ly Thuong Kiet Street Hoan Kiem District Hanoi Vietnam Tel: +84 (4) 3942 8076 Fax: +84 (8) 3942 8075 Email: hanoi@sbsc.com.vn
th
Hoa Viet Branch

36-38 Phung Hung Street District 5 Ho Chi Minh City Vietnam Tel: +84 (8) 3854 7858 Fax: +84 (8) 3854 7856
Tay Do Branch
212A Ba Thang Hai Street, Ninh Kieu District Can Tho City Vietnam Tel: +84 (710) 378 3434 Fax: +84 (710) 378 3436
Danang Branch
62 Nguyen Thi Minh Khai Street, Hai Chau District, Danang City Vietnam Tel: +84 (5113) 81 86 86 Fax: +84 (5113) 81 88 86
Vungtau Branch
3rd Floor, 67A Le Hong Phong Street Vung Tau City Vietnam Tel: +84 (64) 3553 398 Fax: +84 (64) 3553 390
Disclaimers
The information and statements contained herein, including any expression of opinion, are based upon sources believed to be reliable but their accuracy, completeness or correctness are not guaranteed. Expressions of opinion herein were arrived at after due and careful consideration and they were based upon the best information then known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time. Expressions of opinion contained herein are subject to change without notice. This document is not and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. SBS and other related companies and/or their officers, directors and employees may have positions and may have affect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services for these companies. No person is authorized to give any information or to make any representation not contained in this document and any information or representation not contained in this document must not be relied upon as having been authorized by or on behalf of SBS. This document is private circulation only and is not for publication in the press or elsewhere. SBS accepts no liabilities whatsoever for any direct or consequential loss arising from any use of this document or its contents. The use of any information, statements forecasts and projection contained herein shall be at the sole discretion and risk of the users. This document is confidential and is intended solely for the use of its recipient. Any duplication or redistribution of this document is prohibited

The Vietnamese Economy Is Moving Towards Soft Landing: in This Issue

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The Vietnamese Economy Is Moving Towards Soft Landing: in This Issue

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Monthly Economics Update

Vietnam Macroeconomics research

Monthly update on Vietnam macro-economics

May 13th 2011