Asia

Economics and Strategy

abc
Global Research

Vietnam Monitor  Economics: Recent rise in inflation an

upward blip in a downward trend
(Issue 2)  Equity strategy: Equities look expensive
Inflation remains on a downtrend at 25x this year’s earnings, but
upcoming IPOs could attract interest

 FI strategy: Liquidity remains flush

despite SBV’s tightening measures

 FX strategy: Recent acceleration in VND

depreciation represents intra-band
repositioning; entry into long VND
positions more favourable now

Despite recent upticks in headline inflation, we think

inflation remains on a downtrend. The SBV’s policy
tightening measures are mainly corrective as the call money
rate has increased by only a modest 20bp. We expect range-
trading in Vietnamese bonds near term.
8 June 2007 Equities continue to look expensive at 25 times this year's
Pieter van der Schaft earnings. We would not be aggressive buyers at current levels
Asia Local Rates Strategist – even though the fundamental long-term story for Vietnam is
+852 2822 4277 pietervanderschaft@hsbc.com.hk
very much intact. We see the index largely moving sideways,
Garry Evans* albeit in a wide range, over coming months.
Equity Strategist
The Hongkong and Shanghai Banking Corporation Limited (HK)
Since mid-May, USD/VND has rallied more rapidly. We do
+852 2996 6916 garryevans@hsbc.com.hk
not interpret this as a shift towards an increased pace of
Daniel Hui
managed depreciation. We think the SBV is repositioning
FX Strategist
+852 2822 4340 danielpyhui@hsbc.com.hk USD/VND into the centre of the band, consistent with a policy
of accelerated currency regime liberalization. We believe SBV
Robert Prior-Wandesforde
Economist will allow medium-term appreciation sooner than expected.
+65 6239 0840 robert.prior-wandesforde@hsbc.com.sg

Virgil Esguerra
Asia Local Rates Associate Strategist Table 1: Key data and events
+852 2822 4665 virgilesguerra@hsbc.com.hk
Date Data and events Notes
6 Jun VGB underwriting VND300-700bn
11 Jun VGB auction VND300-700bn
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
20 Jun VGB underwriting VND300-700bn
and is not registered/qualified pursuant to NYSE and/or NASD
21-25 Jun CPI (Jun) 7.3% y/y prior
regulations.
25 Jun VGB auction VND300-700bn
25-29 Jun Retail sales (Jun) 22.6% y/y prior
Issuer of report: The Hongkong and Shanghai Banking
25-28 Jun IP (Jun) 17.1% y/y prior
Corporation Limited
25-28 Jun Exports (Jun) 18.4% y/y prior
2-6 Jul GDP (Q2) 7.7% y/y prior
Disclaimer & Disclosures. 24-27 Jul
24-27 Jul
Retail sales (Jul)
IP (Jul)
-
-
This report must be read with the 24-27 Jul Exports (Jul) -
disclosures and the analyst certifications Source: HSBC

in the Disclosure appendix, and with the

Disclaimer, that form part of it.
 Asia
Economics and Strategy abc
8 June 2007

Indicators
Key indicators
Chart 1: USD/VND Chart 2: FX reserves

16200 1.4% 15
16100 1.2%
1.0% 10
16000
0.8%
15900
0.6% 5
15800
0.4%
15700 0.2% 0
Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06
15600 0.0%
Dec-04 Jun-05 Dec-05 Jun-06 Dec-06
USD/VND (lhs) Y-o-y change (rhs) Foreign reserv es (USDbn)

Source: HSBC Source: HSBC

Chart 3: Bond yields Chart 4: Headline inflation

9 12%
8.5 10%

8 8%
6%
7.5
4%
7
2%
6.5
0%
6
Jul-02

Jan-03
Jul-03

Jan-04

Jul-04
Jan-05

Jul-05
Jan-06

Jul-06

Jan-07

Jul-06 Sep-06 Nov -06 Jan-07 Mar-07 May -07

5y r VGB y ields Headline CPI, y -o-y change

Source: HSBC Source: HSBC

Chart 5: HCMH Index Chart 6: GDP growth

1400 200% 10%

1200 9%
150%
1000
8%
800 100%
7%
600 50%
400 6%
0% 5%
200
0 -50% 4%
Dec-04

Dec-05

Dec-06

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07
Apr-05

Aug-05

Apr-06

Aug-06

Apr-07

HCMSI (lhs) Y-o-y change (rhs) GDP y -o-y grow th

Source: HSBC Source: HSBC

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Economics
 The State Bank has raised reserve requirements aggressively to
stem money growth and “get inflation under control”
 While inflation has moved higher this year we suspect it will prove
a blip in the downward trend and expect price rises to slow soon
 There has been no obvious relationship between money growth
and Vietnamese inflation in the past

Panicking about prices? constraining inflation is one of the State Bank’s

The Vietnamese authorities have fired the first
meaningful shot in their battle against the tidal
wave of liquidity and the potential implications it
may have for inflation. By doubling the reserve
requirement on dong deposits from 5% to 10%
and on foreign currencies from 8% to 10% the
State Bank of Vietnam (SBV) has signalled its
intent to mop up excess funds in the banking
system before they add to lending growth. The
official deposit and lending numbers are a year
out of date, but one suspects they are expanding
well above desired rates at present.
The surprise 30 May move perhaps also points to
a change in the policy priorities of the central
bank, away from supporting economic growth
towards capping monetary growth and inflation.
The SBV officially operates twin objectives –
firstly to keep inflation below GDP growth and
secondly to support economic growth. The first
of these is being met at present, while the
slowdown in first quarter GDP growth to 7.7%
from 8.9% would be of some concern.
In explaining the monetary tightening, Central
Bank Governor Thuy argued that “monitoring and
main tasks and we need to take some prompt and
intensive measures in order to get inflation under
control”.
It is certainly true to say that inflation has moved
higher over recent months, rising from a low of
6.4% in January to 7.3% in May. But the question
is does this reflect a blip in the downward trend,
of the sort which occurred during the second half
of 2005 for example, or a reversal in the trend
itself. Clearly, the SBV fears the latter, given the
probable strength of money growth, although we
think the former is the more likely outcome.
There are several points to make:
 Looking at the relationship between monetary
growth and inflation, there doesn’t seem to
have been much, if any, link in the past. The
chart below uses quarterly M2 data, which is
available back to 1997 and extends to the
middle of last year. We also looked at the
annual money growth numbers, which we can
get back to 1991, although again there was no
obvious relationship. The same was also
true of M1.

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Chart 7: No apparent relationship between money growth & Chart 9: ‘Housing’ inflation close to a peak?
inflation
% Yr
% Yr % Yr 12
70 12 11
60 10 10
50 8 9
6 8
40
4 7
30
2 6
20 0
10 5
-2
4
0 -4
3
Mar-99 Mar-01 Mar-03 Mar-05 Mar-07
03 04 05 06 07
M2 money supply growth (RHS) Housing & construction material prices
Inflation (LHS)
Source: CEIC
Source: CEIC

 Intense global competition has probably

 The contribution from fresh food price
helped drive the downward trend in inflation
inflation to the headline rate, which amounted
seen since mid-2004 and there is little reason
to 1.1ppt in May, is unusually large at present
to doubt that this remains a factor.
(see chart). With food price inflation
currently running close to 15% we suspect it  We have argued (see Vietnam: Going for the
will turn lower fairly soon, particularly now next level, September 2006) that the
that the base effects are becoming easier. trend/sustainable rate of GDP growth in the
Chart 8: Food is adding more than 1ppt to headline inflation country is around 7.5-8%. Although GDP
growth exceeded this rate in 2005-06 the
% Yr % Yr
11 12 difference was marginal and followed a
10
9 10 period of sub-trend growth.
8
7 8 Inflation to fall
6 6
5 With all this in mind, and notwithstanding the
4 4
3 strength of money growth, we expect inflation to
2 2 start falling again fairly soon. Our year average
May-03 May-04 May-05 May-06 May-07
CPI forecasts are 7% for 2007 and 6% for 2008.
Headline inflation rate Ex-food inflation rate

Source: HSBC, CEIC

This is not to say that the rise in the reserve ratio
was unwise but should probably be seen as a
 The main contributor to the pick-up in precautionary step, helping to sterilise the huge
inflation this year has been “housing and capital inflows and recent central bank
construction materials”, which has risen from intervention in the currency market. In our view,
5.9% in January to 10.6% in May, adding there remains little reason to panic about a strong,
0.4ppts to the headline rate. This is a sustained rise in inflation any time soon.
potentially more worrying development,
although if history is any guide then it may be
close to peaking. As the chart below shows,
this component has shown a cyclical pattern
over recent years and is now close to the level
it has peaked at in the past.

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8 June 2007

Equity strategy
 Even after its recent roller-coaster ride, the Vietnamese market
looks expensive on 25x this year’s earnings
 We would not be aggressive buyers at this level, but would wait to
buy the big IPOs due over the next six months
 Foreign investors should be aware of the new registration system
that will start in August or September

On hold for the IPO rush What happened is that foreign investors have
taken a realistic view about valuation, buying
What has happened
between 900 and 1,000 and trimming positions
Vietnamese equities have had a volatile ride of when the index rose much above that level. Most
late. The Vietnam index is up 38% y-t-d in USD overseas Vietnam country funds are sitting on
terms. But, as shown in Chart 10, the market significant amounts of cash that they expect to use
corrected 23% between March 12 and April 24, in the privatisation IPOs due in the next six
reaching a low of 906. It subsequently rebounded months (see below for more on this); they are not
23% to May 23, and has since shown some signs in a hurry to put the money to work when they see
of a further correction. the market looking too expensive. Domestic retail
Chart 10: Vietnam stock index investors have largely followed the foreigners’
lead.
1400
VNI
1200 Table 2: Key stock market data
1000 HCM Hanoi Total
800 Market cap (USDm) 15,188 4,566 19,754
Number of stocks 110 87 197
600 Foreign ownership 27% 14% 24%
400 PE (2006) x 33.6 46.6 36.6
PB (2006) x 7.9 6.5 7.5
200 ROE 24.2% 14.8% 21.4%
DY 0.9% 0.8% 0.9%
Oct-05

Oct-06
Jan-05
Apr-05

Jul-05

Jan-06

Apr-06
Jul-06

Jan-07
Apr-07

Source: Bloomberg, HCM STC, SSI, BVSC

Source: Bloomberg
At the current index level (1040), the PE for Ho
Chi Minh listed stocks based on 2006 earnings is
34x. Assuming 25% EPS growth this year (the
consensus among Vietnam-based fund managers)
and 15% next (roughly the rate of nominal GDP

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8 June 2007

growth), this equates to a PE of 25x 2007 earnings Chart 11: Daily trading on Ho Chi Minh (USDm)

and 21x 2008. We remain comfortable with our 80

target for the VN Index of 900 by end-2007, 70 Daily traded v alue (USD mn)

based on 18x forward earnings at that time. 60

50
We would, therefore, not be aggressive buyers at 40
30
the current level – even though the fundamental
20
long-term story for Vietnam is very much intact. 10
We see the index largely moving sideways, albeit 0

Oct-05

Oct-06
Jan-05

Apr-05

Jul-05

Jan-06

Apr-06

Jul-06

Jan-07

in a wide range, over the next few months. At the
right price, the IPO offerings would be of interest.
Recent developments
Regulatory issues
The authorities have released draft guidelines for
foreign investor registration. This will replace the
current dual system of (1) a securities trading
code for listed stocks, and (2) capital contribution
account for OTC stocks. The documents that will
be required for registration are not particularly
onerous (they seem to be based on Taiwan’s FII
system), and the unifying of the two systems will
simplify procedures somewhat.
The unknowns, however, are whether the
authorities will use the registration system to slow
inflows at times when they feel the market has
gotten overheated, and whether they will reject
applications from investors they see as
Apr-07
Source: Bloomberg
Foreign investor buying has picked up since late
February/early March, when foreigners were
small net sellers for about three weeks. In May,
foreigners bought net USD150m, close to the
level of December-February (Chart 12). One
problem for foreign investors is that many of the
best-quality names have hit their foreign
ownership limits (49% for listed companies, 30%
for banks and OTC stocks). Of the 15 largest
stocks by market cap, five can no longer be
bought by foreigners (see Table 5 for details).
Chart 12: Foreign net buying of Vietnamese equities
400
350
300
250
USD m

undesirable, such as hedge funds. The new system

200
will probably be implemented from August or 150
September. 100
50
Turnover and liquidity 0
Dec-06

Jan-07

Feb-07

Mar-07

Apr-07

May-07

The rally in the market in the past month has

taken daily trading value on the Ho Chi Minh
market back since the start of May to an average Source: Bloomberg

of USD44m a day, although this is still well

below the heady levels of March (see Chart 11).
Over the past three months, 11 stocks have had an
average daily turnover of USD1m or more,
making them liquid enough for many foreign
investors (see Table 5, for key data on the largest
stocks).
IPO timetable
Many overseas country funds are saving cash to
buy a skew of privatisation issues due over the
next few months.
The first major privatisation this year, for Bao
Viet Insurance, was completed successfully on

6
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Economics and Strategy
8 June 2007
June 4, raising USD271m, with 23% of the
offering going to foreign investors. The realised
price was twice the initial reserve price.
The timetable of major IPOs for the rest of the
year is shown in Table 3. A number of these will
have overseas tranches for the first time, and
foreign investment banks are widely expected to
be appointed as lead managers on the issues.
Table 3: Major IPO timetable
Company
Vietcombank
Industrial & Commercial Bank
Mekong Housing Bank
Mobifone
BIDV
Saigon Beer
Hanoi Beer
Vinafone
Source: Media reports including Bloomberg, Vietnam Investment Review, Viet Nam News
Country funds
There continue to be a significant number of new
Vietnam country funds set up worldwide. We
count 13 funds launched since the start of April
this year, and 22 since the beginning of the year
(giving a total of 52 in existence). Not all the
funds report their NAV but, for those that do, total
assets now equal USD6bn. Given total foreign
ownership of listed companies on the two
exchanges of only USD4.8bn, this suggests that a
lot of the money raised is still held in cash
(although some, of course, is invested in OTC
stocks or other assets such as real estate).
A look at new country funds shows a number of
trends. Korea is a major source of inflows into
Vietnamese equities: since the start of the year
eight new funds there have raised well over
USD1bn. The number of countries with Vietnam
funds has increased: recently country funds have
been set up in Singapore, Malaysia, Japan and
Israel. The largest Vietnam-based money
managers, such as Dragon Capital, are
diversifying their product range as – presumably –
they see relatively little value in a balanced fund
abc
of listed stocks. These managers have recently
launched specialist funds in resources, energy,
infrastructure and real estate.
With the Vietnamese market still somewhat small
for most institutional investors, country funds will
continue to be the major source of liquidity. That
provides significant downside support, since these
funds are unlikely to be sellers. It also guarantees
that the forthcoming IPOs will get a good
reception.
Possible IPO date
Aug-07 New index
Oct-07
Oct-07 Given the problem with trying to replicate the VN
Q4 Index (which is not free float adjusted), many
Q4
? investors will be interested in the FTSE Vietnam
?
?
Index Series launched in May. The FTSE
Vietnam Index is adjusted for investibility and
stocks are screened for liquidity. It does not,
however, get over the problem of stocks that
foreigners can no longer buy since foreign
ceilings have been reached. It also has the snag
that it is limited to Ho Chi Minh listed stocks and
therefore misses a number of investible names
listed in Hanoi.
But now that FTSE has moved, does it suggest
that MSCI will have to consider including
Vietnam in its indexes over the next few months?
There are now four Vietnamese stocks with a
free-float adjusted market cap of greater than
USD500m. Add a couple more, once the
forthcoming IPOs are complete, and Vietnam
would seem to fulfil MSCI’s (undisclosed)
inclusion criteria.
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8 June 2007

Table 4: Vietnam country funds set up since April 2007

BBG Code Name Fund Management Co Incept Date Location
VIETRES KY VIETNAM RESOURCE INV HLD LTD Dragon Capital Management Ltd/ 8/1/2007 Cayman
SGVIEOP KY SGAM VIETNAM OPP FUND SG Asset Management Singapore 6/21/2007 Cayman
TIMVIET LE T.I.M VIETNAM TIGER FUND IFM Independent Fund Management 6/4/2007 Liechtenstein
3697677 KS KB VIETNAM FOCUS BALCND-FD-C Kookmin 6/1/2007 Korea
3697685 KS KB VIETNAM FOCUS BALCND-A Kookmin 6/1/2007 Korea
79212075 JN SUMI M VIETAM FUND 2007-5 Sumitomo Mitsui Asset Management 5/31/2007 Japan
AMCFMVP LE AMCFM VIETNAM EQUITY FUND-P IFAG Institutionelle Fondsleit 5/31/2007 Liechtenstein
MAXVIET KY MAXFORD GROWTH-VIETNAM FOCUS Maxford Investment Management 5/16/2007 Cayman
n/a VIETNAM AZALEA FUND Mekong Capital 5/1/2007 Vietnam
CAASCCA LX CAF-ASEAN NEW MARKETS-CA Credit Agricole Asset Management 4/30/2007 Luxembourg
FULVIEA KY FULLERTON VIETNAM FUND - A Fullerton Fund Management Co L 4/23/2007 Cayman
HWAINCH MK HWANG-DBS INDOCHINA FUND Hwang-DBS Investment Management 4/12/2007 Malaysia
7671343 KS TONGYANG VIETNAM PRIVATZN 1 Tong Yang Investment Trust Man 4/2/2007 Korea
Source: HSBC, Bloomberg

Table 5: Key valuation data for largest listed Vietnamese stocks

Code Company Exchange Mkt cap Ave daily Foreign Foreign Room for PE (2006) Chg 3M
(USDm) t/over ownership limit foreign
(USDm) buying
(USDm)
VNM Vinamilk HCM 2,048 2.62 44% 49% 103 42.0 -36%
STB Sacombank HCM 2,026 8.35 30% 30% 0 53.8 -5%
PPC Pha Lai Thermal Power JS Company HCM 1,371 1.26 6% 49% 588 16.9 -28%
FPT FPT Corp. HCM 1,304 4.41 20% 49% 376 60.0 16%
ACB AsiaCommercialBank Hanoi 1,105 1.03 30% 30% 0 n/a -22%
PVD PVDrilling HCM 1,099 2.74 15% 49% 370 117.5 -13%
SSI Sai Gon Securities Investment Hanoi 545 4.46 12% 49% 202 n/a -5%
ITA Tan Tao Industrial Park HCM 541 1.25 19% 49% 162 45.8 74%
VSH VinhSon HydroPower HCM 541 0.82 23% 49% 142 31.8 4%
GMD Gemadept HCM 440 1.51 49% 49% 0 38.4 -10%
KDC South Kinh Do HCM 438 0.78 38% 49% 47 44.5 74%
SAM Sacom Cable HCM 405 0.78 49% 49% 0 35.2 142%
REE REE Corporation HCM 396 3.35 49% 49% 0 28.2 -13%
BMI BaoMinh Insurance Hanoi 358 0.20 8% 49% 146 n/a 358%
BVS Bao Viet Securities JS Company Hanoi 353 0.50 23% 49% 93 n/a -17%
SJS Sudico HCM 277 3.19 11% 49% 106 52.9 -28%
BTS But Son Cement Hanoi 250 0.09 6% 49% 107 n/a -17%
VIP Vipco HCM 230 0.28 24% 49% 57 44.7 -35%
TDH Thu Duc House HCM 222 0.88 49% 49% 0 23.4 -40%
BCC Bim Son Cement Hanoi 217 0.27 10% 49% 84 n/a -19%
MPC Minh Phu Seafood Joint stock Co Hanoi 208 0.34 2% 49% 97 n/a -16%
VNR Vinare Hanoi 207 0.05 7% 49% 86 n/a 4%
Source: Bloomberg, HCM STC, BVSC, SSI

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8 June 2007

Fixed income strategy

 Liquidity remains flush despite SBV’s liquidity tightening measures
 5yr VGBs likely to remain range-bound around 7%

Recent SBV measures to mop up excess liquidity
by raising (and equalising) reserve requirements
on VND and FX deposits to 10% for deposits
shorter than 12 months and 4% for 12-24month
deposits, and cap the amount of unlisted bank debt
that can be held by offshore investors to 50% have
had limited impact on Vietnamese government
and bank bonds.
Despite the absence of official data on bank
deposits, the reserve requirement hikes are
estimated to mop up approximately VND40-50trn
in bank liquidity out of total excess liquidity of
VND60-80trn. Excess liquidity will, however,
continue to rise sharply further given our estimate
for approximately USD15bn of foreign capital
inflows to enter Vietnam during 2007. In turn, the
reserve requirement hikes, which were effective 1
June, have only led to a modest 20bp rise in the
call money rate to 3.55-3.8% at present, and our
traders onshore do not expect the call money rate
to reach 5% anymore during Q3 despite an
expected pick-up in loan disbursements from July
onwards to finance infrastructure projects.
enforcement of this ‘regulation’ to corporate
bonds is unlikely, in our opinion.
That being said, the Vietnamese authorities will
continue to face a challenge on how to control
excess liquidity, while maintaining their stated 1%
annual depreciation path for the VND in the face
of rising inflation. Although our economist
believes that the recent rise in headline inflation is
temporary (please see “Economics” section), it is
unlikely that the SBV can control rising food and
energy prices through monetary sterilisation
measures. Nevertheless, recent SBV moves may
have been intended to show that ‘they are doing
something’ about inflation and the Vietnamese
authorities may well follow up with further –
mainly administrative – measures in an attempt to
control excess liquidity and inflation before
allowing a strengthening of the VND in 2008.
Chart 13. Vietnam bond yields have risen sharply
9
8.5
8
7.5

SBV’s cap on the sale of unlisted bank debt to 7

6.5
offshore investors appears to have been included
6
in a clarification letter to a foreign bank, and is
Jul-06 Sep-06 Nov -06 Jan-07 Mar-07 May -07
therefore not a formal regulation. It is also
5y r VGB y ields
difficult to see how these regulations can be
Source: Bloomberg
enforced except perhaps by capping the amount of
debt sold to offshore investors during primary
issuance. Hence, an extension and/or strict

9
 Asia
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8 June 2007

In the meantime, 5yr VGBs are expected to trade

range-bound around 7% with ample support from
onshore investors (given approximately 350bp
spread pick-up over the call money rate) and
offshore investors considering that Vietnamese
bonds provide an attractive call option on
medium-term VND appreciation.

Table 6. Vietnam bond yields

Tenor Yield Size
Vietnam Government Bond (VGB) 5yr 7.05% -
10yr 7.50% -
Electricity of Vietnam 10yr 8.60% 1 trn
Development Bank of Vietnam 5yr 7.15% 8trn
10yr 7.60% 0.6trn
15yr 7.80% 0.1trn
Bank for Investment & Development 10nc5 7.70% 1.1trn
15nc10 8.20% 1.1trn
Vinashin 10yr 8.65% 3trn
Source: HSBC Vietnam

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FX strategy
 A recent acceleration in VND depreciation represents intra-band
repositioning, not a signal for faster depreciation
 Liberalization of the currency regime is happening
 Entry into long VND positions more favourable now

Since mid-May, USD/VND has rallied at a more
rapid rate. Market participants, however, should
not interpret this as a policy-shift towards an
increased pace of managed depreciation (beyond
the conventional 1% p.a. pace). Instead, an
examination of the SBV’s daily band setting
against this movement in spot, suggests that the
SBV is repositioning USD/VND back into the
centre of the band. This is consistent with a view
of accelerated currency regime liberalization. We
continue to believe that SBV will allow medium-
term appreciation sooner than expected (see
VND… appreciation coming soon, 21 May 2007).
We believe that upside to our view is largely
limited to the risk that SBV delivers on its implicit
policy of 1% annual depreciation. We continue to
advise gaining exposure to VND appreciation
risk. Now that intra-band repositioning has largely
been completed (chart below), entry into long
VND positions are more favourable now.
An evolving currency regime
Shifting balance-of-payments dynamics,
combined with a recent growing capital inflows is
necessitating an acceleration of currency regime
liberalization. In the past six months, the
oversupply of dollars and undersupply of VND
has led the USD/VND to pressure the floor of the
official trading band. These conditions have
proved problematic for the currency market, with

Chart 14: USD/VND

16250 Band widening

16200

16150

16100

16050

16000

15950

15900
Oct-06 Dec-06 Feb-07 Apr-07 Jun-07
Fix USD/VND Close Ceiling Floor

Source: Reuters

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Chart 15: USD/VND Intra-band positioning Chart 16: USD/VND

100 16650
16550
50
16450
0 16350
16250
-50
16150
-100 16050

-150 15950
Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Nov-06 Jan-07 Apr-07 Jul-07 Oct-07
USD/VND HSBC f'cst
close - fix Band Band 1% deprec trend Late may pace
Source: Reuters, HSBC Source: Reuters, HSBC

SBV purchasing insufficient USD to keep the Entry opportunity?

VND market from clearing properly (for details,
see VND… appreciation coming soon, 21 May
2007).
It appears that the SBV has decided to address this
imbalance by buying USD more aggressively,
dragging the USD/VND rate away from the edge
of the band, back towards the centre (Chart 15).
From a policy standpoint, there are two
implications to this recent development. First,
shifting the burden of exchange rate management
from a reliance on trading band restrictions to
more direct intervention will give SBV a more
flexible and market-based method in guiding
exchange rates, while maintaining liquidity in the
market.
However, at the same time, increased selling of
VND will increase the liquidity management
burden for an SBV already struggling to manage
inflation risks. It is due to this last point, that we
believe VND appreciation may come about
sooner than expected.
In repositioning USD/VND to the midpoint of the
band, besides more aggressive buying of USD to
push the USD/VND rate higher, the SBV has also
been modestly re-fixing the band lower (Chart
14). However, the end result is that, on the
surface, VND has still been depreciating more
rapidly against the USD in the past few weeks (at
around a 3.5% p.a. pace).
Investors should not extrapolate this into trend
that creates the expectation that USD/VND will
end the year much higher (Chart 16). With
repositioning now largely over (and USD/VND
already within 17pips of the band centre, from an
average 80pips three weeks ago), we feel the
further upside to USD/VND is limited to the
additional depreciation required to hit the implied
SBV policy target of 1% depreciation in 2007
(about 122pips more), implying a much slower
pace of USD/VND depreciation from here (Chart
16). As such, entry into long VND positions are
more favourable now for medium-term investors
looking to gain exposure to appreciation risk.

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 Asia
Economics and Strategy abc
8 June 2007

Macro framework

2002 2003 2004 2005 2006 2007f 2008f

Production, demand and employment
GDP growth (% y-o-y) 7.1 7.3 7.8 8.4 8.2 7.8 8.0
Nominal GDP (USDbn) 35.1 39.6 45.5 52.9 61.6 69.6 78.5
GDP per capita (USD) 440 489 555 637 732 817 909
Private consumption (% y-o-y) 7.6 8.0 7.1 7.5 7.0 6.5 6.7
Government consumption (% y-o-y) 5.4 7.2 7.8 7.9 5.0 5.0 6.0
Investment (% y-o-y) 12.9 11.9 10.4 11.0 12.0 10.0 12.0
Industrial production (% y-o-y) 14.24 19.80 17.64 25.53 13.40 8.8 9.3
Gross domestic saving (% GDP) 32.0 30.5 33.5 36.6 36.3 36.5 37.0
Unemployment rate, end-year (%) 6.01 5.78 5.60 5.31 4.40 4.2 4.0
Prices
CPI, average (% y-o-y) 4.1 3.1 7.8 8.3 7.5 6.5 6.0
CPI, end-year (% y-o-y) 4.0 2.9 9.7 8.8 6.6 6.3 5.8
PPI (% y-o-y) -0.3 1.8 2.7 -1.9 3.0 0.6 0.1
Money, FX & interest rates
Broad money supply M2, average (% y-o-y) 17.6 24.9 29.5 29.8 25.0 20.0 25.0
Real private sector credit growth (% y-o-y) 22.2 28.4 41.7 40.0 35.0 25.0 30.0
Prime lending rate, end-year (%) 9.48 9.52 9.90 11.33 11.00 10.50 10.50
5yr yield, end-year (%) -- 8.30 8.50 8.75 8.30 7.00 6.75
VND /USD, end-year 15,363 15,615 15,738 15,878 16,052 16,237 16,399
VND /USD, average 15,258 15,500 15,718 15,832 15,986 16,161 15,999
VND /EUR, end-year 15,695 19,230 21,105 18,840 21,188 23,544 23,779
VND /EUR, average 14,431 17,538 19,540 19,750 20,191 22,385 22,964
External sector
Merchandise exports (USDbn) 16.7 20.1 26.5 32.4 39.9 44.7 52.7
Merchandise imports (USDbn) 17.8 22.7 28.8 33.3 40.1 46.1 54.8
Trade balance (USDbn) -1.1 -2.6 -2.3 -0.8 -0.2 -1.4 -2.1
Current account balance (USDbn) -0.7 -1.9 -1.6 0.2 0.4 -0.8 -1.5
Current account balance (% GDP) -1.9 -4.9 -3.4 0.4 0.7 -1.2 -2.0
Net FDI (USDbn) 2.0 1.9 1.9 2.0 3.0 3.0 3.0
Net FDI (% GDP) 5.8 4.8 4.1 3.7 4.9 4.3 3.8
Current account balance plus FDI (% GDP) 3.8 -0.1 0.7 4.1 5.5 3.1 1.9
Exports (% y-o-y) 11.2 20.6 31.4 22.5 22.9 12.0 18.0
Imports (% y-o-y) 23.3 28.0 26.6 15.7 20.4 15.0 19.0
International FX reserves (USDbn) 4.2 6.4 7.2 9.2 15.0 20.0 25.0
Import cover (months) 2.9 3.4 3.0 3.3 4.5 5.2 5.5
Public and external solvency indicators
Gross external debt (USDbn) 12.2 13.3 15.5 16.9 19.3 21.6 23.0
Short term external debt (% of int'l reserves) 26.7 18.0 14.0 12.7 6.7 5.0 4.0
Private sector external debt (USDbn) 2.5 2.7 3.1 2.9 3.3 3.6 4.0
Consolidated government balance (% GDP) -3.9 -4.9 -3.3 -2.6 -2.0 -1.9 -1.7
Central government balance (% GDP) -3.5 -6.1 -3.6 -3.0 -2.1 -2.1 -2.3
Gross public domestic debt (VND trn) 57 83 96 118 141 163 186
Gross public domestic debt (% GDP) 10.6 13.5 13.4 14.1 14.3 14.5 14.5
Gross public external debt (USDbn) 9.7 10.6 12.4 14.0 16.0 18.0 19.0
Gross public external debt (% GDP) 27.6 26.8 27.2 26.5 26.0 25.9 24.2
Source: HSBC

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 Asia
Economics and Strategy abc
8 June 2007

Disclosure appendix
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's
decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other
considerations.

Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company, please see the most recently published report on that company available at
www.hsbcnet.com/research.

The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the views expressed herein
accurately reflect their personal view(s) about the subject security(ies) and issuer(s) and that no part of their compensation was,
is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report:
Garry Evans, Virgil Esguerra, Robert Prior-Wandesforde, Pieter Van Der Schaft and Daniel Hui

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1 This report is dated as at 08 June 2007.
2 All market data included in this report are dated as at close 06 June 2007, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.

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 Asia
Economics and Strategy abc
8 June 2007

Disclaimer
*Legal entities as at 5 September 2006 Issuer of report
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Limited, Hong Kong; HSBC Securities (Asia) Limited, Taipei Branch; HSBC Securities (Canada) Banking Corporation Limited
Inc, Toronto; HSBC Bank, Paris branch; HSBC Trinkaus & Burkhardt AG, Dusseldorf; 000
HSBC Bank (RR), Moscow; HSBC Securities and Capital Markets (India) Private Limited, Level 19, 1 Queen’s Road Central
Mumbai; HSBC Securities (Japan) Limited, Tokyo; HSBC Securities Egypt S.A.E., Cairo; HSBC Hong Kong SAR
Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Telephone: +852 2843 9111
Banking Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Telex: 75100 CAPEL HX
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Johannesburg; HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid,
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Milan, Stockholm, Tel Aviv, HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul
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15
 abc

GEMs Macro & Strategy Research Team

Global Emerging Markets (GEMs) Eastern Europe, Middle East and Africa (EMEA)
Philip Poole Juliet Sampson
Head of Research & Chief Economist, GEMs Chief Economist, EEMEA
+44 20 7991 5641 philip.poole@hsbcib.com +44 20 7991 5651 juliet.sampson@hsbcib.com
John Lomax Alexander Morozov
Head of Equity Strategy, GEMs +7495 721 1577 alexander.morozov@hsbc.com
+44 20 7992 3712 john.lomax@hsbcib.com
Murat Ulgen
Regis Chatellier +90 212 366 1625 muratulgen@hsbc.com.tr
+44 20 7991 5673 regis.chatellier@hsbcib.com
Esra Erisir
Dafydd Lewis +90 212 366 1615 esraerisir@hsbc.com.tr
+44 20 7992 3685 dafydd.lewis@hsbcib.com
Simon Williams
Wietse Nijenhuis +97 145 077 614 simon.williams@hsbc.com
+44 20 7992 3680 wietse.nijenhuis@hsbcib.com
Latin America
Asia
Alexandre Bassoli
Peter Morgan +55 11 3371 8184 alexandre.bassolii@hsbc.com.br
Chief Economist, Pan-Asia
Javier Finkman
+85 22 822 4870 petermorgan@hsbc.com.hk
+54 11 4344 8144 javier.finkman@hsbc.com.ar
Dilip Shahani
Jonathan Heath
Head of Fixed Income & Credit Research, Asia
+52 55 5721 2176 jonathan.heath@hsbc.com.mx
+852 2822 4520 dilipshahani@hsbc.com.hk
Clyde Wardle
Hongbin Qu
+1 212 525 3345 clyde.wardle@us.hsbc.com
+852 2822 2025 hongbinqu@hsbc.com.hk
Benito Berber
Garry Evans
+1 212 525 3124 benito.berber@us.hsbc.com
Head of Equity Strategy, Pan-Asia
+852 2996 6916 garryevans@hsbc.com.hk Marjorie Hernandez
+1 212 525 4109 marjorie.hernandez@us.hsbc.com
Richard Yetsenga
+852 2996 6565 richard.yetsenga@hsbc.com.hk Hernan M Yellati
+54 11 4348 5759 hernan.m.yellati@hsbc.com.ar
Robert Prior-Wandesforde
+65 62 390 840 robert.prior-wandesforde@hsbc.com.sg Luis F Cezario
+55 11 3371 8203 luis.cezario@hsbc.com.br
Frederic Neumann
+85 22 822 4556 fredericneumann@hsbc.com.hk Juan Pedro Treviño
+52 55 5721 2179 juan.trevino@hsbc.com.mx
Devendran Mahendran
+852 2822 4521 devendran@hsbc.co.hk Ivonne Ordoñez
+52 55 5271 2172 ivonne.ordonez@hsbc.com.mx
Perry Kojodjojo
+852 2996 6568 perrykojodjojo@hsbc.com.hk Arcelia Jimenez
+52 55 5721 2422 arcelia.jimenez@hsbc.com.mx
Manas Paul
+91 944 827 1868 manaspaul@hsbc.co.im
Christopher Wong
+852 2996 6917 christopherwong@hsbc.com.hk
Pieter van der Schaft
+852 2822 4277 pietervanderschaft@hsbc.com.hk
Virgil Esguerra
+852 2822 4665 virgilesguerra@hsbc.com.hk
Daniel Hui
+852 2822 4340 danielpyhui@hsbc.com.hk

16