xpert says Viet Nam stock market woes linked to inflation fight

Viet Nam’s complicated battle against inflation has weakened its stock market, John Shrimpton, a director of Dragon Capital, a HCMC-based investment fund, said in a Bloomberg Television interview Tuesday.
How’s the Vietnamese stock market looking?
John Shrimpton: It’s still pretty weak and it’s likely to remain so as long as the government continues to target inflation as its key issue.

Is it not getting any support from the renewed confidence in the US markets – isn’t that doing any good to the confidence among investors?

Not really, first of all I think we can say that the performance of the Vietnamese market is somewhat non-correlated with what’s going on in the outside world and especially the US market.

Viet Nam is very much moving under its own factors.

The key one is the government, quite simply, is in a bit of a bind.

We’ve got inflation at a level of 21% year-on-year and it’s very much constrained in terms of its ability to tackle inflation which of course is being driven by things like food prices as we see elsewhere, [and] by the need also to pay attention to maintaining high growth in order that the job creation rate required by the demographics of this country is maintained.

So the net result is it really is between a rock and a hard place at the moment.

So what is the risk of a return to hyperinflation as seen back in the late 80s?

- I think that’s not a likely scenario.

The economy of course is in a much more sophisticated situation these days; it’s a much more complex picture for the government to tackle and so the remedies that were indeed rolled out successfully back at the end of the 80s and beginning of the 90s to take inflation down from levels of more than 400 percent down to 1 or 2 percent per annum as we saw into the mid-nineties [may not work].

It’s going to require a more sophisticated approach these days because of the level, for example, of integration into the global economy, courtesy not least of Viet Nam joining the World Trade Organization (WTO) last year.

The result of that is that the asset markets including the stock markets are collateral victims of the government squeezing liquidity and seeing interest rates heading up.

Well, what do you mean when you’re recommending a sophisticated approach to the problem over inflation, the government has already raised rates this year and raised the reserve requirement ratios selling more bills and bonds…

That’s correct, but the big issue in Viet Nam, as indeed elsewhere, is that the key driver for inflation is food prices and Viet Nam is a net food exporter and the second largest rice exporter.

So, in many respects, it’s a beneficiary of the higher commodity prices we see prevailing particularly in terms of soft commodities that we see at the moment.

But the key issue is one that you can’t wage an all-out campaign on a single issue such as inflation without having regard for the effects of what goes on with its currency and, in turn, its attractiveness as a foreign direct investment destination because the big challenge that underlies everything the government does here is the demographics mean that one and a half million people come into the job market every single year.

That means there’s always underlying pressure to create jobs and, with a shrinking state sector these days, that means creating more reforms, better conditions for foreign investment and also for private sector investment in the country - so it’s not really just a question of targeting a single issue here.

It requires a much more symphonic approach than has been encountered before. (Bloomberg)