Viet Nam's Capital Controls Will Prevent Crisis, S&P's Chew Says

Viet Nam's ``extensive'' capital controls and the management of its currency will prevent overseas investors from fleeing the nation even as inflation accelerates and economic growth slows, said Standard & Poor's.

Foreign funds are mostly limited to buying property and stocks, said Ping Chew, the Singapore-based head of Asian sovereign and corporate ratings at S&P, the first of three ratings firms to put the nation's debt on ``negative'' watch. Stocks have slumped 59% this year, the world's worst performance, and the dong is set for its biggest drop since 2001, falling 3.6%.

``Viet Nam is not in a currency crisis,'' Chew said in a June 17 interview. ``There's definitely a bit of hot money that went in. But is it going to leave en masse like that which decimated Asia in 1997? I don't think so.''

S&P put the country's BB long-term foreign currency rating on ``negative'' watch May 2, saying the country's overheating economy was a risk to stability. That is two levels below investment grade. Viet Nam's inflation rate rose to 25% in May as food and energy prices climbed and the trade deficit tripled in the first five months of the year.

Foreign investors have cut their stock purchases in half this year to $334.2 million, according to data compiled by Bloomberg. Morgan Stanley last month said the dong was heading for a ``currency crisis,'' citing a widening current-account deficit. Calyon, Credit Agricole SA's investment banking unit, said this month there was a threat of a balance of payments crisis and Citigroup Inc. said a banking crisis is the primary problem facing Viet Nam.

`Very Bad Story'

The dong traded at 16,616.50 per dollar as of 11:23 a.m. in Hanoi from 16,619.00 yesterday, and is allowed to trade 1% either side of a reference set by the central bank each day. The State Bank of Vietnam weakened the dong by 2 percent on June 11 seeking to prevent currency speculation and raised rates to 14% from 12% to curb inflation.

Forwards contracts are pricing in a 33% drop in the next year, after taking into account interest-rate differentials, according to offshore 12-month non-deliverable forwards at 24,900 per dollar. Forwards are agreements in which assets are bought and sold at current prices for future delivery.

``Viet Nam is turning into a very bad story,'' said Thomas Harr, a senior currency strategist from Standard Chartered Plc in Singapore. ``The 2% devaluation a few weeks ago was not a good move. They should instead have been more aggressive on hiking rates to signal that they are committed to dealing with inflation.''

The dong won't stop falling until investors are convinced of the central bank's commitment to fight inflation, he said.

Cracking Down

The impact of flagging confidence be limited as investors will ``have difficulty'' taking profits out of Viet Nam, said Joseph Lau, an economist at Credit Suisse Group in Hong Kong.

``Generally banks aren't allowed to trade the currency for speculation, you need to have a reason for it,'' said Lau. ``It is difficult for a householder to purchase dollars legally, which is why when they do want to do it, they have to go through the black market.''

Vietnamese banks selling U.S. dollars at a higher rate than the official trading level will be fined and may have their trading licenses withdrawn, Viet Nam News reported, citing an official at the central bank.

While a ``herd mentality'' has led to a loss of confidence in the dong among some Vietnamese, the country's banking system is stable, said Dam Bich Thuy, Australia & New Zealand Banking Group Ltd.'s chief executive for Vietnam. ANZ has a 10 percent stake in Saigon Thuong Tin Commercial Joint-Stock Bank and a 12% stake in Saigon Securities Inc.

Banking Confidence

``We see some people trying to get dollars, but then they still put their dollars back into the banks,'' Hanoi-based Thuy said. ``They don't take money out and put it under the mattress.''

Viet Nam's economy ``is in reasonably good shape,'' buoyed by strong currency reserves, Alex Thursby, Asian-Pacific managing director for ANZ told reporters in Ho Chi Minh City. ``I don't think there's a crisis.''

Viet Nam's foreign currency reserves are about $20 billion to $22 billion, Credit Suisse's Lau said. By comparison, the market capitalization of companies on Viet Nam's benchmark stock market, the VN Index, is $9.08 billion, the second smallest in Asia after Sri Lanka, according to data compiled by Bloomberg.

``This is still a managed currency with extensive capital controls,'' said Chew at S&P, which issued a report today saying that Viet Nam faces pressures but no crisis. ``For the negative outlook to turn around, we need to see more tightening measures, we need to see them addressing lending problems in banks.''

Balance Sheets

Bank's non-performing loans may increase as the economy slows and the central bank raises lending costs, said Chew. The economy expanded 7.4% in the first quarter from a year earlier. Last year, gross domestic product grew 8.5%, the fastest pace since 1996.

The balance sheets of banks in Vietnam may not reflect the state of the bad loans as the country has yet to adopt internationally accepted accounting standards, he said. Non- performing loans are debts which fall behind on interest payments or are unable to service principal repayments. (Bloomberg)