The Vietnamese economy is the one that will grow the most in the Asia-Pacific region this 2022, according to forecasts by the IMF and the World Bank, which place its growth rate above 7%. Quite quietly, Vietnam has evolved from being one of the poorest economies on the planet to one of the fastest growing, helped, especially in recent years, by increased competition between China and the US. These good data economics, however, stand in stark contrast to the recent slump in its local stock market. The stock markets of Hanoi and Ho Chi Minh City combined lost almost 40% of their value in November, after obtaining magnificent results in 2021. Analysts consider that, in addition to the economic turmoil affecting the entire planet, the aggressive campaign Anti-corruption measures launched by the authorities and credit crunch have seen Vietnamese equities tie with Sri Lankan equities as the least profitable to invest this year.
“Stocks tend to look to the future and readjust based on unforeseen events,” says Trinh Nguyen, emerging markets researcher at Natixis. “Last year, although in terms of GDP Vietnam’s growth was slow, the stock indices were among the best on the planet, driven by expectations for the future. This year, the reverse is happening,” she points out. 2021 was an unprecedented record year in terms of revaluations, liquidity and the number of new accounts opened by investors. Its stock indices posted gains of 122%, driven mainly by the reopening after the pandemic.
Thanks to the liberalization of its trade policy —it is part of 15 free trade agreements, including one with the European Union—, this nation of 98 million inhabitants has managed to position itself as one of the preferred destinations for companies that are looking to diversify their supply chains from China. Vietnam is Apple’s largest production center outside of the Asian giant, where MacBook laptops and most AirPods headphones are made, and it will close the gap after the recent establishment of new Foxconn plants on its soil. Microsoft also produces some of its Xbox products in this country, while Samsung has invested 16.4 billion euros and will make an additional outlay of 3.1 billion to produce semiconductor components. Synopsys, a chip design software firm, recently announced that it will invest in engineering training. Google, for its part, plans to move half of the production of its Pixel phones.
This strength, however, is also its Achilles heel. “Being a frontier market, Vietnam and its currency are facing a lot of pressure as the US Federal Reserve raises interest rates,” says Nguyen, adding that the Vietnamese Central Bank has been forced to do the same to maintain inflation at bay and stop the devaluation of the dong against the dollar.
In addition to the rise in interest rates, the recent arrests of several businessmen in the real estate market and the credit limitation imposed by the Central Bank have scared off stock market investors. And it is that the anti-corruption campaign launched in 2012 by the general secretary of the Communist Party of Vietnam, Nguyen Phu Trong, has become especially aggressive this 2022. Known colloquially as “the burning furnace”, the crusade has accelerated after several scandals during the last worst of the pandemic, such as the fixing of the prices of PCR tests or the bribes accepted by officials to organize flights to repatriate Vietnamese citizens after the outbreak of the health crisis. According to official figures, 168,000 party members have received a disciplinary sanction and 7,390 have been convicted of corruption. The Minister of Health, the mayor of Hanoi (the capital) or the president of the Ho Chi Minh City Stock Exchange are some of the public officials who have fallen out of favor.
That drastic crackdown on fraudulent activity has also had a ripple effect on the private sector. “The government is targeting certain industries,” says Quoc Tuan Ho, professor of finance at the University of Bristol. “The arrests of the most important promoters in Vietnam have affected the stock market, because investors are skeptical. Those large real estate companies are in turn owners of other listed companies and they issue a large number of bonds. By freezing their assets, all activity has been halted,” Ho explains.
In March, Trinh Van Quyet, founder of developer FLC, the parent company of Bamboo Airways, the country’s third-largest airline, was charged with stock manipulation and concealment of information. In April, Do Anh Dung, chairman of the Tan Hoang Minh real estate group, was arrested for embezzlement after issuing bonds worth 10 billion dong (401 million euros). In October, the arrest of Truong My Lan, founder of the Van Thinh Phat Group Holding conglomerate, accused of illegally issuing 25 billion dong worth of bonds between 2018 and 2019, sparked a flood of customers demanding to withdraw their savings from the Saigon Joint Stock Commercial bank, which has strong ties to the property group.
“Everything is connected. The arrests affect the banking, bond and parquet markets”, defends Ho. Although the growth of the corporate bond market has been an ambition of the country (it aims to reach 25% of GDP in 2030), after the arrests, the authorities have undertaken a series of reforms to regulate issuance and protect investors , fearing excessive risk taking. After banks tightened lending channels to the real estate sector, the industry turned to corporate bonds for liquidity. In September, private credit in Vietnam reached 125% of GDP, of which 40% corresponded to the real estate sector. Since the intensification of regulation of corporate bond issuance, liquidity for the sector has dried up.
Despite the situation, Nguyen from Natixis is optimistic and assures that Vietnam is “the rock star of the Asian economy” and will continue to be so in 2023, although he foresees a slowdown in GDP growth to 6.5%, due to the weakening of consumption in the US and Europe and, therefore, of the demand for exports. Ho agrees that “the appeal of Vietnam is still there.” “In the long term, the forecasts are more than positive, but in the short term, while the Government addresses these problems to properly develop the financial market, uncertainty will continue,” he concludes.
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