Boat Refugees Returning Home Warm to Vietnam Dong: Asean Credit

“I am optimistic and betting on Vietnam,” Khoa Pham says over the phone from his Microsoft Corp. office in his birthplace Ho Chi Minh city. “One can say the economy is revving up like a motorbike.”

When Khoa Pham returned to Vietnam in 2011, 34 years after fleeing on a boat, the U.S. lawyer was wary of keeping wages in the dong. The currency had just been devalued 7 percent and inflation was faster than 20 percent.
Three years on, with consumer-price gains at around 5 percent and Vietnamese spilling out of the country’s first Starbucks, the 48-year-old is saving more in dong and looking to invest in a local stock market that has surged 14 percent this year. Pham, who spent four months adrift at sea when he was 11 and then six months in a Malaysian refugee camp, says Vietnam is ready to join the ranks of Southeast Asian tigers.

“I am optimistic and betting on Vietnam,” he says from his office at Microsoft Corp. in his birthplace Ho Chi Minh City. “One can say the economy is revving up like a motorbike.”
Vietnam received about $11 billion in remittances from overseas citizens last year and rising foreign investment helped lift exports, prompting Prime Minister Nguyen Tan Dung’s government to forecast the fastest expansion in three years in 2014. Fitch Ratings raised its outlook on the nation’s B+ credit ranking to positive from stable last month, while noting that banks “have a high but unknown level” of bad loans.

Customers line up to purchase drinks on the opening day of the first Starbucks outlet in Ho Chi Minh City on Feb. 1, 2013.

 

The inflows have lessened pressure on authorities to devalue the dong, according to BNP Paribas SA and Standard Chartered Plc, the most-accurate forecasters for the currency, who expect the central bank to depreciate by 1 percent in 2014 as the U.S. Federal Reserve pares stimulus. The currency has weakened 1.2 percent in the past year to 21,100 per dollar, compared with plunges of 19 percent for Indonesia’s rupiah and 9 percent for the Philippine peso.

Regaining Trust

More overseas Vietnamese, known as Viet kieu, are investing in the local economy or returning to find work, where previously they would send money to relatives, said Tony Diep, managing director at Indochina Capital, a fund manager and property developer whose real-estate vehicles have $460 million of committed capital. Diep fled in a boat as a five-year-old in 1975 when Communist forces won the Vietnam War and he returned in 2007 after leaving JPMorgan Chase & Co. in New York.
“You see high-quality, overseas Vietnamese starting to come back to Vietnam,” he said. “There was a lot of skepticism about the government. More and more people trust the government so more and more come back. The more times you come back, the more confident you are. You don’t invest the first time you come back. But perhaps the third or fourth.”

The dong has weakened 1.3 percent against the dollar in the past year, compared with plunges of 20 percent for Indonesia’s rupiah and 10 percent for the Philippine peso, and looks set to hold its value as the Federal Reserve pares stimulus. 

 

Doubts Remain

There are more than 4 million Vietnamese living and working overseas, according to a Jan. 23 posting on the government website. About 500,000 overseas Vietnamese visit the country every year, including experts coming back to work and people seeking business opportunities, the government said in September 2012. Pledged foreign direct investment climbed 55 percent to $21.6 billion in 2013.
BNP Paribas, which had the closest estimates in the last four quarters as measured by Bloomberg rankings, predicts the dong will weaken 1.4 percent to 21,400 per dollar by year-end. Standard Chartered, the second-best, sees a drop to 21,300.

Vietnam devalued the dong by about 7 percent on Feb. 11, 2011 when the central bank fixed the reference rate 8.5 percent weaker and narrowed the trading band to 1 percent from 3 percent previously. The currency fell 24 percent over the six years through 2013 and was last devalued by 1 percent in June.

Australia & New Zealand Banking Group Ltd. forecasts a 2.8 percent drop to 21,700 per dollar as a U.S. economic recovery bolsters the dollar.

Exports Decline

“The dong has outperformed regional currencies and to be in line with weakness of regional currencies, it makes sense for them to let the currency weaken slightly,” Irene Cheung, a foreign-exchange strategist at ANZ in Singapore, said in an interview yesterday.

Vietnamese exports fell 10.8 percent in January from a year earlier, the first drop in two years, official data show. Foreign-exchange reserves, estimated at $28.6 billion at end-December, are equivalent to 2.4 months of current external payments, not a large buffer, Fitch said in its statement last month.

Vietnam’s economy is in a “muddle-through” stage due to its impaired banking system, Matt Hildebrandt, an economist in Singapore at JPMorgan Chase & Co., wrote in Jan. 27 research note. He predicts a 5.7 percent expansion in 2014. Annual growth has averaged 6.6 percent this century, according to International Monetary Fund data.
Indochina Capital’s Diep concedes that overseas Vietnamese still harbor doubts over the economy.

“They put money mostly in real estate and sometimes small businesses with their relatives,” he said in a Feb. 12 interview in Hanoi. “Viet kieu don’t invest much in the stock market because they don’t trust the books.”

Gold Premium

This year’s stock rally is more than twice as big as the next best among 22 Asia-Pacific share indexes. The yield on five-year government bonds has dropped 33 basis points to 8.13 percent this year. The yield is 15 basis points higher than similar-maturity notes from Indonesia, ranked five levels above Vietnam by Moody’s Investors Service.
 
A narrowing gap between local and international gold prices is also signaling confidence in the dong, said Mirza Baig, head of foreign-exchange strategy at BNP Paribas in Singapore. The premium investors pay to buy gold locally over global prices narrowed to 2.27 million dong per tael today from 4.22 million at the end of 2013, reducing the demand to import the precious metal. One tael is 1.2 ounces.
“There’s a certain bullishness around the Vietnamese economy as a whole,” said Eddie Cheung, a strategist in Hong Kong at Standard Chartered. “There is a push for greater foreign-investor participation in many of the local sectors.”

Remittances Rising

Inflation slowed to 5.45 percent in January after reaching 23 percent in August 2011, the fastest pace since 2008, official data show. Policy makers have cut the benchmark refinancing rate eight times since the start of 2012 to spur growth, which the government forecasts will reach 5.8 percent this year from 5.42 percent in 2013.

Remittances, which make up around 7 percent of Vietnam’s economy, may rise at least 20 percent this year, Dau Tu newspaper reported on Jan. 27. Authorities issued a decree on Jan. 6 allowing “strategic” foreign investors to take a 20 percent stake in local banks, up from a 15 percent ceiling.
Vietnam raised its per-capita income more than fivefold to $1,896 last year from $375 in 1999, according to International Monetary Fund estimates. The gain has lifted the country to middle-income status, according to the World Bank.

“The government has done a commendable job,” said Microsoft’s Pham, who like Diep returned because he believed he could make more of a difference in his birthplace than his adopted nation. “Vietnam’s best days are still ahead.”