Three things make us believe that we are not headed for another period of currency volatility: 1) The central bank bought $18b of reserves last year and about $3b in 1Q13. Even after the SBV's purchases of gold on the world market, Vietnam's FX reserves are probably just above the traditional safety threshold of 3-months' worth of imports (the central bank does not clearly disclose the current level of reserves), 2) bouts of currency weakness in Vietnam are usually caused by high inflation – which prompts local savers to take their money out of VND and into USD and gold. Inflation in Vietnam is currently running at just under 7% y-o-y and likely to stay around these levels, 3) Despite investors' preoccupation with the trade deficit we actually think this is a non-issue as far as the VND is concerned.
The reason we are not overly concerned about Vietnam's trade deficit is that the country faces a structural trade deficit due to large FDI inflows. Money comes into Vietnam via the capital account but then goes back out via the current account / trade deficit because FDI funded factories need to import the machines and materials required for production. Unfortunately, tertiary industries in Vietnam are generally weak, so basic materials like the textiles used to make garments need to be imported. The trade deficit will improve as the country's exports move up the value chain - we expect Vietnam to run persistent trade surpluses starting in about 3 years due to an explosion in the manufacture of Japanese and Korean high tech products such as electronics and cell phones. Mobile phone exports are on track to reach $20b this year, up from just $2.5b in 2010.
Eoin Treacy's view Vietnam has been one of the primary beneficiaries
of the migration of cost sensitive manufacturing from China to other Asian locations.
The country has long been a centre of textiles and footwear manufacturing but
the advent of electronics is a welcome addition and is likely to result in better
terms of trade over the medium to longer-term.
The impact on the Dong of the volatility in the gold price described in the above piece suggests that this will be less of an issue in future as the structure of gold deposit accounts changes The VN index continues to steady in the region of the 200-day MA and a sustained move below it would be required to check medium-term recovery potential.
The UK listed Vietnam Opportunity Fund is trading at a discount to NAV of 27% and continues to range above $2.10. A sustained move below that level would be required to question recovery potential.