How Vietnam is Coping with Hyper-Inflation 15 comments
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Zimbabwe is still the number one "inflation" story of the year; however, Vietnam is starting to write a similar one. It comes as no surprise that another dollar-linked or semi-pegged currency has collapsed vis-à-vis gold. As usual the weaker economies have to give in before the stronger ones do. Which one will be next!?
Vietnam’s 27 % inflation level has yet to reach the vertiginous levels we see in Zimbabwe, but the country is experiencing every problem that causes a rush into precious metals. Interest rates are over 8% and rising, the stock market was down every day since May, and official unemployment has more than doubled and reached a figure of 5.1% this year (Spain has 10,2% unemployment). The real spending power of household has drastically declined. The Stock market index has collapsed all the way to the base from where the parabolic rise started (200) and Real Estate is coming down in sequence.
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In Vietnam, people are reacting in a different way than in Zimbabwe. The main reason being that the population in Zimbabwe had and has no or little access to Gold. Vietnam was a French colony (Indochine) and it has, like all colonies have, inherited the French way of living. French people traditionally jumped into gold in times of economic and financial problems. They were over and over again trained by history.
Hence it is no surprise Vietnam’s economic and monetary problems have sent its people fleeing into gold. Not gold stocks... but physical gold bullion. They're hoarding it and hiding it from their government.
Only about 10% of what Vietnamese hold in Gold has been deposited into banks (which actually pay 2.5% interest on gold). The remaining 90% is likely under mattresses or hanging around the owner's neck.
The trend toward gold is spilling into other financial areas. After a long period of quoting land prices in Vietnamese dong (the nation's currency), landlords are now setting prices in gold in order to avoid the devaluation.
The Vietnamese economic miracle, averaging a stunning 7.3% GDP (gross domestic product) growth rate this decade, is abruptly coming to an end. Austrian economists would classify the Vietnamese economy as a HOCG economy. What happens here and now is completely in line with the theory as explained by Ludwig von Mises.
Ironically, and as expected, since June, the Vietnamese can no longer buy gold. Officially, the government claims this new policy is to temper booming imports, which resulted in a record trade deficit for the first half of 2008.
Next step, as Vietnam continues to lose control on inflation and the economy, gold confiscation becomes a real possibility.
Disclosure: Author is long gold
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This article has 15 comments:
The last trading week ended at an 11% percent loss. Today’s market response did however leave investors with some hope for this week. Why? Last Tuesday one stock managed to increase, Wednesday six, Thursday claimed twelve and finally Friday we saw 27 issues close at a gain. Today more than 70 issues managed to increase. This advance in market breadth is the kind of pattern we have seen that launched the recent rallies. Market offers have begun to plateau as no new major sell orders are placed, while buyers seem to be waiting for this week to identify whether or not the market will define a support level.
My advice would to be tread carefully, but pay attention to the rising small cap issues, as these could soon entice or continue enticing speculators thus giving the market the boost it needs to drive the index higher.
2 things drove prices skyward and rather abruptly, Oil and Food, Rice in particular. The price of rice has dropped by about 1/3rd, so expect a rather dramatic slowdown in inflation in the coming months and as the Vietnamese people become more affluent expect them to become more insulated to the rise in oil.
The Asian stock markets have taken big hits, they will be the first to recover. The US is only down 20%, when it is down 40% I will start nibbling.
Right from the beginning of the last week, the market received unfavorable news about the Ministry of Finance’s sudden decision to adjust petrol price up by over 30%. This gave rise to concerns about CPI growth rate for the rest of the year. Consequently, VN-Index
lost points throughout the week, with not even one successful correction session. Liquidity of the market drastically plunged compared to the week before. However, in general, liquidity remained rather good compared to the previous down correction. Average daily trading volumes on HoSE was over 9.7 million units. Supply – demand gap represented by excessive buy over sell order volume was very high right from the beginning of the week. Tuesday witnessed the record large supply-demand gap of –101 million units on HoSE. However, on the last two days of the week, the gap considerably narrowed, reaching only –31 million.
According to the latest statement released by the General
Statistics Office of Vietnam (GSO), CPI in July was 19.57% (not
factoring in high fuel prices), an increase of 1.13% from June—the
lowest increase since the beginning of 2008. It is also worth mentioning that CPI is not only influenced by gasoline price but also by other commodities such as steel, paper pulp, whose prices also increased in July. As Vietnam has to import up to 80% of inputs for production, the influence of world commodities’ prices on Vietnam’s CPI is significant.
Consider the issue of confidence and how the lack of confidence in the market was what caused the stock market to plunge. No one is arguing that the real estate values and stock prices were sound before the crash, but a correction does not always lead to a crisis.
You also speak of escalating inflation and completely misuse hyper-inflation by constantly drawing a comparison to Zimbabwe which is about as similar as France to Vietnam. If you actually were to look at month to month inflation, it is decelerating not increasing.
While no one claims Vietnam is in a perfect position, these kinds of articles are exactly the problem. A major issue is simply the lack of confidence in the market and pushing bullshit like this only creates a self fulfilling prophecy.
www.bloomberg.com/apps...
It is very hard to call the down leg of a stock market that comes down from a top of 1100 to 434 in only 10 months' time, a correction. In a similar way, it is very hard not to design an official inflation figure of 27 % as Hyperinflation, knowing that adding food, energy and other items would even push up this figure higher. Nothing goes up or comes down in a straight line, not even (hyper)inflation figures.
So is Vietnam out of the woods? Unfortunately, maybe not. The key for Vietnam now, as for most Asian markets is how much growth is going to slow, as a result of the government’s anti-inflationary measures and because of weakening global conditions. The next worry is earnings growth, with some companies reporting surprising profit drops – and even losses – in H1. While the earnings outlook is unclear, the market remains risky.
The key to the direction of the market will be domestic investor sentiment. Foreigners have been steady buyers of the market this year, buying between USD28m and USD122m every month. Even when the market was in freefall, the country funds that raised money last but had not had the opportunity to invest it, continued to put money into Vietnam.
So, while the long-term Vietnamese story may well remain exciting, at the moment investment in this market remains only for the brave. In the current jittery global environment, I do not expect much in the way of new foreign money to find its way into a market as risky as Vietnam.
The remark of Thang Lee puzzled me and I made some research on the matter. The result is very interesting.
Milton Friedman wrote the early stages of a hyperinflation (Weimar, US civil war) were accompanied by a huge speculative influx of foreign capital. This momentarily can stabilize the equity and credit markets. It is to be seen as a result of false signals given by the Fractional Reserve Banking and the resulting misallocatin of funds. However, after the initial benefit, the influx of foreign capital helped to destabilize the system. At first, foreigners are persuaded that it would subsequently appreciate. However, as the inflation goes on. expectations are reversed, the inflow of capital replaced by an outflow, and the currency depreciates more rapidly.