Friday, July 16, 2010

I'm still only in Saigon... Every time I think I'm gonna wake up back in the jungle

One of the more fun things about doing macro in emerging markets is that, historically at least, the crises and manias come hard and fast, and the monetary cycles have about as much subtlety as Wagner coming out of a helicopter - at least you know when to run.

Certain members of TMM have recently been doing trips back to Vietnam, a market with which the market quickly fell in, and out, of love with in 2006 and early-2007, only to go down hard with emerging market equity flows drying up, and currency devaluation which made it one of the worst performers in the World.

Vietnam's recent economic history is best summarized in the chart below (green - M2 growth, white - Dong/USD exchange rate, red - inflation, yellow - GDP growth, orange - current account deficit as a %age of GDP):
As can be seen, Vietnam is no stranger to Chinese levels of base money growth or old-school LATAM inflation. What happened in the mid-2000s was as much a demographic phenomenon as anything else - a very large number of people were hitting peak consumption years and imports picked up accordingly.

The only problem was that FDI was high, but barely enough to keep up and was not able to generate quite enough exports to plug the gap, though that has begun to change. By late 2006 and early-2007, Mark Mobius, Marc Faber and the gang were telling everyone to pile into Vietnamese equities on the back of the great fundamentals - growth, cheaper than China etc etc... Around that time, EM equity analysts - particularly in Vietnam - sounded like this guy:

The fun could not last, of course - a surge in inflation (fuel & food are big parts of CPI-baskets in EM) and a deterioration in the balance of payments soon took its toll on the Ho Chi Minh exchange, taking it down more than 70% from the peak by March 2009. Add in the depreciation of the Dong over that period and that's an 82% loss. By that time, the only foreign investors engaged in the market were closed-end funds who simply could not get out, and more private equity-orientated investors who didn't have margin calls to meet. Since then, foreign investor activity has been pretty limited at best.

There's nothing that TMM likes more than something non-consensus, so going back to Vietnam was something one of the team had to do. Dennis Hopper's Apocalypse Now character isn't running research anymore and the ratio of Wall St to Main St guys you see in your hotel is a lot more healthy than in 2006, and these kinds of announcements are positive - ultimately, TMM is not what an improving current account are made of, it's boring Korean corporates that build the factories that generate hard currency that are. and those guys just keep on coming, look at the FDI numbers:
Problems remain, however, and the government deficit continues to be monetised - i.e. money is still being printed like it's going out of style. A screenshot of onshore government debt yields makes Indonesia look pretty tame:It may sound crazy, but TMM is thinking that with notional independence of the Central bank and a nascent global recovery, it might be possible for the country to get inflation under control as the need for China-style credit stimulus abates. The Big Mac Index or any measure of PPP makes the Dong look pretty interesting.

Could it be time for Team Macro Man's favourite gag trade - Long Dong Silver?


Petey said...

Dai Viet!

giangle said...

Try to justify staying with Dragon? Good luck! Couple of points:
- The overconsumption in mid-2000s has nothing to do with demography, it's a result of real estate and stock market boom, partly because of the influx of foreign capital.
- The spike of inflation and bond yield early 2008 was mostly the result of the central bank's unsterilized foreign reserve accumulation in the preceding years.
- The FDI number in the chart looks like the registered total, nowhere near half of the actual implemented inflow.

Nemo Incognito said...

ginagle, then my big question is why this hasn't translated into some improvement in net exports. I'm well aware the level of monetary sophistication is about the same level as China's in the early 90s, but normally countries get some kind of dividend out of all that FDI.

Nemo Incognito said...

In other news, who tried to fade long bonds over the last week? If you know a good bomb disposal expert who can tell me where I can get prosthetic fingers do let me know. Ouch.

Leftback said...


I am flirting with that as of late Thursday, with a stop based on the prior low 30y yield of 3.88%, and my fingers are still intact as of this moment.

Of course had you caressed that beauty a day earlier, Mr Market would have smashed your face in and slammed the car door on your fingers, before kicking you in the nuts for good measure.

A couple of days of risk on and Goldie earnings will put this one in profit, and then it's time to say goodbye before Thursday's existing homes data.

Nemo Incognito said...

Back to (almost) flat but my timing sucked on that one. Pickup up some gold risk reversals though - Mr Paulson, you can't buy at 1180 forever.....

And as always single name shenanigans in commodities and cyclicals are most of my bread and butter anyhow.

giangle said...

Nemo, many FDI projects in Vietnam are for import substitution, eg steel mill, car/bike assembly. Another large chunk of FDI goes to real estate (hotels, resorts, office buildings). To make the matter worse, the government has kept the exchange rate overvalued at least since 2004 (see the chart of VN REER here: