Just as the economy overheated through excessive capital inflows, the sharp drop in the country’s foreign reserves is signalling that a liquidity squeeze is taking place.
While this will be negative for asset prices in the near term (especially when combined with the restrictive administrative/monetary measures of the central bank and a 400bp hike in interest rates), it is also the means by which the economy cools and paves the way for a return to healthier growth in 2012.
The tightening measures introduced by the government in February appear to have stabilised the dong as evidenced by the VND appreciation in the parallel market. Nonetheless, inflation will remain elevated in 2011 on the back of 1) the lagged effects of faster M2 growth 2) higher electricity charges and 3) weaker VND.
Vietnam will not escape the effects of the Japanese earthquake and the nuclear fallout. On a relative basis, it appears to be less affected, owing to: 1) limited capital inflows 2) its exports are mainly primary goods and 3) it is not plugged in the regional production network that dominates other Asian economies. The procurement ratio from Japan is only 23% against Thailand’s 32%. Vietnam’s problems lie elsewhere.
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