SBV’s dong policy raises anxiety

Investment manager Vietnam Holding offered words of encouragement in its May investor newsletter regarding the dong:

“Fears that a return to trend-line economic growth and the side-effects of last year’s economic stimulus package would result in a return of high inflation have proven to be premature. The consumer price index figure for May was just 0.3% month-on-month and 9.1% year-on-year.  Crucially, food prices actually dropped in May, by 1.3% month-on-month, following an even steeper drop in April.  So far this year, the consumer price index has risen by 4.6%, which includes the inflationary effect of the ‘Tet’ (lunar new year) holiday.  The Government recently revised its inflation target for 2010 from 7% to 8%. Although much depends on the summer harvest and the impact of recent drought conditions, a 2010 inflation figure of 10% seems more likely.”

Vietnam’s persistent dong devaluation policy (February’s was its fourth since June 2008), while theoretically long-run inflation inducing, proceeds under the guise of shoring up the country’s trade deficit (its export market is founded upon an ever larger import one) while also tempting dollar hoarders to return cash into circulation and thus slow down the vicious circle whereby the central bank (SBV) sells dong to fund its hard currency needs.  The IMF noted in early June that Vietnam’s foreign-exchange reserves had declined to the equivalent of about seven weeks of imports from less than 11 weeks in December.  Inflation has dogged the country this entire decade, when market reforms unleashed a torrent of growth (GDP grew from 2000 to 2007 at an average of 7.5%) as well as a steady flow of foreign capital.  And while the credit crisis eased inflation by depressing oil and food prices, exports slumped and FDI plummeted, causing the trade deficit to balloon, reaching $10.2 billion in the first 11 months of the year, while dollar sales aimed at stabilizing the dong shrunk foreign reserves.

Yet a ‘mixed signals’ policy may ultimately doom the dong.  While the World Bank recently opined that confidence in the currency was “gradually returning,” for example, and that dong deposit rates were becoming more attractive, tempting local investors to shift their portfolios out of gold and foreign-currency assets, officials seem particularly keen to loosen monetary policy as soon as possible.  The SBV, which has held its benchmark interest rate at 8 percent since December, stated in early June that it would try to ‘encourage’ commercial banks to reduce their lending costs because current interest rates were at a level that ‘hurts corporate profits,’ per its Deputy Governor Nguyen Van Binh.  Analysts in general are bewildered.  “Premature easing is the key risk to unraveling dong confidence, leading to another round of reserve deterioration,” warned Johanna Chua, the Hong Kong-based head of Asian economic research at Citigroup days later.

Middle East may begin to import massive amounts of alfalfa

Canada may not be a frontier market, but it could quickly grow into an important source of forage not only for Asian markets, which it current supplies, but also for Middle Eastern ones.

The Saudi Gazette reported today, for instance, that water scarcity in Middle Eastern countries may open up good export opportunities for Canadian forage exporters in the coming years:

Whereas Asian markets purchase mainly timothy hay, a high-energy, low-protein grass preferred by animals for its sweet taste, Middle Eastern markets would present opportunities for exports of alfalfa, a protein-rich, high-energy, low-fiber legume.  Due to vast land and water availability, Canada is a leader in alfalfa production.

That said, one problem facing exporters has been an inability to secure adequate rail containers to carry forage, and “some companies are anticipating a return of transportation headaches once the economy picks up again and are fighting to change rail policies.”  At present, notes Glenn Friesen, business development specialist for forages with Manitoba Agriculture, Food and Rural Initiatives at Carman, Man, “we’ve had a heck of a time working with the rail companies to get enough containers, [and] that has been the biggest bottleneck.”

Saudi Arabia is considering shutting down its irrigation system, which analysts expect would allow for another one million tons of forage to go there per year.

A perceived heartier appetite for risk spells volatility in Asian bond markets

Yields on Indonesia’s three-year government bonds fell to its lowest in a month on Wednesday, prompting economists and analysts alike to cite a general increase in “risk appetite”. The general speculation across Asia at the moment is that improving finances in U.S. banks will increase demand for emerging-market assets. Also, as one analyst noted, fiscal stimulus spending and lower tax revenues are narrowing fiscal balances, pushing up government debt and financing needs. These rising bond issues make yields attractive.

Likewise, the yield on the five-year, 5.094% Malaysian bonds dropped 13 basis points to 3.7%, which one trader indicated meant that people believe not all of the country’s recent stimulus will need to come from bond sales, but rather from foreign-exchange reserves. Such reserves helped Malaysia maintain its A3 credit rating with Moody’s, as well as its rating with Fitch.

Finally, Philippine government bonds continue to rise on speculation that the central bank will further lower borrowing costs. Bonds fell last week after the central bank cut its key interest rate by a quarter of a percentage point. That cut, however, was less than the half-point reduction forecasted by economists. But as the economy continues to deteriorate, a future cut is likely inevitable, meaning yields on bonds will continue to come under pressure in the near term.

Not all markets are illiquid…

The fastest-growing market for single malt scotch whisky has been East Asia—particularly China, where the value of whisky sales rose from £1m in 2001 to £70m in 2007, according to the Scotch Whisky Association, a trade body.

Looming RMB depreciation could hurt Asian economies

Is an RMB (yuan) depreciation in the offing?  Michael Pettis, a professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets, noted Monday that President Hu Jintao’s speech at this past weekend’s Politburo meeting leaves some wondering.

According to today’s People’s Daily, besides warning “that the global financial turmoil will make it harder for China to maintain the pace of its economic development in the near future”, [Hu] said, in a widely noted comment, that “with the spread of the global financial crisis, China is losing its competitive edge in the world market as international demand is reduced.”

What exactly does this mean? It is worth noting that this has come in the context of recent RMB weakness. According to a Bloomberg piece today, “China’s yuan fell by the most in seven weeks, three days before U.S. Treasury Secretary Henry Paulson visits Beijing for trade talks, on speculation the central bank wants to weaken the currency to spur the economy.” Meanwhile calls for depreciation of the RMB are getting more common, and more and more commentators are beginning to wonder if we might not see a conscious strategy of RMB depreciation.

The yuan has been somewhat of a ‘safe haven’ these past few months, which in turn has helped cushion other regional ‘proxy’ currencies such as TWD, MYR, and HKD.  But a weakened yuan, likewise, could cause an exodus of capital that would extend into the other Asian economies.