Due Diligence by Investors- Critical Element to Driving Attractive Returns

 

The intention of the authorities to stabilize prices and the currency is encouraging and we are fully supportive of it. We’d like to see some of the measures applied differently, such as the allocation of credit growth among banks, but the authorities’ strategy is right. We do not underestimate the challenges ahead given the inflationary pressure from both domestic and external sources, and the ongoing need to create currency stability in an environment of international volatility. There are signs that policy is working to reduce inflation, but we believe it will still be some months before interest rate reductions can be justified.

 

The impact of the measures has been significant on the banking system as a whole, but has been different from bank to bank. Standard Chartered has been fortunate in being able to maintain strong capital ratios, good liquidity, low loan losses and decent earnings. Globally and in Vietnam, Standard Chartered’s balance sheet is in excellent shape and continues to be highly liquid, conservatively positioned and primarily deposit funded. Not all banks can say this!

 

Vietnam is facing many of the same risks and issues as other developing economies at the same stage of development. Prime among these are high inflation and currency devaluation, both of which the authorities are specifically addressing, and which we believe will be materially better through 2012 than in 2011. There are clearly other risks for investors now, but most are related to specific projects rather than general “environmental” issues. However, I would point to infrastructure, administrative processes, and a lack of experienced and skilled workers as factors that impact investors’ decisions about investment in Vietnam.

 

Despite all of these issues, Standard Chartered remains positive for Vietnam in 2012, when we forecast growth of almost 6.5 percent and average annual inflation of 11.3 percent. However, it is becoming a necessity, not a luxury, to consider the sustainability of business models in whatever industry. Standard Chartered’s brand promise, to be Here for good, has sustainability of business and communities at its heart. In facing the inevitable challenges to business in Vietnam over the coming years, building in sustainability as a core attribute will be important, and I define sustainability in its broadest sense. It includes: people, communities, materials, financing, technology, and environment.

 

 

As with many areas of the world, it is relatively easy to construct a “bull case” and a “bear case” for Vietnam! On the positive side, official economic data still paint a pretty positive picture of growth. Export growth in June and July stayed above 30 percent. Industrial production also remained remarkably stable, at around 14 percent. Freight traffic, both cargo and passenger, shows little sign of moderating. While retail sales have shown a slowdown in volume terms, the nominal growth rate was sustained at an average of 18 percent in May-July. Nominal sales have been buoyed by rising wages, including a rise in farmers’ incomes due to higher commodity prices. This has helped to prevent rising inflation from undermining living standards.

 

However, there is feedback suggesting that a surge in commercial lending rates - generally quoted at 20-25 percent - is causing real pain in the corporate sector, especially among small and medium-sized enterprises. The rigid loan growth quota of 20 percent is also limiting some corporates’ access to capital. The economy expanded by 5.6 percent in H1-2011, and we expect a similar pace of growth in H2. Our forecast for real growth in 2011 is 5.8 percent, which is lower than our original prediction of 6.3 percent. But even this “bear case” is not too bad – with the brakes fully on the economy, it will still grow almost 6 percent - that looks pretty good to many foreign investors!

 

Personally, I am more on the optimistic side, so long as the authorities continue to take measures to curb inflation for long enough to ensure it has conclusively been addressed. From the second quarter of 2012, Vietnam could look more attractive to foreign investors than it does now.

 

 

This is an economy with huge opportunity in many sectors. Infrastructure needs for the coming decade are huge, and will need private capital. Manufacturing is likely to remain very competitive in Vietnam, and investment in higher value added production will be key to continued competitiveness. Agriculture and aquaculture have considerable further potential. Tourism and leisure (domestic and foreign) have some way to go. Banking and financial services development still lags the real sector. And most things related to consumer and retail products appear to have bright prospects. But while we can generalize on these different sectors, it will all depend on the execution of each individual business opportunity, and due diligence by investors will be a critical element to driving attractive returns.