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No capital flight, says Deutsche Bank’s Vietnam fund 19th June 2008

Devaluation forecasts for the dong have been “overly bearish” as the country isn’t experiencing capital flight due to concern over inflation and a widening trade deficit, a Deutsche Bank fund said. Inflation accelerated last month to the fastest since at least 1992 and the nation’s trade gap has more than tripled from a year ago.

Three credit-rating companies have cut Vietnam’s rating outlook since May, and Morgan Stanley said last month the Vietnamese dong is poised to weaken in a manner similar to Thailand’s baht in 1997. Although some unnamed “market commentators” are betting on “major capital flight,’’ there has been no sign of a crisis of confidence in Vietnam’s financial system that may lead to bank runs and cause such outflows, Deutsche Asset Management (Asia) Ltd., which manages the DWS Vietnam Fund Ltd., said. “On current evidence there are no signs of capital flight,’’ said Deutsche Asset Management, a unit of Deutsche Bank AG, in a monthly note. “The risk of massive capital flight is currently quite low.’’ Higher interest rates have caused the Vietnamese to move money into the banking system, Deutsche Asset Management said.

The State Bank of Vietnam has increased its benchmark interest rate twice in the last month. Despite a decline in Vietnamese stocks this year, foreign investors have been net buyers of local shares and long-term foreign direct investment in the country is strong, according to Deutsche Asset Management.

Location and population

Even as Vietnam is battling “worrisome economic issues that have resulted from heady growth,” the country is still “a vibrant, well-located, well-populated and attractive market,’’ the UK-listed fund Vietnam Holding Ltd. told investors in a note released yesterday. Higher interest rates in Vietnam have “helped raise support for monetary policy,” according to Vietnam Holding, which argued that any future policy-driven currency depreciation should be accompanied by a reduction in government spending. The dong was little changed at 16,619.50 per dollar yesterday, versus 16,619 Tuesday.

The State Bank of Vietnam allows the dong to trade up to 1 percent on either side of the daily reference rate. “We are not seeing the massive sell-off of dong that would lead to a serious devaluation scenario,’’ Deutsche Asset Management said. “The market’s fear of a massive devaluation is overly bearish, and in the medium- to long-term the currency will trade in a very narrow band against the dollar.’’

Any possible steep dong decline is made less likely by Vietnamese foreign-currency reserves that total about $26 billion, according to the fund manager. “The Vietnamese dong is a controlled currency,” Deutsche Asset Management said. “The authorities have enough reserves to intervene in the market to support their policies.’’

Source: TNN

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