Macro Brief Tuesday, 06 August 2019

Trade War Becomes a Currency War: Can Vietnam Hold the Line?
Key Points
• China’s abandonment of its defense of the 7/USD level versus the RMB has
led to a major sell-off in EM currencies and assets, and an intensification of the
US-China trade war.
• The VND has been stable and we believe that keeping it so is among the
highest of SBV’s priorities. Net open position in USD in the banking sector
means that SBV will likely not have to resort to credit restrictions or higher
domestic rates to maintain the dong at this point. We maintain our year-end
target of 23,500-23,650, which is well inside the 3% depreciation official
guidance range.
• We also maintain our view that the US is more concerned with bilateral trade
balances than with currency intervention insofar as Vietnam is concerned, and
see a low likelihood that maintaining VND stability will cause Vietnam to be
labelled as a “currency manipulator.” We believe that GoVN has other policy
levers to use in order to maintain the US-VN relationship and that such policies
are already bearing fruit.
• Heaviest potential corporate impact of the EM currency re-rack will be in the
industrial sector, followed by transports. Note that our team believes that steel
and plastics are mainly insulated even within the industrial sector. Agri and
consumer as the most local sectors should be relatively safe, and our view that
credit will not be restricted is positive for real estate. We continue to see a long-
tail of industrial park demand, regardless of day-to-day currency movements.
• Note that our view that the VN index will test—and possibly break—the January
lows of 880 remains intact.

Paul Sheehan
Head of Research
paul.sheehan@hsc.com.vn

Do Minh Trang .
Director
trang.dminh@hsc.com.vn

Luu Cong Thanh

Head of Fixed Income Research
thanh.luucong@hsc.com.vn

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 Macro Brief Tuesday, 06 August 2019

China Moves Lead to Broad EM Market Weakness

Yesterday the Chinese government allowed the RMB to break lower, and through
the 7 RMB per USD level which had heretofore been seen as a hard limit. As we
write this, the USDCNY is trading at 7.0507, down 1.6% in a day and 2.2% over
the last 5-days.
This is clearly an intentional and considered government policy, rather than the
market simply out-muscling the PBOC, as in the 1997 devaluations which signaled
the advent of the Asian Crisis. More than the absolute amount of change in
currency rates, this has shocked the markets.
Other key EM currencies globally have been hit hard in sympathy, notably BRL,
ZAR, MXN, and KRW.

Figure 1: Currency performance vs USD: Major EM currencies

-1 day -5 days
ZAR -0.29% -5.01%
RUB -0.42% -3.41%
PHP -0.84% -1.59%
MXN -0.29% -3.11%
KRW -0.31% -3.05%
INR -1.60% -2.84%
BRL -2.20% -4.90%

Source: Bloomberg

Asian currencies have held up somewhat better (ex-KRW) due to strong local
support, but the average SEA currency is still down 116bps against USD in the
past 5 days—a fairly massive move.

Figure 2: Currency performance vs USD: Asian currencies

-1 day -5 days
VND -0.19% -0.25%

KRW -0.31% -3.05%

TWD -0.78% -1.67%

SGD 0.00% -1.03%

MYR -0.21% -1.41%
IDR -0.49% -1.65%
PHP -0.84% -1.59%
THB -0.07% -0.13%
INR -1.60% -2.84%

HKD 0.04% -0.25%

CNH -0.43% -3.36%
CNY -1.56% -2.23%

Source: Bloomberg

VND Stability is a High Government Priority

Maintaining our <2% depreciation
forecast for VND: YE@ 23,500-
23,650.
Against this backdrop the VND has remained quite stable against the USD, off
less than 19bps yesterday and under 25bps in the last week. This is substantial
outperformance versus all major Asian currencies save for JPY (which is
appreciating) and THB (which had shown recent strength before a very minor
depreciation over the past week).
Obviously the stability is in part due to government intervention or to the credible
expectation thereof. In our view, currency stability remains one of the highest
priority policies of SBV and of GoVN as a whole, and we expect them to keep
order in the market and to permit depreciation only within the narrow 3% per

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 Macro Brief Tuesday, 06 August 2019

annum guidance band. Note that YTD the VND is down only 0.41% in dollar
terms—positive versus expectations.
We continue to forecast that VND will remain even tighter than official guidance,
with a 2% maximum depreciation, and look for YE to finish in the 23,500-23,650
range.

Policy Levers and Responses

SBV has no need to restrict credit
now
Given the high priority placed on currency stability, what do we expect from SBV
to maintain the benign environment as all EM markets experience outflows?
Our fixed income research team notes that SBV has experience navigating these
waters, reminding us that:
“This is less depreciation than in 2018, when regional currencies lost their
value (more than 10%) due to strong USD (DXY climbed from 90 to 97
points). In 2018, VND depreciated only 2.2% (it lost 2.8% then gained a
bit at the end of the year).”
And our financials research team chimes in to say that:
“One more detail is that the total net open position of the whole interbank
market now is around US$ 1.2-US$ 1.3 billion (and has been so for the
last several months) and so the banks all welcome any mild depreciation
of VND.
However, when the depreciation becomes too much, SBV will use their
SOCBs (VCB, CTG, BID, AGR) to control the FX rate by reducing the
VND offering to the market (all these banks are net lenders in the
interbank market). Thus, private banks will sell out US$ to maintain their
VND liquidity [and generate VND demand as a counterweight to any
outflows].”
Based on this, in the current environment we do not see SBV needing to take any
other measures such as restricting credit growth at domestic banks in 2H, or lifting
local interest rates. These measures are, of course, available policy options
should the EM nervousness become an outright rout, or something even more
serious.

No Abnormal Pressure from the US

On Monday the US Treasury formally labelled China a “currency manipulator,”
and said in a statement that Secretary Mnuchin “will engage with the International
Monetary Fund to eliminate the unfair competitive advantage created by China’s
latest actions.” While China’s move to allow the RMB to cross the 7/USD barrier
was clearly intentional, the fairly absurd notion that the PBOC’s ceasing to
intervene in the market makes China a “manipulator” has given rise to questions
about whether Vietnam’s managed regime leaves it open to similar treatment and
potential retribution.
Note that in May 2019, the US placed Vietnam on its Monitoring List (along with
Japan, Korea, Singapore, Malaysia, Germany, Italy, and Ireland) or currency
manipulators, even though it declined to designate Vietnam formally as a currency
manipulator after a meeting between Deputy Prime Minister Pham Binh Minh and
Secretary Mnuchin. The report highlighted that:
Despite changes to the exchange rate regime in 2016 that increased the de jure
flexibility of the exchange rate, in practice the Vietnamese dong remains closely
managed against the U.S. dollar. As a result, foreign exchange intervention has
been used frequently, and in both directions, to maintain the close link to the dollar.
The Vietnamese authorities have credibly conveyed to Treasury that net
purchases of foreign exchange were 1.7 percent of GDP in 2018.5 These

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 Macro Brief Tuesday, 06 August 2019

purchases came in a context in which reserves remained below standard

adequacy metrics and there was a reasonable rationale for rebuilding reserves.
Further, while purchases of foreign exchange outweighed sales over the course
of the year, the central bank intervened in both directions, with foreign exchange
sales used to resist downward pressure on the Vietnamese dong in the second
half of 2018. As Vietnam strengthens its monetary policy framework, and reserves
reach adequate levels, Vietnam should reduce its intervention and allow for
movements in the exchange rate that reflect economic fundamentals, including
gradual appreciation of the real effective exchange rate, which will help reduce
Vietnam’s external surpluses.
Although the language is heavily oriented towards discussion of currency
intervention, we believe the current US administration is much more concerned
with the bilateral trade deficit, and that GoVN initiatives are more likely to involve
additional purchases of capital equipment, passenger aircraft, and military
supplies from the US as a means of successfully defusing the issue.
We do not believe that maintaining the stability of the dong in the current
environment gives rise to any additional risk of being labelled a manipulator, or of
other adverse trade actions by the US. (Of course, the predictability of the current
administration is in all fairness…low.)

How to position portfolio-wise in this Corporate Impact

environment
We see the greatest potential impact in the industrial and transport sectors, with
domestic sectors being more resilient.

Our macro team notes that the localization ratio of Vietnamese exports was only
55% in 2015 (last available data), and estimates it to be around 50% now, while
Chinese components share in total exports will extend from 14% in 2015 to around
20% currently. The highest levels of localization by industry is agricultural/fishery
products, followed by textiles and footwear (where localization reaches 70%), and
the lowest is in electronic, computer, and machinery products (about 35%);
naturally the highest export growth has been seen in this lowest localization sector.

In industrials we look for manufacturing to be potentially affected by greater

Chinese competitiveness as the currency falls, as well as similar competition from
Korea on a falling won.

Passenger transport and hospitality may see an immediate fall in demand from
Chinese tourists, both because travel to Vietnam is becoming more expensive and
because we expect the PBOC and SAFE to even-more-strictly limit conversion of
RMB into foreign currencies by individuals such as tourists.

Our industrials research team notes that while we might expect steel to be an
industry under immediate threat from China as the currency fall makes it more
competitive, that the combination of effective tariff barriers in Vietnam and high
transport costs means the sector will be fairly insulated from the movements seen
so far. Likewise, plastics manufacturers tend to have limited Chinese competition
due to transport costs and thus are not under threat.

Given that we do not see the necessity for higher interest rates, and that we
believe most speculative Chinese buying has already left the Vietnamese market,
property should continue to do well across all sectors. Industrial park demand
specifically remains strong, and in our view as decisions on relocating factories
and associated supply chains take a very long time to conceive and execute, we
do not see scope for companies to re-think their moves to Vietnam on the current
news.

If anything, the accelerating belligerence of the trade war between the US and
China reinforces the need for multinational companies to have supply chains and

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 Macro Brief Tuesday, 06 August 2019

facilities which are well-diversified geographically; we think Vietnam will continue

to be a prime beneficiary of this trend.

Finally, our consumer team notes that the rise in the price of gold (+9.7% over the
last month) and other precious metals has led some to enquire about any potential
impact on PNJ (O/Perf, VND80,700, target price VND86,476). Covering analyst
Bui Nguyen Cam Giang notes that on average gold only accounts for around 30-
40% of COGS for PNJ (except for gold bars that closely follow the gold price).
PNJ management has said that the company will consider adjusting the price of
gold jewelry items once the gold price goes out of a specific range (but they don’t
disclose this range) for some items that have high gold value, but in the interim
we expect no big impact on margins or demand.

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