(C) VIETNAM CONSIDERS CAPITAL CONTROLS TO SLOW SOARING STOCK

C O N F I D E N T I A L SECTION 01 OF 02 HO CHI MINH CITY 000143

SIPDIS

SIPDIS

E.O. 12958: DECL: 2/9/2017
TAGS: EFIN ECON PGOV EINV VM
SUBJECT: (C) VIETNAM CONSIDERS CAPITAL CONTROLS TO SLOW SOARING STOCK
MARKET


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1. (C) Summary: The skyrocketing Saigon Stock Exchange has gone
ballistic since President Bush visited the trading floor in
November. The investment frenzy has boosted the Vietnam Stock
Exchange Index by about 80 percent since the President's visit,
with 44 percent appreciation since January 1. Market insiders
believe the funds flowing into equities are divided about
equally between foreign and domestic investors. The GVN is
concerned about the pace and sustainability of the market and is
considering new regulations on securities trading and capital
controls. In the last few days, leading investment banks have
issued warnings of a possible Thailand scenario. The rapid
restructuring of the Vietnamese economy; its post-APEC and WTO
emergence on the world stage; and accelerating trade and FDI
flows, make it difficult to assess either the underlying value
or inherent risk of Vietnamese securities. Our contacts in the
investment community observe that the authorities do not want to
choke the markets, since they hope to list the shares of major
GVN-owned companies this year. They are concerned, however,
about rapid capital flows that could have a significant impact
on reserves, money supply, exchange rate and the real economy.
End Summary.


2. (U) The Ho Chi Minh City Securities Trading Center continues
to climb from its 2006 records. The VN Stock Exchange Index (VN
Index) was up 145 percent in 2006, and rose an additional 48
percent between January 1 and February 7. A year ago market
capitalization was USD 460 million; now it is close to USD 20
billion. The number of listed companies has grown from 39 one
year ago to over 100. The rapid rise of the market was
initiated, at leas in part, by the late 2005 GVN decision to
increase foreign ownership limits in listed companies to 49
percent from 30 percent.


3. (SBU) The change in ownership limits sparked foreign interest
in Vietnam. In an atmosphere of strong global liquidity and
tolerance for risk, foreign capital has flooded into Vietnam.
In addition to accounting for about half the investment in
Vietnamese securities markets, foreign investors play a major
role in Vietnam's nascent bond market. One HCMC fund manager
estimated that 70 percent of GVN debt is held abroad with
substantial, leveraged investment that is banking on the
stability of the VND and two to three percentage points of
premium between dollar and dong interest rates. Investors'
interest in Vietnam was piqued by the APEC summit and WTO
accession. Resident Bush's visit to the HCMC stock exchange
floor was credited with starting another market surge.


4. (U) Foreign interest in equities sparked renewed interest
from domestic investors. Economists and bankers have always
thought that private wealth in Vietnam was underestimated.
Traditionally, Vietnamese have literally buried their savings
in gold or invested in real estate. While gold imports and
sales have been climbing, gold is no longer the central store of
value it once was, especially with world prices at high levels.
Likewise, speculative activity in real estate has been limited
in the last couple of years through a variety of government
regulations. As a result, high net-worth Vietnamese discovered
the stock market in 2006.


5. (C) Vietnam's markets are being influenced by domestic
liquidity as well as global liquidity. With a stable, managed
exchange rate and booming exports, Vietnam's central bank is
creating substantial liquidity. At the same time, remittances
are putting billions of dollars in the pockets of Vietnamese.
Furthermore, some experts are skeptical of Vietnam's balance of
payments figures, believing that the current account has been in
surplus, rather than deficit, for several years. One analyst
estimates the difference between the reported and actual current
account could be as much as four to five percentage points of
GDP. In short, experts believe there is substantial uncounted
liquidity in the economy.


6. (C) According to analyses by investment banks such as HSBC
and Credit Suisse, Vietnam's equities are selling at 40 times
previous year's earnings, a high - but not unprecedented - level
for an emerging economy. While some see this as signs of a
bubble, on the other hand, corporate results are benefiting from
structural reforms as leading companies become progressively
more market-oriented, especially banks. HSBC forecasts 2006
annual earnings to have grown an average of 30 percent market
wide, with some major outperformers. Some observers look at the
rapid run-up of valuations as an extended, but one-time,
re-adjustment of valuations of the Vietnamese economy. Whatever
the case, the most knowledgeable market players agree that both
valuations and risk are highly subjective. Whatever the
valuations, clearly a lot of the money flowing in is not looking
at valuations but playing the momentum. We heard one story of a
woman who made a tidy sum in the market and donated it to a
Buddhist monastery, only to have the monks return three-quarters

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of it to her for re-investment in the market.


7. (C) As the market has heated up, the GVN has become
increasingly concerned. Towards the end of January, GVN
officials like the chairman of the State Securities Commission
(SSC) tried to talk down the market. However, in the last week
the GVN has let it be known that it is looking at both
regulatory and capital controls as means of slowing down the
stock exchange. On January 29, the GVN published some
conclusions issued by Prime Minister Nguyen Tan Dung. He stated
that foreign ownership limits on listed companies would not be
raised in the near term, that market authorities should tighten
the supervision of the stock market, securities companies and
investment funds, and that mechanisms to control fund flows
should be developed.


8. (C) On February 2 the GVN circulated within the financial
community a revised draft circular that would regulate the
activities of investment funds. The circular, which was shared
with us in confidence, would be part of a raft of implementing
regulations for the new Securities Law. One expert stated the
draft would "raise the bar substantially" for financial service
firms. Among its measures, the circular would require offshore
funds to transform local representative offices into licensed
branches in order to trade in the Vietnamese market. As
branches, the funds would have to meet more robust reporting and
management requirements. The circular also proposes that
foreign institutional and individual investors be required to
invest only through foreign fund management companies and their
branches ed in country. The purpose of this measure, the
analyst said, was to discourage hot money investors from moving
money in and out of Vietnam.


9. (C) About the same time the revised regulations were being
circulated, the governor of the State Bank of Vietnam (SBV)
reportedly proposed to PM Dung that capital controls be placed
on foreign funds flowing out of Vietnam. In what local experts
are calling an intentionally badly-kept secret, SBV governor Le
Duc Thuy suggested that foreign investors be required to wait 12
months before being allowed to take share sale proceeds out of
Vietnam. Other capital control measures reportedly being mulled
include a capital gains tax, which Vietnam currently does not
have, and an announcement period, in which investors would be
able to transfer funds out of the country 30 days after
declaring their intention to do so. HCMC's financial community
has proposed to the GVN that an alternative might be a
progressive levy on outflows. Under this mechanism, capital
leaving the country would be taxed based on the amount of time
it spent in Vietnam, with funds in the country a short period of
time taxed at a rate higher than funds in the country for a
longer period of time.


10. (SBU) Foreign investors have responded quickly to these
developments. Vietnam-related funds listed in London dropped by
three percent on February 7, according to one analyst. The VN
Index lost four percent on February 8 and a further two percent
in trading February 9. HSBC, Deutsche Bank, Credit Suisse, and
JPMorgan have issued warnings to investors. A number of people
in the investment business are in a tizzy about Vietnam becoming
the next Thailand and losing the Vietnam market just as it
becomes hot.


11. (C) Comment: Vietnam's economy and financial markets remain
small in comparison with other emerging markets and relative to
the size of recent flows. In round terms, Vietnam's 2006 GDP
was USD 60 billion, exports were USD 40 billion, and imports
were USD 44 billion. The capitalization of the Vietnamese stock
market was almost USD 500 million in early 2006, and it grew to
USD 17 billion over the course of the year. An inflow of USD 2
billion, which may well have occurred in January, would
represents a five percent increase in Vietnam's money supply,
according to one expert. Already, the currency is appreciating
in nominal terms, for the first time in a number of years. And
with inflation running at six percent, the real appreciation is
even sharper. Further, we understand the actual exchange rate
on large transactions is increasing as banks reportedly and
unofficially charge extra fees to gather large quantities of
VND. With poorly developed financial markets, a banking system
that is dedicated overwhelmingly to allocating credit to
state-owned enterprises, a managed exchange rate regime, and a
minimally developed bond market, the GVN does not see a lot of
monetary policy tools at its disposal. It appears that monetary
stability, more than export competitiveness and the exchange
rate, is driving GVN policy at this point. End Comment.
WINNICK