Vietnam Raises Minimum wages by 15%, Bank of Indonesia Hikes Interest Rates, Thailand’s Parallel Universe

The Vietnamese government mandated a 15% increase in minimum wages a few days back.

Speaking in behalf of Japanese companies whom has expressed concerns over rising input costs, the Nikkei Asia reports

Prime Minister Nguyen Tan Dung approved the wage adjustment proposals made by the National Wage Council without substantial changes. The new minimum wages will become effective on Jan. 1, 2015.

The decision means that Vietnam's minimum pay will post a 17-fold jump from 15 years ago, in keeping with the rapid economic growth during the period. The upward trend of wages is likely to continue as workers stage strikes in demand of higher wages.

Increased labor costs could have serious repercussions for Japanese companies operating in the country.

The minimum monthly salary in Region 1, which includes urban areas like Hanoi and Ho Chi Minh City, will rise 14.8% from 2014 to 3.1 million dong ($145) in 2015. While Region 2, mostly made up of suburban areas, will rise 14.6% to 2.75 million dong. Provincial Region 3 and the rural Region 4 will increase by 14.3% and 13.2%, respectively, to 2.4 million dong and 2.15 million dong.

The increases for Region 3 and 4 will be 20,000-50,000 dong less than the National Wage Council's August proposals for those regions, which called for pay increases of over 15%. The differences indicate the government's acknowledgment of mounting concerns by foreign companies over labor costs.

Why is this significant? Because simply stated, government’s inflation statistics (from tradingeconomics.com) and reality doesn’t match. There won’t be amplified political pressures for wage hikes if not for significant cost of living increases!

This report from a domestic news outfit, Thanhniennews.com reveals of the implied discrepancy (bold mine)

even that salary only covers 69-77 percent of a Vietnamese person's basic living costs, according to the survey, which polled 1,500 workers in 12 cities and provinces during the first half of this year.

Up to 13 percent of workers said their salaries do not cover their basic living costs, 25 percent said they had to spend carefully and 50 percent said their salary only affords the most basic standard of living.

Vietnam's economy, which recorded growth of 5.42 percent last year, is expected to expand 5.8 percent in 2014, in line with a government target. The Southeast Asian country is expected to keep annual inflation at a rate below 5 percent, or about 2 percentage points below a government target.

Why shouldn’t there be increased inflationary pressures in Vietnam's economy?

Vietnam’s government has been on a spending binge as revealed by the huge fiscal deficits (as of 2013). How are these being funded? External borrowing plays a big role in the financing. External debt has been ballooning in nominal terms and as well seen from debt-gdp ratio. 

So borrowing externally and I would suppose also internally has caused a surge in M2.

Balance of trade has been negative of late even as current account remains positive-–most likely as a result of external borrowings. 

So the Vietnamese (both private and public) has been spending more than they have been producing. Spending which has been financed largely by debt.

Naturally, this entails strains on the domestic currency. The USD-Vietnamese dong has been soaring. The USD-VND now at July milestone highs. All these points to bigger inflation pressures than what has been revealed by government statistics.

Nonetheless like almost elsewhere, Vietnam’s stocks has been at a 5 year high. It has only been in August where the Ho Chi Minh Index has seen some selling pressures in the face of a severely weakening dong.

What Vietnam’s macro fundamentals reveal has not only been inaccurate statistics but importantly structural fragilities making her economy vulnerable to shocks either internally or externally triggered. 

Yes the Vietnamese government have recently posted record foreign exchange reserves but this have been funded by external borrowings.

And ASEAN’s economic troubles keep mounting.

Indonesia has raised interest rates for the sixth time since June 2013 as the government reduced oil subsidies and allowed for a 30% hike in fuel prices.

From Reuters: 

Indonesia's central bank, moving quickly to contain inflation after the government raised fuel prices more than 30 percent, hiked its benchmark interest rate by 25 basis points to 7.75 percent on Tuesday.

In his first major economic policy decision, President Joko Widodo on Monday night raised subsidised gasoline and diesel prices by more than 30 percent to help fund his reform agenda and tackle the country's budget and current account deficits.

What has adjusting interest rates (a monetary tool) have to do with fuel price increases (real economy)--the latter of which should signify a temporary boost? This relationship has hardly been questioned by the consensus or by media or explained by 'experts'.

Well, the answer can be shown above.  

The Indonesian government has likely been using fuel prices as a pretext to curb runaway private sector credit! 

Indonesia's political economy used to be the poster child for the ASEAN boom which had been blessed by upgrades by credit rating agencies.

And true enough, credit upgrades got Indonesians to rack up more credit. Yes this applies even to the government where fiscal deficits has widened, which as usual has been financed by a surge in external debt and domestic monetary inflation.

At the end of the day,  Indonesia's credit bubble has inflated both a property and a (signs of deflating?) stock market bubble as seen by the JCI Index (left window) even as the rupiah has been significantly weakening (see right window, now the USD-IDR approaches January 2014 highs). 

Remember Indonesia has been labeled one of Emerging market's fragile five and currently has been marked as one of the most expensive bourses in the world by the Telegraph!

Finally, Thailand just posted a .6% growth in the 3Q.  

From the Strait Times: Thailand's planning agency on Monday trimmed its economic growth forecast for this year to 1.0 per cent from 1.5-2.0 per cent seen in August, citing weak exports. In 2013, growth was 2.9 per cent. The Thai economy grew a much less-than-expected 0.6 per cent in July-September quarter from the same period a year ago, and expanded 1.1 per cent from the previous three months, the National Economic and Social Development Board, which compiles gross domestic product (GDP) data, said earlier on Monday.

I recently questioned the optimism by Thai authorities who predicted a 1.5% growth for 2014: 2Q GDP of a  marginal +.4 growth in GDP spared the Thai economy from a technical recession (chart from tradingeconomics.com) Given the stagnant 1H, it would take about 3% growth for the 2H in order to meet the BoT’s 1.5% target this year. Yet the BoT admits that debt burdened consumers have been marginally improving.

So the Thai economy continues to struggle. Aside from the politics, onerous debt burdens should continue to weigh on the economy.

Yet does the Thai government know that produce 1% GDP for 2014 would require 2.5% growth in 4Q? Have they been dreaming?

Don’t worry be happy, in today's world illusions prevail. Bad economic news has become good news for stocks. The Thai experience of near recession growth or stagnation comes with near milestone high stocks!! 

Parallel universes have now been the fad. As one may notice, regardless of fundamentals, stocks have been foreordained to rise forever!!!

Vietnam’s Keynesian Property Bubble Bust

It appears that Vietnam has been enduring a bubble bust which somehow resonates with the China: aside from easy money policies, an artificial boom had been stoked by state owned enterprises.

First the bubble bust, from Bloomberg:

Office and retail rents in Vietnam’s two largest cities have slumped as a wave of supply entered the market at a time when slowing economic and retail-sales growth curbs demand for commercial real estate. The Hanoi market added more office and retail space since the start of 2011 than in the previous four years combined, according to property broker CBRE.

The average asking rent for top-grade central business district office space in Hanoi was about $47 per square meter per month in 2009, more than double the levels for the same grade space in Bangkok and Kuala Lumpur at that time, according to data from the Vietnam unit of Los Angeles-based CBRE. The rate was 11 percent lower at $42.01 per square meter in the third quarter…

Vietnam’s credit imploding real estate has been bankrolled by State Owned Enterprises. More from the same article

Real estate loans totaled 203 trillion dong ($9.7 billion) as of Aug. 31, of which 6.6 percent were classified as bad debt, Minister of Construction Trinh Dinh Dung told the National Assembly on Oct. 31, citing a State Bank of Vietnam report. A broader category of real estate-related loans, including property-backed debt, account for 57 percent of total outstanding borrowing, or about 1,000 trillion dong, he said…

Many of Vietnam’s 1,300 state-owned enterprises are reportedly facing losses because of their recent forays into property, said Alfred Chan, director of financial institutions at Fitch Ratings in Singapore.

“It is not obvious, if you were just to look at the disclosure, what the potential risks to the banking sector are if you just look at the real estate sector,” Chan said. “Some of this exposure could well come from non-real estate companies that have ventured into that sector.”

Non-performing loans at banks are “significantly understated” and could be three or four times higher than official estimates, Fitch Ratings said in a March report.

The central bank chief, Nguyen Van Binh, said in April the level of bad debt at some lenders may be “much higher” than reported. Bad debts in Vietnam’s banking system may have accounted for 8.82 percent of outstanding loans at the end of September, Nguyen Van Giau, head of the National Assembly’s economic committee, told legislators in Hanoi Nov. 13.

So far, the impact from the mini-bubble bust has only slowed the economy which likely means that the Vietnamese has ample savings to cushion the capital consumption from the recent bust. The average Vietnamese predilection for gold hoarding has been a manifestation of savings.

Or perhaps government’s statistics may not have been forthright 

Vietnam’s bubble bust has fingerprints of Keynesian policies everywhere.

Vietnam’s Ho Chi Minh Index (Bloomberg)

Charts from tradingeconomics.com

 
Easy money policy fueled a boom which got reflected on the stock market, the property sector and the inflation index. This bubble has been abetted by speculations by state owned enterprises. Some of which had been justified as infrastructure spending. The boom led to higher interest rates which eventually popped these politically induced malinvestments.

And the ensuing bust seem to have prompted the Vietnamese government to implement stabilizers in 2010 (see red ellipse) which rekindled price inflation.

The Vietnamese government’s interventions, which seems aimed at forestalling recession or preventing the market from clearing of the previously acquired malinvestments, has only delayed the economic recovery.

And the article above describes the symptoms of the capital consumption process.

Vietnam needs to allow market forces and the price signaling mechanism to function. She needs reduce her interventions by liquidating and or privatizing bankrupt state owned enterprises while simultaneously liberalizing her economy to allow entrepreneurship to blossom. Reducing government spending will also allow the economy to use scarce resources which should be channeled into productive engagements.

Vietnam’s Banking System Has Been Short on Gold

I pointed out earlier how Vietnam’s banking system enticed the public by paying dividends on gold holdings lodged or deposited with them. This seems to be a ruse.

Yet like any typical paper money based banking system, bankers distrust gold and exploit them. The public’s gold stored at the banks have essentially been “shorted” by Vietnam’s banking system supposedly to boost liquidity.

Notes the Zero Hedge, (bold original) 

any time a bank, and especially an entire banking sector, is willing to pay you paper "dividends" for your gold, run, because all this kind of (s)quid pro quo usually ends up as a confiscation ploy. Sure enough, as Dow Jones reports today, the gold, which did not belong to the banks and was merely being warehoused there (or so the fine print said), was promptly sold by these same institutions to generate cash proceeds and to boost liquidity reserves using other people's gold, obtained under false pretenses. 

And now, it is time for the forced sellers to become forced buyers, as "the State Bank of Vietnam, the country's central bank, may allow local banks to buy up to 20 metric tons of gold over the next two months to improve their liquidity ahead of a ban soon on their use of gold as a means of boosting their operating capital." What they mean is that having been caught engaging in an illegal reserve boosting operating, the banks are now "allowed" to undo their transgressions ahead of a "ban" on what inherently was not a permitted practice. What is left unsaid, of course, is that any gold anywhere in the world, that is not in one's physical possession, and has been handed over to an insolvent bank (virtually all of them) for "safekeeping", is currently being sold, lent out, rehypothecated and otherwise traded with, in a way that any demand for full delivery will generally be met with silence, blank stares and phone calls going straight to voicemail.

The growing clamor for ‘audits’ on gold reserves and the "discovery" or revelation of Vietnam’s banking system gold “shorts” should provide gold prices the necessary support.

Yet this gives further motivation for the average Vietnamese to stockpile their gold holdings at home.

Vietnam Banks Pay Gold Owners for Storage

Here is an enlightening piece from Tim Staermose of the Sovereign Man.

Here’s something you don’t see every day: Banks in Vietnam will actually pay YOU to store your gold in one of their safe deposit boxes. I was pretty surprised to find this out for myself; neither Simon nor I have seen it anywhere else in the world except here.

This is actually how banking used to be. The original bankers were goldsmiths– big burly guys who worked with gold on a daily basis. They had the security systems already established, and, for a fee, they were willing to let you park your gold in their safes.

Eventually, goldsmiths got into the moneylending business; instead of charging a security fee, they would pay depositors a rate of interest for the right to loan out the gold at a higher rate of interest.

Goldsmiths’ reputations lived and died based on the quality of their loan portfolios, and their consistency of paying back depositor savings.

Today that’s all but a footnote in history. Except in Vietnam.

Read the rest here.

Interesting to note that despite technical political restrictions to do so by Vietnam’s authorities, whom sees gold as a constriction to their activities, paying fees to gold depositors seem to have become an ingrained practice by Vietnamese bankers. The simple reason for this is that gold ownership has been the main preference of the average Vietnamese over fiat money or the dong.

Yet perhaps, today’s exception will become the tomorrow’s norm. Stated differently, perhaps Vietnam’s banking ‘archaic’ banking system could become the banking system's paradigm of the future.

Add to this Malaysia’s desire for a gold standard, India’s cultural attachment to gold and the growing appetite for gold by the Chinese as evidenced by surging imports (see chart above from US Global Funds), I’d say that these evolving trends in Asia could serve as clues to the direction of the prospective reforms of the global monetary system.

Vietnam Stock Market Plunges on Monetary Tightening

If major ASEAN markets have been resilient (except for the past 2 days). Vietnam’s benchmark has been cratering.

Chart from Bloomberg

The Financial Times Blog notes

Stock markets rarely move in straight lines but nervous Vietnamese investors have done their best to buck that trend of late, with shares falling for nine sessions in a row amid worries about the economic outlook.

The benchmark VN Index closed down 3.6 per cent at 402.59 points on Tuesday.

Shares on the 11-year-old Ho Chi Minh Stock Exchange have now lost 16.7 per cent since May 11, as falls have precipitated a series of margin calls

Traders said investors were worried about inflation, which accelerated to 19.8 per cent year-on-year in May according to figures released on Tuesday, and the possible impact on businesses of high interest rates, part of the government’s plan to stabilise the fast-growing but shaky Vietnamese economy.

While media says that the likely cause has been about inflation, I think it is the opposite: a prospective tightening.

Given the way Vietnam’s government has been overspending…

Ballooning Budget deficit

surging Money supply

One can see why inflation has been surging.

Charts above from tradingeconomics.com (money supply, budget deficit and inflation)

And because the Vietnamese government wants to slough inflation, it has been raising rates and putting credit growth caps on the banking system especially on foreign banks.

From the Bloomberg,

The State Bank of Vietnam on May 17 boosted the repurchase rate to 15 percent from 14 percent, the second increase this month and its sixth this year to curb inflation, which is at 28- month high. The central bank has more than doubled the rate since early November as a widening trade deficit forced four currency devaluations in 15 months and threatened growth.

As a side note: The link between the Vietnam’s interest rates and currency devaluations isn’t from likely from trade deficits, but from government spending and expansionary credit.

And the ceiling on Vietnam’s government credit growth.

Reports the thanhniennews.com

The State Bank of Vietnam has banned foreign bank branches from setting credit growth targets of higher than 20 percent, persisting with a tight monetary policy to fight inflation.

According to a statement dated Friday, the central bank said most foreign branches in Vietnam have planned to keep credit growth below 20 percent and tried to cut back on lending to non-production sector. Some banks, however, have not moved to reduce their lending operations.

As a result, the central bank has ordered all foreign bank branches to control their lending, especially for real estate and stock market transactions. “The State Bank of Vietnam will not accept any plans by foreign financial institutions and bank branches to have credit expand by more than 20 percent this year,” the statement said.

Vietnam’s dramatic flattening of the yield curve doesn’t seem to manifest concerns of inflation (asianbondsonline.org), instead the yield curve could be signaling a slowdown in economic growth as consequence to policy based tightening.

Bottom line: stock markets are remarkably sensitive to the inflationary dynamics more than the conventional notion of ‘micro fundamentals’.

Vietnam’s Relative Policy Success Is Mostly Premised On Less Interventionism

In a recent comment at a social web platform, a local politician commented that the reason for the marginal improvements in Vietnam relative to the Philippines had been due to the “effective implementation of their policy”.

While it is true that political policies serve as fundamental framework to social activities, the question that needs to be identified is the kind of policies involved and to what extent the so-called ‘effective implementation’ which results to positive externalities.

For instance, the politician further noted that domestic agricultural issues had signified as a seemingly timeless unresolved imbroglio which needs to be addressed. Unfortunately, he didn’t say how.

Yet in citing Vietnam, what was not elaborated was that the so-called the ‘effective policies’ in agriculture had been the decollectivization or privatization of agricultural lands which served as a crucial step in the transition to a market economy.

As World Bank’s Martin Ravallion and Dominique van de Wallel wrote,

Vietnam's land reform of 1988 abandoned the collective farming system that had been introduced in the 1960s. The 1988 Land Law and its key implementation directive-"Resolution 10"-gave individual households long-term use rights over the collectives' land and other resources. Four million hectares of land were thus scheduled for effective privatization.

Opaque generalized political statements frequently leads to confusion. Statements like this would seem mellifluous to hear for the economic ignorant, yet lack the teeth in terms of specific actions.

Essentially, the fundamental reason for the apparent relative policy success of Vietnam is because of the thrust towards trade liberalization or economic freedom, which implies less government interventionism or political meddling in distributing scarce resources. And this runs contrary to the intone of the local politician.

This from McKinsey Quarterly,

Vietnam began to liberalize its economy in the 1980s, when the country’s leaders launched doi moi (or “renovation”). It was only after President Clinton lifted the US trade embargo in 1994, though, that multinationals began to pile in. Since then, Vietnam has taken off. In 2007, it joined the World Trade Organization (WTO)—just in time for the global financial crisis. The country weathered the storm well, posting 5 percent growth in 2009.

The remarkable embrace of globalization by Vietnam has prompted for a sharp recovery from a once war ravaged economy.

The following chart from the KOF Index of Globalization

Vietnam has undertaken substantial steps to reduce bureaucratic red tape.

The following chart from World Bank’s Doing Business presentation

Vietnam has also reduced and streamlined taxes.

According to World Bank’s Doing Business 2010

Vietnam cut the corporate income tax rate from 28 percent to 25 percent and eliminated the surtax on income from the transfer of land. It also adopted a new enterprise income tax law and value added tax law. In addition, increasing competition in the logistics industry and the application of new customs administration procedures as part of the World Trade Organization (WTO) membership reform program have reduced trade delays.

So overall, the marginal edge Vietnam has over the Philippines isn’t because of more politics but because of MORE TRADE.

As one would note from the above illustration, Vietnam has surpassed the Philippines in attracting investments by reducing hurdles to investments or has made the political and legal environment more conducive to trade and investments.

And the following chart from Google’s Public data seems to corroborate this.

Vietnam’s external trade (% to GDP) has sharply surpassed the Philippines. (Caution: currency values appear less of an influence compared to ease of business environment)

Economics shapes politics.

It is true that Vietnam remains politically a one party authoritarian regime, where according to the Heritage Index of Economic Freedom, “political repression and the lack of respect for basic human rights remain serious concerns.”

Chart above from KOF Index of Globalization

Nevertheless if economic trends should continue to influence politics, political trends may also gradate towards more openness or democracy. But this isn’t certain, specially not over the near term, as Vietnam may be following China ‘dualistic’ model.

Meanwhile, economic freedom is also reflected on social freedom.

Again from KOF Index of Globalization

And here is more proof that Vietnam’s society have been integrating with the world, this from McKinsey Quarterly,

In 2009, the General Statistics Office estimated that Vietnam had 5 million Internet subscribers and 18 million Internet users. Those figures are impressive for a country at a relatively early stage of digital development, and other estimates suggest the number is even higher. In Hanoi and Ho Chi Minh City, for instance, up to half of the population is now online, spending more than two hours a day, on average. Expenditures on digital marketing for the country as a whole, however, are still very low: only $15 million, according to Cimigo, a market research firm. As Mai Huong Hoang, the chairwoman of one of Vietnam’s leading advertising agencies, the local branch of Saatchi & Saatchi, noted, “TV is still king in Vietnam, because women are the decision makers in the family and they spend a lot of time watching TV.” However, recent McKinsey research in other emerging markets, such as China, India, and Malaysia, suggests that the pace of digital change can be rapid, especially with younger people. Therefore, businesses—particularly consumer goods companies—shouldn’t ignore digital media in their marketing plans.

Bottom line: “Effective policy implementation” means less political interventionism, where people will be incented to harness their innate talents and skills in an environment fertile for business growth.

In other words, Vietnam’s success formula has been the relatively more aggressive adaption of economic freedom compared to the Philippines.

And more politics won’t serve as the elixir to the Philippines’ dismal and lagging performance.