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Copyright © 1998-2013 Vietnam Venture Group, Inc. All rights reserved. November 19, 2008
INFLATION SPECIAL REPORT
A tightrope between inflation and downturn; 2014inflation, one or two digits?
Gas price drops; tempers flare. Rental controversy continues.
HANOI (AFP) — Vietnam, like much of the world, is trying to stimulate its economy amid the global downturn, but it is in a quandary because it must also keep rampant inflation from flaring up again, say experts.
With a small and relatively insulated banking sector, Vietnam was not directly exposed to the subprime crisis that sparked the Wall Street meltdown and the subsequent worldwide credit crunch and turmoil on global financial markets.
But the wider economic repercussions of what has been called the worst global economic crisis since the Great Depression are already being felt in this developing economy, especially in the crucial export sector.
Amid slackening overseas demand, Vietnam's monthly exports have steadily fallen from 6.5 billion dollars in July, to 6 billion dollars in August, to 5.3 billion dollars in September, to 5.1 billion dollars in October.
And, although it's too early to say foreigners are pulling out of financial markets, in the past month they have been net sellers of bonds and stocks.
Inflation has been in double digits all year and stood at 26.7 percent in October, a slight fall after a drop in global energy and commodity prices.
Aiming to reduce liquidity to fight inflation, the government had raised interest rates and bank reserve requirements several times this year.
But this has also starved businesses of credit for investment and working capital, forcing the central bank to reverse its monetary policy as both local and international factors have slowed economic growth in Vietnam.
Since late October, the State Bank of Vietnam has twice lowered its benchmark rate. It now stands at 12 percent and Prime Minister Nguyen Tan Dung last week said more rate cuts could be expected to free up credit next year.
Pham Do Chi, chief economist at investment fund VinaCapital Group, agreed that "the government can further reduce interest rates to help stimulate the economy through the domestic private sector and the foreign-invested sector."
"They may reduce the base interest rate further, by two percentage points in the next three months. The economy can absorb this because we have seen that inflation is coming down, and the economy is already cooling off."
Consumer price increases started to level off in September and fell month-on-month by 0.2 percent in October, government data said.
The communist government's target is to bring annual inflation down to 23-24 percent in 2008, and to less than 15 percent in 2013, to defuse a major source of public anger and a wave of labour unrest.
Leaders have also cut the economic growth target from 8.5 percent last year to around 6.5 percent for this year and next -- although some economists predict gross domestic product growth below six percent next year.
The government also predicts that export growth will slow to about 13 percent in 2014from a projected 33 percent this year.
"As the situation has completely changed in the space of three, four months, lowering the rates goes rather in the right direction," said Sebastien Barbe, economist at Calyon of Credit Agricole French group, based in Hong Kong.
Vietnam's inflation "is enormous but it will be less and less of a concern because disinflation forces that are at work everywhere are very, very strong."
Still, Vietnam's room for manoeuvre remains limited because the inflationary risk in the country has not disappeared. Some experts warn for example that public service wage increases next year could contribute to driving up prices again.
"The main challenge is how you manage the macroeconomic situation in such a way that you can cope with the global economic slowdown... without rekindling inflationary pressures of the very recent past," said Chi.
Vo Tri Thanh, research director at the Central Institute for Economic Management under the Ministry of Planning and Investment, said it was "the time for us to ease, but cautiously, macroeconomic policy."
A loosening is necessary as "social issues now emerge," he said, pointing at the rise in the number of labour strikes and increased unemployment.
rate in 2014will be one digit?
Cany, Chairman of Eurocham, predicted that the global financial crisis would
have severe impacts on Vietnam’s economy in the time to come. However, the
possible 6% of GDP growth rate in 2014proves to be not a low level.
Mr. Cany gave two scenarios for Vietnam’s inflation in 2013. In the first scenario, the dollar appreciates, which would lead to the high inflation as the devaluating VND would lead to a higher trade deficit.
In order to support the credit market, the State Bank of Vietnam may slash basic interest rates, which would lead to the loosening of loaning conditions, and to the inflation increase.
In the second scenario, Mr. Cany said if the GDP growth rates of China, the US and Europe are low, this would lead to falls in the consumption demand of key products, thus reducing the prices of many commodity items. If so, the prices of key commodity items like food, cement and steel would be at lower levels. In such conditions, Vietnam’s inflation rate may go down to one digit by the end of 2014instead of 12-14% as previously forecast.
Securities remain attractive
Statistics showed that in the first nine months of 2008, the net profit growth rate of Vietnam’s financial sector was -33.1%, while the earnings per share growth rate were -67%. The P/E in the last 12 months was 9.7, while the P/B was 1.6. The VN Index dropped from 910 points at the end of 2007 to 314 points in mid-October 2008.
The decreases themselves are believed to create the driving force for the recovery of the market in the time to come. A panel speaker quoted Bloomberg as saying that foreign investors are still interested in Vietnam’s stock market.
Currently, Vietnam’s stock market is making transactions with the P/E index at 10.5, P/B 1.8, which prove to be very near to other markets in South East Asia.
Investment opportunities available
Nguyen Chi Dung, Deputy Minister of Planning and Investment, affirmed that in 2013, though Vietnam may have to face a lot of difficulties due to the world’s economic recession and the fluctuating oil prices, there still more opportunities than challenges in the country.
The investment capital flow may decrease and the foreign direct investment (FDI) disbursement may slow down due to the narrower scale of foreign investment funds.
The global expenses cuts will affect Vietnam’s exports. However, the effects would not be serious, as Vietnam has many cheap export items which can replace expensive products in South East Asia. The demand for oil, farm produce, apparel, footwear and wooden furniture has been stable.
However, the export forecasts still need to be adjusted in accordance with the forecast GDP growth rate decrease in the world. Analysts all believe that Vietnam has been well prepared to overcome the challenging period.
Vietnam: Gasoline Price May Be Down 12.12 per cent to
Gasoline prices in Vietnam may be reduced by VND1,500-VND2,000 or 9.09 per cent-12.12 per cent per liter to VND14,500-VND15,000/liter if the global oil price falls to less than US$80 per barrel, said Vu Ngoc Hai, chairman of Board of Directors of Vietnam National Petroleum Corp (Petrolimex).
The expected price tumble does not calculate petroleum trading firms’ refunding VND3 trillion (US$181.81 million) advanced by the government for their trading losses from 2007 by July 21 this year, Hai attributed.
“If the world oil price keeps stable at US$80-US$90 per barrel, our company will make profit of VND1,500-VND2,000 per liter,” the official said.
If the companies are making profit of VND1,500 per liter of gasoline, it will take them six consecutive months to recover their huge losses, said Ms. Nguyen Thanh Huong, deputy head of the Price Management Department of the Ministry of Finance.
Hai, however, elaborated that petrol firms are very careful when adjusting prices as they are waiting to see whether the government will raise the petroleum import tax or not.
Petroleum retail prices in Vietnam are still kept unchanged despite the plunge in the global oil price to US$77.7 per barrel October 11, the lowest rate in the past 12 months.
Explaining for the situation, Mr. Hai said that petroleum is still under a macro control by the Vietnamese government for national energy security and economic growth; therefore, and enterprises have no entire right to decide the price.
Under the current regulation, petrol enterprises that want to adjust selling price must make a report to the Ministries of Finance, and Industry and Trade for consideration and approval three days before announcing the new price.
Within the three-day
period, if the ministries make no response, the proposed prices will be applied;
however, if the ministries find any inappropriateness, they will disagree with
the proposed prices by sending written documents to enterprises.
VietNamNet Bridge - Cushman & Wakefield recently forecast office rent would tumble by half in HCMC in the next one or two years. This is actually good news for tenants, especially those searching everywhere for affordable space at buildings in the downtown area to locate their offices.
But this forecast has sparked a controversy among major foreign real estate management, and consulting firms. They described this forecast as impossible. Office rent will remain high in years to come despite a slight downward adjustment induced by new office building projects.
How will office rent move?
At least three foreign property management and consulting firms in Vietnam, namely CB Richard Ellis (CBRE), Savills and Jones Lang LaSalle, have shrugged off Cushman &Wakefield’s projection.
They share a view that office rent will remain firm or drop slightly rather than sharply because of high demand.
“We do not think rent will fall quite as dramatically as some are suggesting, particularly in the Grade A office sector,” says Brett Ashton, managing director of Savills Vietnam.
He says there is office space available here but supply is not redundant to cause the rent to plunge as forecast by Cushman & Wakefield.
Toby Dodd, general manager of Cushman & Wakefield in Vietnam, says office rent in Vietnam will stabilize at US$30 per square meter for Grade A, US$20 for Grade B and US$10 at Grade C. These are the same as in regional cities such as Thailand’s Bangkok, Indonesia’s Jakarta, Malaysia’s Kuala Lumpur and the Philippines’ Manila.
“That’s why I believe office rent in Vietnam will be lower”, Dodd told the Daily after a seminar on real estate investment held in HCMC earlier this month by the European Chamber of Commerce in Vietnam (EuroCham) last week.
CBRE Vietnam’s managing director Marc Townsend describes such a decline as a “collapse” if the office rent will go that way. But he concedes the current office rent is “extremely expensive” and is at least twice that in those cities.
“We do not see rental collapse,” Townsend says, attributing the expensive rent to the biggest problem in relation to getting access to cheap land and infrastructure in Vietnam.
He also points out inflation, high construction cost and the “extremely difficult” chance of getting a license as other reasons. “That’s the reason why Vietnam rents for hotels, serviced apartments and retail are more expensive than in the cities of the same size of population or less.”
Ashton says the rent will depend much on the quality and location and management of each building. However, it will take time for the rates to come down though Savills predicted Grade A rents will reach US$100 per square meter by the end of 2008.
Townsend reveals the Kumho is looking to break a number of records in the rental market.
Ashton estimates the supply of Grade A offices currently stands at 75,000 square meters in HCMC and me latest rents, based on the most recent new leases in Grade A buildings, equate to some US$97 per square meter, inclusive of service charges, but exclusive of value-added tax.
Jones Lang LaSalle Vietnam says the limited supply has led the average net rental of Grade A space to rise to a new high of US$79.3 per square meter per month at the end of the second quarter of 2008, a quarter-on-quarter increase of 26% and a year-on-year rise of 94%.
Ashton says Savills believes Grade A rents over all, including existing buildings will settle at US$65-75 per net square meter next year. Meanwhile, the Grade B office rent will stand at around 35-45 per square meter given the expected new supply coming to market and Grade C at US$20-25 per square meter.
Andrew Brown, general director of Jones Lang LaSalle Vietnam, assumes the office rent will enter a period of stabilization in this regard. “Then we expect pricing especially for premium end office space will remain at current levels and or show some further moderate levels of growth off existing levels”.
High demand vs undersupply
Townsend is seeing an undersupply because there will not be too much new office space of Grade A to be put into service in the near future. “Two or three large new buildings will go online in District 1 in the next 18 months”.
He demonstrates there will be 31,562 square meters at the Kumho project, 27,660 square meters at the Centec Tower and 15,600 square meters at the Sailing Tower.
According to Jones Lang LaSalle Vietnam, the central business district (CBD) expects no new stock of Grade A office building until the Kumho Asiana Plaza and Centec Tower are completed. The company furthers the current supply is generated from expired leases of tenants that vacate space to move to less expensive buildings.
Savills figures show HCMC has 510,000 square meters across all grades and locations while there is 375,000 square meters of Grade A and B space in Hanoi.
Ashton says the office market last year was the exception, not the norm for HCMC. “Over the past 10 years, HCMC has seen an average of 25,000 to 30,000 square meters of office take-up per year. Last year, the take-up was 120,000 square meter, or four times the average”.
Talking about the future supply, Ashton says the Kumho and the Centec Tower will represent a rise of 73%, and more competition will occur. “This means existing buildings will have to come down somewhat from current asking prices and all Grade A buildings will have to compete more fiercely given the new buildings coming to market,” he says.
Brown of Jones Lang LaSalle Vietnam says the fundamentals of the HCMC office market remain healthy with limited supply and robust demand, especially for better quality office premises.
But life will likely be tough for the offices of Grade B and Grade C. “The mid and lower quality grade buildings in the market are likely to experience more fluctuation given greater choice and supply levels,” Brown says.
Jones Lang LaSalle Vietnam predicts 119,000 square meters of new Grade B office space to be put into the market in HCMC in the next 12 months, giving potential tenants more options for lower-rent space.
Market trend and outlook
Ashton says supply and demand are the biggest decisive factors for office rents along with location and quality. Vietnam has registered more than US$47 billion in foreign direct investment in the year to date, and foreign firms will need to set up offices and the associated suppliers will see increases in their business over the medium term.
“Assuming Vietnam continues to increase its rate of committed capital from FDI, then demand will pick up again,” he says. He elaborates the FDI companies generally take smaller office space when starting out while existing firms in Vietnam are waiting out the current economic uncertainty and a fall in rents before committing to a new building.
Townsend says CBRE sees sizeable new tenants in Vietnam and the potential for the Grade A office space because Grade B and Grade C buildings do not have big space.
“Definitely, many multinationals are not able to expand because the existing buildings are full… You see big multinationals are looking for bigger column-free space of 1,000-1,500 square meters at new buildings where there are better facilities,” Townsend says.
Ashton says there are companies moving to the suburbs and other non-prime locations for larger floors, a better surrounding environment and lower rents. “For many companies, rent is the second largest outgoing after salaries, so the ability to reduce this cost helps the bottom line profits of a firm. At the current CBD rates, this makes even more sense”.
Townsend says many companies try to stay in CBD to maintain their advantages. However, few tenants in quality office buildings are local companies, according to Jones Lang LaSalle Vietnam. Demand for Grade A office space for both renewals and new take-ups mainly comes from foreign companies operating in such industries as finance, and insurance, ICT and software, real estate, consumer goods and offshore sourcing.
Ashton notes much will depend on the overall economy in the next six months. “The banking sector needs a soft landing and needs to start lending again. Inflation must come down and lending rates with it because many local companies rely on bank loans to finance growth.
Ashton says if the economy goes that way, then demand will pick up and remain steady over the next 24 months though companies are taking a wait-and-see attitude at the moment.
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