Will Emerging Market Re-emerge - Vietnam (1)?

I've been following Vietnam, on and off, for a while. I have a very curious interest in the country. It's a story following China's, a state economy going through drastic reforms trying to find its way in creating wealth and pride. The road is surely bumpy, but it's set to move forward. The next big opportunity lies with Vietnam.

Vietnam has going through a small scale currency crisis at mid of 2008, slightly ahead of the full-blown worldwide banking crisis. As a large importer of Energy Commodities, rising of oil prices pushed the foreign currency reserve account to near diminishing. With double-digit inflation and tightening measures by central bank to combat inflation, foreign investors fled and left Dong sink by over 15% in the black market. - Officially Dong is pegged to USD and is traded in a very narrow band set by the central bank. By late 2009, recovery of oil prices again caused panic on the foreign currency reserve account. Summarized from Consultative Group Meeting with IMF, these are the main issues:

1, Pressure on the balance of payments. The easing of monetary and fiscal policy under the stimulus program has boosted imports, contributing to a return of significant trade deficits ($3½ billion in the third quarter).

2, Dong under depreciation pressure. Central bank has officially devalued Dong for 5.4% on Nov 25th, 2009. Residents have been rushing for gold and other foreign currencies. In black market Dong is trading further 10% or more lower.

3, Gross international reserves have fallen to below 2½ months of imports. Access to foreign exchange has been difficult.

4, Trade deficit stood high at $3.5bln in the 3rd quarter. Export remains weak. Export prices of all items (except Gold) fell.

5, Central bank turned to tightening due to pickup of inflationary pressure due to rising commodity prices and liquidity injection-led asset price inflation in the earlier months. Last measured CPI stood at 4%. 1-yr treasury is selling at above 10%.

6, Stock market has reversed the rising trend in the past 2 months and has retreated by nearly 30% from the Oct high.

7, NPLs at banking sector has been rising substantially. Official figure on NPL at State Owned Commercial Banks was at 4% at Q3 and doubled from 2007 level however Fitch estimate was at 13%. My speculation is that most banks were loaded by real estate loans including construction loans, mortgates, commercial RE loans during the boom time of 2005 to 2007 and now lots of those could be under water. Major effort such as the interest rate subsidiary program out of the VND143 Trillion Stimulus Package was put in place to alleviate the problem.

With most banks predicting some further devaluation of Dong in the coming year, central bank's drawing back the liquidity, and other negative domestic news (e.g., budget deficit may run to 50% of GDP next year), all-in-all, there is a lot of headwinds to recovery. The pressure on external account balances may persist for a while (may be for the next half to one year, probably?) due to elevated oil prices and continued weak external demand. But when most investors are deterred to put a stake in Vietnam, the opportunity of investing will be rising.