beyondbrics

While a sovereign debt downgrade normally sends shudders through the investment community, the market reaction to Moody’s rating cut on Vietnam has been surprisingly muted.

Vietnam’s currency, the dong, was little changed in the gold shops that double as black market foreign exchange dealers this morning. Likewise, there was no significant reaction in the thinly-traded non-deliverable dong forward market and only a small widening in the spread on Vietnam’s credit default swaps, in line with a wider regional move.

Vietnam’s benchmark stock market index, the VN-Index, ended down 2.7 percent, with Dow Jones Newswires attributing the fall to “profit-taking” and some concern about the downgrade.

There are a number of possible reasons for the lack of a strong reaction.

Firstly, most of the problems raised by Moody’s are not new.

“The reasons cited are the usual suspects – the trade deficit, inflation, the weak currency, high public spending,” said Alan Pham, chief economist at VinaSecurities, a stockbroker in Ho Chi Minh City. ”All of these problems have been around a long time.”

Secondly, the Moody’s downgrade has received very little coverage in the Vietnamese media. With a key Communist party committee currently locked in a meeting room to decide on the country’s new leadership, Vietnam’s state media appear to have decided that it is safer not to give this story too much attention yet.

There seems to be more coverage in the Vietnamese media of Moody’s decision to put Spain on downgrade alert than there is of Moody’s actual downgrade of Vietnam.

Thirdly, most of the markets relating to Vietnam lack liquidity. The offshore non-deliverable forwards and CDS markets are thinly traded. Unrestricted foreign exchange trading is limited to the black market. And the Ho Chi Minh Stock Exchange is only open for business from 8.30am to 11am  (Vietnamese stock market traders probably have the cushiest hours in the global finance industry).

This makes it difficult for investors (and journalists) to assess sentiment.

Of all the indicators, the black market dollar and gold prices are probably the most useful measures of sentiment. Vietnamese people have grown used to switching out of the dong in times of financial uncertainty.

The fact that there has been no great downward move since the Moody’s downgrade perhaps suggests most Vietnamese people were already well aware of the macro-economic problems facing their country. And as with most markets, being told what you already know is not a reason to sell.

Related reading:
Vietnamese stock market adjusts after rapid change, FT Trading Room
Push for growth hurts Vietnam dong, FT
Vietnam: not hot money, but ‘what money?’, beyondbrics