Why Vietnam's outlook isn't all doom and gloom

There are quite a few people who take a doom and gloom perspective on Vietnam, particularly when it comes to its balance of payment outlook. You are more optimistic. Why?
I think people put too much stock in the headlines without really understanding how Vietnam’s economy works. While challenges exist, fears are overblown. Many focus on the trade deficit of about $12 billion for 2010, or 12% of gross domestic product (GDP), but few see that the deficit is more than compensated by inflows of about $11 billion in foreign direct investment, $8 billion in remittances and $2 billion in official development assistance, giving us in theory net inflows of roughly $9 billion, or 9% of GDP. These inflows are all expected to increase in 2011, while the trade deficit will likely decrease as export growth continues to outpace import growth. The same thing goes for base interest rates. The focus is on the official base rate of 9%, 300bp below the 12% inflation rate, but few people note that deposit rates at banks are in the 12% to 14% range and lending rates in the 18% to 20% range – not low by any standards. Finally, I would point out that in 2008, several major investment banks issued reports calling for an imminent Thai-style balance of payment crisis, citing similar reasons as those who are calling for one now. Soon after, global hedge funds sold their Vietnamese dong bonds at any price and yields reached 21%. Those who bought these did the best trade of the year, especially since that crisis never happened.

Back to the FX reserves number, can we be sure about the data? There are concerns that reserves aren’t actually accurately reported...
It is certain that net inflows into FX reserves are much smaller than the theoretical $9 billion due to what is called 'local leakages', basically the population selling dong to buy value stores, namely US dollars and gold. These flows are hard to estimate, but we suspect them to be unusually large, which denotes a lack of confidence in the dong. Some have speculated that they are so high that FX reserves have shrunk in 2010, pushing the country closer to a balance of payment crisis. On the other hand, the World Bank recently estimated FX reserves to have increased by $2.6 billion in 2010 and said it expects a higher number for 2011. Current FX reserves are not public information. Market consensus put current FX reserves at roughly $12 billion, but nobody knows for sure. There’s also chatter that Vietnam has two or three undisclosed FX reserves of roughly the same size, which is probably true to some extent.

Do you think the nation is too reliant upon imports?
Thanks to its low wages and hard-working people, Vietnam has been successful in attracting large amounts of FDI, especially manufacturing industries oriented towards exports. However, because the country is still at an early stage of industrialisation, it needs to import the machinery and raw materials that come in the production of these exports. For example, Vietnam is a major importer of textile -- the country’s largest non-energy import -- but a lot of it is re-exported in the form of garments, which is one of its top exports. The same goes for wood and furniture. This implies that should exports unexpectedly stop one day, imports would also fall drastically. It is short-sighted to draw a BOP crisis scenario without making adjustments for how much imports would fall should exports disappear overnight.