Vietnamese policymakers insist they can tackle the country’s alarming inflationary pressures but have conceded that previous targets may be beyond them.

Vietnam’s National Assembly had set a full-year target for inflation growth in 2011 of below 7%, which looks highly ambitious in light of April’s 17.5% year on year CPI growth, with some analysts putting food inflation as high as 24%. “The targets have not been revised officially,” said Nguyen Van Giau, Governor of the State Bank of Vietnam, the country’s central bank. “However, I think that Vietnam, and other countries, are now facing difficulties in realizing the targets. They were set four or five months ago and new issues have arisen,” he said, highlighting global commodity price increases, Middle East politics and the Japan tsunami as unexpected influences.

Vietnam’s Minister of Planning and Investment, Vo Hong Phuc, said yesterday that “in 2011 our top priority is to combat against inflation,” and conceded that the previous policy – growth at expense of all other considerations – had to be revised. “The economic growth rate is no longer the number one priority,” he said. “We will try to sustain rapid economic growth, but not at any cost.” He said he hoped for 6.5% economic growth in 2011.

The centerpiece of Vietnam’s efforts to combat inflation is the so-called Decree 11, issued in February.  This is a six-point plan designed to combat inflation and improve macroeconomic and social stability, including tighter monetary control, maximum credit growth of 15% in 2011, reduction of imports and changed pricing mechanisms. These measures have coincided with a drop in the value of Vietnam’s currency, the dong. Governor Giau told Emerging Markets of his “strong belief that Vietnam will be able to control inflation in future” through these measures.

Ayumi Konishi, the ADB’s country director for Vietnam, said the country was doing the right things to tackle inflation but that they would take time to be effective. “We do believe Resolution 11 contained the right set of policies to control inflation and stabilize the macroeconomic situation,” he said. “However, economic policies always take time to have an impact. It’s not like poison: you don’t see the result overnight.”

“We hope the government will continue to be determined to follow this policy, and we hope the Vietnamese people will be patient,” he added. “Controlling inflation means there will be some pain.”

Analysts have tended to see Vietnam as the architect of its own inflation problems. “Up until February this year, Vietnam still had a very clear policy objective: growth at all costs,” said Tai Hui, regional head of research for southeast Asia at Standard Chartered. “Last year inflation started to pick up but they refused to raise rates – in fact, cut rates to boost growth. It was an amazing response.” For Mr Hui, the February measures, along with interest rate rises at that time, “were a major turning point for Vietnam. The government and central bank are now aligned to fight inflation – but they key is execution.” Mr Hui expects inflation to get worse before it gets better, likely hitting 18% and keeping pressure on for currency depreciation. “The patient has started to be given the right medicine but it will take time to recover.”

Many feel that problems have arisen because of a lack of independence of the central bank, but Governor Giau denied this to Emerging Markets yesterday. “Even though we are a member of the government, and it may give the impression that it means we don’t have autonomy and independence, our law allows the State Bank of Vietnam to have a certain level of independence in exercising our monetary policy.”

December 2009

Vietnam is much the youngest local currency debt capital market covered in this report, and the most vulnerable to external shocks. After a promising 2007 in which D10.5 trillion was raised, issuance almost completely dried up in 2008, totalling less than a tenth of that, according to ThomsonReuters.

In that context, 2009 was something of a return to form. By November 19 D7.3 trillion had been raised by local issuers, including the country’s biggest corporate bond to date, an important, market-reopening D3.5 trillion issue for electricity utility EVN.

Still, both locally and internationally, bankers vary on their opinions about the market’s development and prospects. “I think the market has huge potential,” says Terence Chia, vice president, Asia debt syndicate, capital markets origination at Citi. “It is still at the developing stage but the sorts of sizes we have been seeing getting done are pretty amazing for a market that is so new.”

Since the EVN deal, these have included D1.5 trillion of issuance for Vinacomin, the coal and minerals mining conglomerate; D2 trillion for Sacombank; D1.362 trillion for another bank, BIDV; and most recently D2.1 trillion for a third, Techcombank, in October.

Citi led the Vinacomin and (with ANZ and Sacombank Securities) Sacombank deals; Chia says Vinacomin could have gone well over D2 trillion had it wanted to. “Vietnam certainly has the potential to develop a pretty robust local currency market,” he says. “I think issuance will remain sporadic for the time being because of the interest rate environment, which has been volatile this year. But if we see the rate environment stabilise we should see more deals getting done in the local market.”

Certainly, many of these deals have been impressive in any context, and not just EVN, discussed in the box in this article. Sean Henderson at HSBC points to BIDV, the first lower tier two deal in Vietnam for three years, which HSBC jointly led with BIDV itself. “That was a great print in terms of being able to execute a lower tier two deal through the crisis,” he says. Doing it internationally would have been “exceptionally difficult if not impossible for most names – you’ve only just seen OCBC do it. So it was a great success being able to get them capital out of their domestic market.” HSBC also joint-led the Techcombank deal, with Standard Chartered, the largest single tranche by a financial institution this year. Peng-Meng Ling at Stanchart thinks there’s more where that came from, and reports a number of local currency deals in the pipeline.

There’s certainly no shortage of a need for funds. Vietnam’s vice minister of planning and investment, Dang Huy Dong, tells IFR Asia he hopes the local bond market can be one of many sources for the country’s vital infrastructure funding. “We need a substantial amount of capital to finance our ambitious and huge demand for infrastructure developments,” he says. “So far we have been relying on the conventional sources, such as the national budget, grants and loans. Now we have to look to the commercial bond markets, domestically and internationally.”

He accepts there is more to do. “The domestic bond market is developing,” he says. “It’s still in its initial stages, but we are learning by doing, and as people become more confident it will expand. I’m optimistic about it.”

And it’s not just the projects that need funds. Companies need to expand and are keen to do so with rates low. “Corporates want to raise medium to long term funding for two reasons,” says Nguyen Quang Minh, deputy director of the treasury department at Vietcombank. “Firstly there are real needs to finance their projects. Secondly, they expect that next year interest rates will increase, so if they raise funds now it will be cheaper than in the next two years.”

But Nguyen is typical of local bankers in seeing harder times ahead, and his tone is more cautious than the international players. He says despite the successful issues this year – he calls it “the year of the corporate bond” – things may get tougher. “Now I think it is very difficult for corporations to issue,” because the State Bank of Vietnam is not adding liquidity to the market. Similarly at BIDV, Trinh Quynh Thanh, deputy manager of the dealing room, also bemoans the lack of liquidity and calls 2009 “a tough year” for that reason. “In 2007 you could see a strong amount of capital coming to Vietnam and a lot of government bond investment, but after 2008 and the financial crisis it ran out. There was also a sell-off of government bonds in Vietnam and after that liquidity fell to a low over 2009.”

And the future? “We think 2010 will also not be really good for liquidity for bonds. We need the recovery not only of Vietnam but the whole world.”

Indeed, one of the striking things about the bond issuance in 2009 is that it has been done almost entirely with only a single slice of the potential investor base – domestic banks. Local funds play a limited role, but international capital, once so active, has all but gone. “Last year they [foreign investors] got very big losses because of fluctuations in the exchange markets,” says Nguyen. “I don’t see them coming back yet – the main players are the domestic commercial banks.”

Getting this international capital back into these markets requires changes to happen both inside and outside Vietnam. Minister Dang Huy Dong says that dispersed FDI in the first 10 months of 2009, at US$8 billion, is not significantly down on the $9 billion figure for 2008, but the committed FDI is dramatically down – $18.9 billion for 2009 to date when we spoke to him compared to $69 billion in 2008. And portfolio flows have been even more flighty. “I don’t think they are ready to come back because of their home country; they don’t have the confidence elsewhere in the world,” he says. “But quite a few foreign funds are still active in the stock markets.”

Some are no doubt deterred by the macro position, particularly inflation. “Just like any other country inflation is always an issue and any government has to take a close look at it; Vietnam is no different from that,” he says. “As we are rolling out the stimulus package, we install the mechanisms with a number of different indicators to keep a close watch on inflation.” And what are those indicators telling him? “At the moment they are saying we are still on the safe side. The moment we feel it is shaky, we have mechanisms.”

If foreign flows do return to dong bonds, they ought to support growth in the market. “In 2010 the picture may be a little brighter, but it should be taken step by step and there will not be a big change in the market,” says Trinh. “If you look at the macro, Vietnam is quite an attractive place to invest: we have positive GDP growth rates in 2009, a little bit higher in 2010; we are recovering quite well. By the second quarter of 2010 we may have some cashflow coming back into Vietnam.”

Deal profile: EVN

EVN’s D3.5 trillion bond re-opened a market that had been flattened for more than a year. “The market had really been closed since the fourth quarter of 2007, given the disruption to local fixed income markets with rapidly accelerating inflation,” says Reuben Tucker, head of debt capital markets for Asia at ANZ. “The bond markets had been shut for five quarters.”

ANZ had been close to EVN for years, having handled its inaugural transaction in dong. “We saw them as an ideal candidate to reopen the market with an appropriately sized benchmark deal, to signal to domestic investors that the market was open.” Early in the first quarter of 2009 the bank began sounding out accounts who said they had a lot of dong liquidity to deploy, given the dearth of trading available in the secondary markets at that time. Finding appetite from large domestic players, the bank went back to EVN with that feedback in late February, and the issuer set out for a D1.5 trillion transaction. “We felt that would be large enough to represent a true benchmark in the market, and also an adequate size to reopen the market with.”

Documentation took around four weeks, which Tucker suspects is a record in the local market. “But more important than the timing was the fact that we used the deal not only to reopen the market, but create a benchmark of international style documentation in the local market. It closely resembled a traditional Regulation S offering circular in international markets.”

The bookbuild took three days and closed at over D5 trillion, allowing the deal to increase to D3.5 trillion, the largest ever Vietnamese dong corporate bond. It succeeded in reopening the door, as many other issues followed.

Tucker says he is “very optimistic about this market, which is why we continue to commit more resources to it. It is in early stages of development but there is good diversity in terms of issuers: we have had large SOEs, joint stock banks, and a listed company in the tech space this year. The market is showing its capability to absorb credit across the entire spectrum of issuer types, and that’s occurring at a very early stage in the market’s development.”

He says he is seeing the level of sophistication in bank and asset manager portfolios lifting dramatically. He hasn’t yet seen international funds returning to the market, though he feels it will come back. “The encouraging thing to note is that many transactions have been successful based on almost 100% onshore distribution. While the return of international investors will be an encouraging signal, the fact that the market has seen the volumes it has without them is a strong sign.”

VIETNAM

 There was a time when Vietnam was something of a darling of the global credit markets. No more: worries about the state of its economy have sent investors elsewhere.

In the debt markets, the starkest confirmation of this change in attitude came in June when the sovereign, the Socialist Republic of Vietnam, officially ended plans for a G3 currency issue this year. Last year Barclays Capital, Citi and Deutsche Bank were mandated on a US$750 million global bond, but it had been clear for months that the deal was not going to make it across the line. Vietnam’s finance ministry has indicated that the deal will come back at some stage. But both because of the state of the global credit markets, and Vietnam’s own problems, nobody is expecting that to be any time soon.

Corporate issuance has gone the same way. Rumoured deals from Vietnam National Textile and Garment (US$500 million, through Deutsche), Vinashin Petroleum Investment and Transport (US$200 million) and PetroVietnam have come to nothing.

It’s a far cry from 2005, when a $750 million 10-year bond flew out the door, with orders of more than $4.5 billion. That bond paid a yield of just 7.125% for a new emerging market issuer.

The biggest problem has been the headlong arrival of inflation into what had otherwise been a vibrant economy, which had grown at 8.48% in 2007. Inflation figures for April were 25.2%, a 10-year high. On the back of that data, the currency has been badly hit and spreads have widened dramatically. The trade deficit is growing (although it did narrow in May on the back of a tighter monetary stance) and there are problems in the property market. Some consider the situation to be so bad that a localised version of the Asian financial crisis, with currency devaluation and a painful period of write-offs and recovery, may be on the cards; a Morgan Stanley report outlined exactly this vision in May, causing some alarm among domestic banks and fund managers. Against all this the stock exchange halved in value in the first half of the year.

The domestic bond markets don’t look much better either. In April, the government failed in a fourth consecutive domestic bond auction, with the coupon said to be as much as 100 basis points below the level investors think is fair.

Domestically at least, there are still plenty of borrowers ready to launch when things improve.  Vietnam International Commercial Bank (VIB) got a Moody’s rating, from B1 to Ba2 depending on the structure and term of the issue, in July, having gained approval to sell D3trillion of bonds this year the previous month. Techcombank has also been given approval to sell D5 trillion of bonds this year. And Sacombank has also received approval for domestic borrowing.

And, despite Vietnam’s absence from the international debt markets, domestic deals have got away even in the current environment. Vinpearl Tourism and Trading sold D1 trillion of privately placed three year and five year bonds through Bank for Investment and Development of Vietnam in May; the same month, Vincom Joint Stock Co sold D2 trillion through Vietnam Bank for Agriculture and Rural Development (Agribank).

The big question now is what happens to Vietnam’s economy. While the Morgan Stanley crisis theory remains an outlier view, there is still widespread expectation of devaluation in the currency, although the improvement of the balance of payments position in May does suggest that Vietnam has a good chance of bringing inflation under control. The State Bank of Vietnam raised its base rate by 200 basis points on June 11.

A typical strategist view is to say that things can be fixed, but that investors should still be wary. “Although in our view the authorities are moving more forcefully against inflationary pressures, and we believe we have seen the worst in terms of the deterioration in the trade deficit and rising inflation, the country is not yet out of the woods,” said Nicholas Biddy at Barclays Capital in a June study of the country’s position. He expects at least another 200 basis points of hikes in coming months. “We currently recommend investors err on the side of caution in the case of Vietnamese financial assets.” The state of bank asset quality is a particular concern, which in turn is likely to have an impact on their funding programs and use of the local and international debt markets.

KEXIM

Kexim Bank has been a stunningly active borrower in the capital markets this year. It has been everywhere, from the major currencies to Asian and Latin American local capital markets.

“Kexim is one of the savviest borrowers in the region,” says Sean Henderson, head of debt syndicate Asia-Pacific at HSBC. “They’ve proven again this year they have significant flexibility to consider almost every global market – and that is a lot more complicated than it looks.

“It requires a degree of internal sophistication in understanding a number of different market practises across documentation and execution, as well as an ability to accurately time each currency as opportunities arise.”

Kexim’s most recent adventures have been global. In May it raised a Eu750 million SEC-registered five-year bond through Citi, Deutsche Bank, Depfa, RBS and HSBC – the first euro-denominated deal from Asia in a year. It is understood to be planning a dollar deal, with the five banks to handle it (Barclays Capital, Deutsche Bank, Depfa, Merrill Lynch and Morgan Stanley) already agreed although no firm mandate has been given. Market rumour is for a US$1 billion 10-year global.

It has also issued twice in the Swiss markets, most recently with a Sfr350 million two-tranche fixed and floating rate senior bond in April, led by ABN Amro. It had already issued a five-year in January and has voiced an intention to return regularly. Kexim said at the time that the deal achieved funding around 20bp inside what it would have managed in dollars. Elsewhere, a five-year Y1billion deal went through in February via HSBC, and a seven year HK$375 million trade through Citi the same month.

It has also been active in less obvious funding markets. In April it launched a S$50 million one-year deal through HSBC, increased to S$70 million on demand. In March, it went for the ringgit markets, raising M$1 billion in five and 10-year bonds, placing to 40 local accounts. This was the first issuance by a South Korean borrower in ringgit; RHB led the deal with CIMB and OCBC as joint lead arrangers and Merrill Lynch as global financial advisor. Kexim has a M$3 billion MTN funding programme in Malaysia, so is likely to be back in that market before long.

And it’s not just in Asia that Kexim has been busy. In January it launched a Ps1.2 billion five-year floating rate bond issue in Mexican pesos through Merrill Lynch. This followed a 10-year Ps750 million global last October, again led by Merrill, which was tapped for a further Ps800 million in April this year. Earlier, the bank had taken a foray into Brazilian reals with a series of MTN deals in August 2007. It has even been active in Turkish lira.

This diversity looks set to continue, with the bank approved the right to sell up to Bt3.5 billion of local currency debentures in Thailand in the second half of this year. Once again, it will be a trend-setter: the first Korean financial institution to borrow in the baht market. Also looking ahead, Kexim has filed updates for Y200 billion of issuance between the end of June 2008 and 2010.

“It’s difficult to overstate the value of diversification in the current market,” Henderson says. “Global liquidity is shrinking, and various currencies can open at different times; often a borrower’s ability to lower cost will depend on being able to access the most appropriate market at any one time.”

He adds: “It pays not to overload one particular funding source. If you are too reliant on one market, it increases the risk you’ll eventually get backed into a corner either on a challenging market environment or investor capacity issues, and this adds up to more expensive funding.”

It hasn’t all been plain sailing, though. In April it cancelled a three and five-year Samurai issue two days before it was due to price, after failing to reach the Y50 billion the bank was hoping to achieve. Leads on the planned trade were Daiwa SMBC, Nikko Citi and Nomura. On April 23 the bank put out a statement blaming unfavourable markets, meaning it could not achieve the size or the pricing it wanted, although it is understood that there was demand for at least Y22.5 billion. There has been some conjecture in the markets that part of the problem was the fact that Kookmin Bank had launched a bigger deal, worth Y24.4 billion, just a week earlier in its inaugural Samurai issue, and that Kexim couldn’t countenance a smaller deal than its Korean contemporary. It remains to be seen whether the late pulling of the deal damages Kexim’s ability to return to Japanese investors.

This remarkable activity is to help get through a US$ 5 billion funding requirement for this year, spurred by an announcement in January that Kexim plans to lend W40 trillion this year, the largest amount since the bank’s foundation. There’s more to do, but Kexim has already got much of the hard work behind it.

ANZ

ANZ has demonstrated its strength and sophistication as a borrower consistently through the credit crunch. It says something that, despite ambitious capital raising requirements, it has almost completed its 2008 funding program already without having to pay through the nose for any of it.

So far this year ANZ has raised the equivalent of around A$32 billion. It has been active in euros, dollars, yen, Australian and New Zealand dollars, Swiss francs and Singapore dollars; increasing the period under review to the last 12 months adds several sterling deals to the mix as well.

“Since the onset of the global credit crisis our approach to funding has been to maintain an evenly balanced strategy much as we would do within normal market conditions,” says Rick Moscati, group treasurer at ANZ. “We set a strategy at the commencement of the year, we articulate that strategy to the market, and try to stick to that strategy.” That means not surprising investors with unexpected volumes. “If we say we’re going to do $25 billion of term debt issuance we don’t then do $40 billion or $15 billion. Transparency is very important for investors.”

It seems to have worked. Moscati says that since the credit crisis began, “we have had the opportunity to issue in all major global debt markets. By and large it has continued to be an issue of price.”

Perhaps the most significant was a domestic deal in April. The bank initially raised A$1.35 billion in senior five year fixed and floating rate transferable deposits, in a self-led deal; a day later it increased it by another A$150 million. Pricing, at 128 basis points over the three month bank bill swaps rate for the floaters, and an 8.5% coupon yielding 8.615% with a 128bp spread over A$ mid swaps for the fixed, was not especially cheap but did demonstrate the viability of a market that had been largely inactive for months. A month later, ANZ tapped the bonds again, bringing the total outstanding on them to A$1.75 billion.

It was a very closely watched deal. “There had not been a lot of issuance at the longer end of the domestic curve prior to this transaction,” Moscati recalls. “I think that deal gave the market some confidence: it was at the upper end of our volume expectations and it confirmed the Australian market was working well for domestic issuers.”

Another striking transaction was ANZ’s samurai debut in March. This deal raised Y135.8 billion, or US$1.3 billion, in a three-tranche issue that represented the largest ever yen-denominated bond from Australia. Daiwa SMBC, Mizuho and Nikko Citi were joint leads. “That’s been an important new market for borrowers this year,” says Moscati. “It brings with it some increased diversification, which is always attractive for us.”

This deal was actually cheaper than the Aussie dollar bonds that followed it. A Y37.1 billion three-year fixed rate note had a 1.77% coupon, making 80 basis points over Libor; A five year fixed rate deal raised Y27 billion at 2.07%, or Libor plus 95; and a Y71.7 billion five-year floating rate note was priced at 95 basis points over three-month yen Libor. The five year pricing was equivalent to around BBSW plus 110 basis points, making it 18 basis points cheaper than the Australian trades of the same tenor.

Recent months have also brought benchmarks in euros and dollars. Barclays Bank and Credit Suisse led a Eu2 billion bond for ANZ in May, followed in July by a US$2 billion raising through JP Morgan, Citigroup and Goldman Sachs. “Part of our strategy  is based around executing at least one benchmark bond transaction annually in each of our core strategic markets,” Moscati says. “Traditionally these markets have included the Australian domestic, euro and to a lesser extent the US markets. We have already initiated a strategy to expand this to include all major currencies, including yen, sterling and a greater focus on distribution into Asia.”

ANZ is likely to be quieter in the second half of the year, having already done almost all it needs to for 2008. “We’ve largely completed our 2008 funding task,” says Moscati. “To the extent we issue any larger public deals for the remaining part of this year it will be mainly about pre-funding 2009 requirements, which we expect to be similar to what we’ve done in 2008.”

THE PHILIPPINES

Some decent-sized deals are getting away in the Philippine peso bond market. There’s not much going right in the country’s stock market or economy, but at least it’s clear the local debt markets are maturing.

For example, in May Banco de Oro Universal Bank raised P10 billion, the equivalent of US$235 million, in a bond through HSBC, ING and Standard Chartered. The deal, a public offering of lower tier 2 notes, was originally planned as a Ps5 billion offer but was doubled in size after applications reached five times the initial amount. It flew out the door so fast that the public offer on the bond was ended a week early.

The coupon attracted investors – at 8.5% on the unsecured subordinated notes, it was higher than some other lower tier notes sold this year – but it was not widely priced. Instead, it reflects the growing liquidity in the peso market.

Another example came with a lower tier 2 deal for Philippine National Bank, which raised P6 billion in June in a deal led by Deutsche Bank. This deal, a 10-year non-call five subordinated bond, had drawn Ps8 billion of demand by a week before the scheduled close so, just like BDO, closed a week early. Again, the notes were priced at 8.5%. And while BDO had priced at a zero spread over the benchmark, PNB actually came inside it, pricing at 40 basis points below the Philippine Dealing System Treasury rates.

Other deals, if not quite as tightly priced, have found an enthusiastic following. Rizal Commercial Banking Corp raised Ps7 billion in February, through HSBC and ING, even after lowering its price guidance on the 10 year non-call five issue.

Seeing this, other banks are likely to follow. Metropolitan Bank & Trust is expected to launch a Ps10 billion lower tier two issue in the fourth quarter of this year; it has previously raised Ps8.5 billion in a sub debt issue through ING and Standard Chartered last October. This next one, however, may be partly in US dollars. Additionally, Allied Banking Corp has approved from Bangko Sentral Ng Pilipinas, the Philippine central bank, to go ahead with a Ps5 billion lower tier two offering, with ING understood to be mandated.

An upper tier two deal is also believed to be in the works for Philippine Export-Import Credit Agency – the first major such deal in pesos by a Philippine financial institution. (An upper tier two deal did get away last October, for GM Bank, but at Ps75 million it was not considered particularly significant.) The issue, understood to be slated for the end of the third quarter, is expected to raise up to Ps3 billion.

Aside from the banks, some other groups have been active in the market. National Food Authority raised Ps8 billion in a corporate bond in February, with AB Capital & Investment, Philippine Commercial Capital, Deutsche Bank, United Coconut Planters Bank, Multinational Investment Bancorp and SB Capital Investment lead managing it. Ayala Corp raised Ps6 billion in November, and its affiliate Ayala Land has mandated BPI Capital, HSBC and Land Bank of the Philippines to lead and underwrite a Ps4 billion five year-bond, expected to be launched in August (and, unusually, to list them on the Philippines Dealing & Exchange, as Ayala Corp has also done).

And among foreign issuers, something of a landmark was launched by European Investment Bank, the supranational, in January. It raised a Ps2 billion five-year bond with settlement in US dollars. While not especially large, the deal – led by HSBC – was seen as heralding the start of a synthetic peso market, allowing offshore investors to get exposure to the peso. The issue was mainly taken up by Asian investors but European and American buyers participated too. EIB has previously used a similar model in Indonesian rupiah.

The activity reflects greater local liquidity, a more established benchmark along the curve which makes it easier for other issuers to price off, and also favourable interest rate policy. But it’s really one of the few areas of optimism in the Philippines today. HSBC noted in a recent bond market report: “The Philippines’ unpopular Arroyo administration and the central bank will face an extremely difficult time ahead trying to strike a balance between inflation containment and sustaining economic activity.” Noting high inflation, political uncertainty, poor tax collection and potential revenue shortfalls, HSBC says: “Clearly, the sovereign credit metrics will stay under pressure and investors will be disappointed that the government will have to tap the offshore market to finance its growing budget deficit.”

Vietnam is in the middle of a landmark shift: from being a frontier outpost of great potential, to a market sufficiently developed to have become an essential location for foreign banks and investors. Like all big transitions, it is involving some pain.

Vietnam’s economics are compelling. The country’s GDP grew by 8.5% in 2007, the third consecutive year in which it had done so. It has joined the World Trade Organisation and its path into the global economy seems assured. It has a population of 85 million people, all of them gradually growing in wealth, which supports industries from banking to retail to construction. What people love about it most is the idea that, as a Communist state, it’s the next China.

For foreigners seeking to take advantage, though, there are a number of challenges to consider. For mainstream commercial banks, there’s a clear opportunity: barely 10% of the country’s population has a bank account and 15,000 new foreign investment enterprises were set up last year alone, with US$20 billion of commitment. But there are plenty of people fighting for that prize: Vietnam has five state-owned lenders, 36 joint stock banks, 33 foreign banks, and there are new licences approved for more.

Several foreign banks, unperturbed, have decided to take on the market head-on and have opted for local incorporation. HSBC, for example, received its regulatory approval to go local in March, allowing it to offer a full range of local banking services alongside its strategic stakes in Techcombank and the insurer Bao Viet. HSBC’s Vietnam CEO Thomas Tobin speaks of being able to “reach new and existing customers through a broader distribution network.” ANZ (with a stake in Sacombank) and Standard Chartered (which is a strategic partner of Asia Commercial Bank) are also working on local incorporation. “We can open new branches in a more practical manner this way,” says Thuy Dam, ANZ’s CEO for Vietnam. “With incorporation you become a local bank and hopefully you can get your network more quickly.” Citibank has not opted for local incorporation at this stage, but its country head, Charly Madan, doesn’t doubt the appeal. “More than 90 players is a lot of people to serve a US$75 billion economy, but the fact is Vietnam is an under-served market in terms of its banking sector.”

On the commercial side, if growth continues at its current pace, they may all flourish. But for investment banks, it is a tougher call. Banks have been attracted for years by the prospect of so many landmark state assets coming to the capital markets. At the end of 2006 it was commonly said that as many as seven new listings of these companies, worth a billion dollars apiece, would follow in the next 12 months.

Progress has been considerably slower than that, and it hasn’t been particularly smooth. A few landmark listings have made it to the market, but each has had its own challenges, largely to do with structure and price expectation.

In Vietnam, the process of bringing state assets to the markets is called equitisation. It uses a Dutch auction system, where the state sets a minimum bid, and people then put in their own bids above that level, which will define the successful price. But in a particularly unusual step, successful bidders pay what they bid, not the median figure. Additionally, any strategic investor –seen as absolutely key to any successful equitisation, for reasons of both finance and expertise – must pay the same price as the one set in the auction, as opposed to most nations where a cornerstone investor will come in at an attractive discount.

Even when that’s done, it doesn’t mean the stock is listed on the country’s main exchanges, in Ho Chi Minh City and Hanoi. There is no set period of time within which a company must go from its equitisation (after which it trades on over the counter markets) to a full listing on a main board. Indeed, it can often take a year or more.

The first major state company to grapple with this framework was Bao Viet Insurance last year. Retail bidders showed such exuberance for the stock that some bid as much as 25 times book, pushing the price up way above the levels most foreign investors had bid at. Then, when shares started trading on the OTC markets, they fell so sharply that many investors, having paid only a 10% deposit on the shares, walked away rather than paying the balance to take them up. That meant a second auction had to be undertaken to place those stocks (accounting for about a quarter of the offer), but since the price had to be at least the level set in the first auction, few took any interest in it, with only 10% of that block selling. HSBC then came in as strategic investor, which at least concluded it on a positive note.

Next came Vietcombank, the first of the big state owned banks in Vietnam to be sold, and perhaps the most eagerly awaited offering in the country’s history. The problem here was expectation: the bid was set at a level equivalent to 87 times 2007 earnings, which appears to have scared off potential strategic investors (GE Capital was understood to be all but signed up). Next, Saigon Brewery Company (Sabeco) raised less than two thirds of its target – with overseas investors taking barely 5% of the offer despite being entitled to take up to 49% – with valuation once again the problem. The starting price for bids was set at 72 times 2007 earnings. Don Lam, chief executive officer of VinaCapital, would like to see “something left on the table for investors. If it’s at full value, there’s no upside.”

Since then, the markets have tanked anyway (22% in March alone, bringing the fall to 44% for the first quarter of 2008), which makes further issues unlikely in the short term. The pipeline is considerable: the three other big state-owned banks (two, BIDV and Incombank, have already appointed advisors on their privatisations, Morgan Stanley and JP Morgan respectively); several mobile phone companies, with Mobifone understood to have held a beauty parade; and other big assets. But it’s going to be a while before these deals hit the markets.

Even when they do, that’s just the domestic privatisation. What people are really jostling for in Vietnam is what comes next: the international listings of some of those assets. That’s where the fees are likely to come in. Credit Suisse was advisor on the Bao Viet and Vietcombank deals, but its role was not really to handle the domestic issue, so much as to find a strategic adviser and advise on a foreign listing of the stock in future, so even when deals hit the domestic markets that’s not really putting revenue in the pockets of foreign investment banks. It is believed that Morgan Stanley’s pitch for the BIDV mandate, covering finding a buyer and advising on an international IPO, was $1.8 million – not enough to make anybody rich.

There are some signs of movement, though; Vinamilk plans a listing in Singapore. “It is our firm believe that the success of Vinamilk’s dual listing will be a recognisable milestone for many Vietnamese businesses who are striving to access international capital markets, or more broadly to go global,” says Le Song Lai, deputy director general of State Capital Investment Corp, the closest thing Vietnam has to a sovereign wealth fund, and until recently part of a joint venture with Morgan Stanley. “Any of SCIC’s investee companies that are qualified to list overseas should be encouraged and helped to do so.”

There is a widespread feeling in the market that Vietnamese authorities are willing to listen to market opinion, and that structural changes will probably come to the equitisation process in time. And it is, undeniably, early days in a program which could see as much as US$40 billion in enterprise value hit the markets.

In the meantime, the opportunities are limited for foreign fund managers too, who have for some time been on the sidelines waiting for sufficiently large and liquid issues to hit the market so they can invest in them. Long-standing locally based fund managers like Dragon Capital, Mekong Capital and VinaCapital are doing fine, but the field is becoming crowded: Chris Freund, managing director at Mekong, reckons there are about 60 funds now exclusively focused on Vietnam. One hears talk of billions of dollars waiting to be deployed, although people on the ground tend to be rather sceptical about that.

Nevertheless, deploying any capital is challenging, partly because of the slow progress of the jumbo listings, partly because of foreign ownership limits on certain stocks (particularly banks), and partly because of this oddity where so many stocks don’t trade on the main boards but on the OTC market. This OTC market is not unsophisticated – it is reasonably liquid, for a start – but certainly lacks the transparency that a multinational fund manager is going to be comfortable with.

Still, recent falls in the stock market – accompanied by panicking retail investors selling out – have afforded foreign investors some opportunities to buy, and they put in US$249 million in March, the largest month of net buying in more than a year, according to HSBC. US$450 million went in in the first quarter. “We believe that country funds, which raised money last year but have been unable to deploy all of it, have taken advantage of cheaper valuations to put a higher percentage of their funds into the equity market,” notes Garry Evans, a regional strategist at HSBC.

And with a long term view, despite the growing pains, Vietnam’s future looks bright, as does foreign participation in its emerging story. “The fundamental story of Vietnam as the next major FDI destination is not over,” adds Evans. “Try asking companies in Taiwan, Japan and Thailand where they intend to invest next.”

Vietnam isn’t in the mainstream of Asian investment markets yet, but its economy stands shoulder to shoulder with any of its more closely-watched neighbours. GDP grew by 8.5% in 2007, the third consecutive year in which it topped 8%. According to HSBC, industry grew by 12%, construction by 12% and retail sales by more than 20%. That’s a booming market.

Accession to WTO is integrating Vietnam with the rest of the world, a development that has been welcomed and lobbied for in Vietnam for years. But it is, in some ways, an unfortunate time to be doing so. “When Vietnam becomes more integrated with the rest of the world, through WTO, it brings growth,” says Thuy Dam at ANZ. “But as exports increase significantly, Vietnam will also become more vulnerable to external shocks.” International trade is equivalent to 150% of GDP, according to Citi, which gives some indication just how much impact a global slowdown would have.

While growth is admired, there is a growing sense that the economy needs some more finesse in its policy for the years ahead. The pace of growth from here, says Thuy, “very much depends on other macroeconomic policies the government wants to put in place, to make sure we are not going to sacrifice all other things just for the sake of having very high growth. I believe 2008 will be the year that we see a lot more macroeconomic policy implemented by the government to manage growth more effectively.”

Key to this debate is what the government does about inflation. This hit a 12 year high of 12.6% year on year in December, although the full year average was a less alarming 8.3%. “We do not feel entirely comfortable with the government’s inflation policy,” wrote UBS economist Duncan Wooldridge in a recent note. But inflation is difficult to get a handle on. Dominic Scriven at Dragon Capital points out that Vietnam’s CPI price indicator makes the situation look particularly bad since it includes food and energy, which would not appear in a US index of core inflation, for example. UBS considers two versions of core CPI, one excluding food, and the other excluding food and foodstuffs (that is, including processed foods). CPI ex-food appears to be expanding rapidly; CPI ex-food and foodstuffs is easing. As Wooldridge says: which measure should you believe?

“Some level of inflation is unavoidable in a place like this because of the inherent inefficiencies in real and financial infrastructure,” says Scriven. “The worst has probably been had but it’s a subject of considerable concern to politicians in a country with a big proportion of its population in the countryside.” Nevertheless, it is talked about constantly in Vietnam and intervention is considered more and more likely. “Given the high social cost of runaway inflation, we believe the government will continue to undertake fiscal type measures such as reducing import taxes and increasing control on monopolies,” says economist Prakriti Sofat at HSBC, who also hopes the National Assembly will give more autonomy to the State Bank of Vietnam, “which should give policymakers the leeway to tighten policy.”

This slightly trickier economic outlook than recent years has been reflected in a fall in Vietnam’s stock market, which had gained more than 200% in two years up until March 2007 but has since lost roughly a third of its value. By early January this did at least mean the price earnings ratios had fallen, but only to 19 times, still expensive by Asian market standards.

Tom Nguyen, a director in Deutsche’s global markets division in Vietnam, says foreign investors are reconsidering what they’ll pay for Vietnamese assets in an illiquid market. “The question at the forefront of foreign investors’ minds is, in the context of a global economic slowdown, would you pay 20 times [earnings] for 20-30% consensus earnings growth?”

The structure of Vietnam’s stock markets are still working themselves out. There are separate stock exchanges in both Hanoi and Ho Chi Minh City, which in some measure compete with one another. Most people expect that eventually Hanoi will be the centre for the bond market and Ho Chi Minh City for equities, but that’s not the case today, and Hanoi has the advantage of having less stringent requirements for listing. “That’s why many people use it,” says Thuy at ANZ. “If you want to get to the market quickly you go to Hanoi first, then Ho Chi Minh later.” Several big stocks, such as SSI, have done exactly this, starting in Hanoi and switching south afterwards.

It’s probably only a matter of time before a more practical distinction is made. “It’s not the right answer but it will have to do for now,” says Kelvin Lee, CEO of VinaSecurities. “I’m a firm believer that the marketplace will sort itself out.”

Another thing that needs to sort itself out is the over-the-counter market. Prior to the opening of Ho Chi Minh City’s stock market in 2002, this was how most trading was done; it is reasonably liquid, but far from transparent, and does quite literally involve giving one’s orders and picking up certificates over a counter. Gradually the increasing number of stocks listed on the main boards in Vietnam is reducing the need for institutions to take the OTC route. “The government is very clearly trying to move the unofficial market towards the official public market,” says Dominic Scriven at Dragon Capital.

But it remains popular at a retail level. “The OTC market is just waiting and waiting to disappear, and we wish it would,” says Lee. “It is far better for the marketplace, and for Vietnam’s development in the capital markets, to migrate everything to the formal exchange.”

And Lee thinks there is no challenge in doing so. “It’s a stroke of the pen. You say: though shalt move and thou shalt have 18 months to do so. It’s almost as simple as that.”

There is an argument that shutting the OTC markets reduces the access to capital for smaller companies. “But accessing capital is not a birth right, you have to earn it,” says Lee. “You have to do something to earn investors’ trust. The time has come when you need a higher level of compliance to access the markets.”

The eccentricities and valuations in the public stock markets make many believe that the way to go in Vietnam is private equity. “I was in Hanoi recently,” says one banker, “and of every 10 foreigners in suits in the room, nine of them were involved in principal finance in some way. That’s where the opportunity is, not the capital markets.”

Mekong Capital has focused in this area: two of its three existing funds are private equity, and the next one will be too, moving from growth equity to buyouts. “Private companies can have much better top line growth, and much better true growth in net profit, because they’re expanding their organisations faster than state-owned companies would. In the really good ones you can have 50 to 100% revenue growth per year.” Now that really is boom territory.

BOX: DEBT MARKETS

One of the more exciting developments in Vietnam is the gradual move towards functioning debt capital markets. Scriven says the debt markets are in some ways more interesting than the equity markets: “more meaningfully interesting, in terms of the development of the financial system and nerve centre of this economy, in particular the government bond market.” He describes the development of the market as “on the cusp, which doesn’t mean immediately. But the next step forward is a market where there will be development of the right sort of instruments, the right sort of transparency, the right sort of communication to determine what the risk free rate is in this country.”

These are early stages, but the trend is clear. Dealogic tracked no corporate bonds in Vietnam in 2005; four, worth $268 million, in 2006; and 17, worth $1.304 billion, in 2007. There isn’t, yet, a meaningful level of issuance at a sovereign level domestically, which presents a challenge for others to price off, but nevertheless corporate issuance is developing, with the banks now beginning to join the party. “The economics of it are becoming a bit more attractive as reserve requirements on deposits go up to 11%, and also there’s the element of asset liability management,” says Charly Madan at Citi. “Going to the capital markets allows you to fix those potential gaps you may have on your balance sheet.”

One problem for the debt markets is inflation, which has pushed up the government benchmark. But there’s certainly a willing audience. “The investors we continue to speak to, predominantly overseas, would dearly love to hold Vietnamese paper, whether it’s corporate, government or semi,” says Kelvin Lee at VinaSecurities. “But the problem is two things: you don’t have the supporting institutions to do a total return swap; and the foreign guys continue to watch but are staying away because there’s no Euroclear or Cedel.”

A new group called the Vietnam Bond Forum is gaining momentum, led by the treasurers of the large state owned banks and the big foreign banks active in this area such as Citi, HSBC and Standard Chartered. The idea is to discuss views and present to the authorities some advice gleaned from overseas experience.

Vietnam very obviously needs infrastructure spending, which should also boost the bond market. “Everything you see touch or feel here is in short supply,” says Madan. “And as Vietnam catches up on its infrastructure investments a lot of these will need to be financed through debt. Having a robust capital market with established benchmarks and tradability and transparency is going to be very important.” Buyers are numerous: banks and insurers, wanting long term paper for liability management; private sector funds domestically; and foreign investors, who like the high yields and the generally stable currency.

At a sovereign level, Vietnam launched in the dollar markets two years ago and had been planning to do another offer, but global market conditions have postponed the plans. When it reconsiders, its scarcity may prove to be an asset. “There’s very limited supply of Vietnamese paper in the markets,” says Madan, “so it is trading well below the risk premiums that equivalent risk weighted countries are paying.”

On first glance, Vietnam is a vastly overbanked market. In addition to five state-owned lenders there are 36 joint stock banks, 33 foreign banks, and several new licences approved for more. “By the end of the year, if all applications are approved, you’ll have in excess of 90 players for a US$75 billion economy,” says Charly Madan, CEO for Vietnam at Citi. “That’s a tad too many.”

But is it? The dynamics of supply and demand are tricky to predict. “Yes, it’s an overbanked market, but it’s still very underserved,” says Madan. “The products and services available in the marketplace, on both the consumer and the corporate side, are fairly basic. So there’s a lot of room for existing players to prove themselves by capturing new customers and improving product and service development.”

And there are plenty of customers to aim at. “We have 80 million people in Vietnam but only eight million bank accounts,” says Dam Van Tuan, executive vice president and head of strategic planning at Asia Commercial Bank, a joint stock bank. Credit penetration is low, and in foreign direct investment, 15,000 new enterprises were established last year with $20 billion of commitments, although not all will be taken up. “You will probably see continued double digit growth in banking assets for at least two to three years before things start tapering off,” says Madan.

Local banks are positive. “There are not enough banks to serve all these people,” says Tran Xuan Huy, chief executive officer of Sacombank, another leading joint stock bank. “I don’t see any competition here because the market is so huge in potential.” Retail’s the big appeal: Sacombank has put its corporate activities into a separate division in order to focus on the mass market, and plans to be present in all Vietnam’s provinces (it’s in about two thirds at the moment) by 2010. “80 million people are waiting for us to serve them.”

And it’s not all about people discovering bank accounts for the first time. Sacombank is launching a private banking division, starting out with a minimum entry level of $500,000. “There are lots of people with millions of dollars in Vietnam now,” says Tran. “We have a big base of customers already, all the entrepreneurs, the owners of businesses.” Tran aims to serve these customers as their needs grow overseas – sending children for study in America or Europe, or buying property in Hong Kong – using its links with foreign banks.

ACB, too, sees opportunity, though Dam argues that it’s really only the bigger banks – he considers Sacombank and Techcombank to be peers – that stand to benefit. “There are more areas for growth but in the long run I think there will be mergers and acquisitions,” he says. “New banks will have to try very hard to survive.”

This is not to say that there aren’t danger signs, though. In the short term at least, competition is going to cause challenges. “Definitely you’ll be seeing spreads compressing, new ways of fundraising for clients, and as the capital markets become more accessible and regulations become more streamlined, we’ll see a lot more capital raised in those areas,” says Madan. So long as the economy keeps motoring, things will be fine. “It the economy continues to perform at 7.5% to 9% levels, then as a rising tide lifts all boats the situation is more manageable,” says Madan. “But if it comes to much slower growth, we’ll start seeing issues come to the surface.” That said, Citi expects continued growth of 8 to 8.5%, although the country is clearly vulnerable to external shocks given the fact that international trade accounts for 150% of national GDP.

Bank practices tend to become more reckless in periods of intense competition too. “The terms at which consumer loans are being underwritten is a major worry,” says one banker. “If I was in the regulators’ shoes, that would be my biggest worry. My concern is with the regulatory capacity for looking after 90-plus institutions with limited monetary tools, alongside a problem of inflation.”

In light of that concern, Dam at ACB expects more constraints on banking businesses this year: greater supervision of rapid loan growth, and in particular of areas such as securities lending or real estate lending. That’s going to increase the pressure still further.

Despite the level of competition, many foreign banks have felt sufficiently impressed by the prospects of domestic banks to either incorporate locally – HSBC, Standard Chartered and ANZ are all in the process of doings so – or take stakes in local banks. The rules, which have gradually eased over the years, allow foreign shareholders to own 15% in a bank, which can in some cases be increased to 20% given one-off approvals from the regulators. The total aggregate foreign shareholding in a bank is capped at 30%. ACB is at that limit, with four foreign shareholders, Standard Chartered holding the largest stake; Sacombank, also at 30%, has three, with ANZ holding 10%; HSBC has a 15% stake in Techcombank, making it the first foreign bank to lift its investment beyond 10% following an additional purchase in October (it also holds 10% in insurance leader Bao Viet); and Deutsche has a stake in Hanoi Building Commercial Joint Stock Bank (Habubank), which should soon be boosted from 10 to 20%.

“We always believe that in this market, like in any other country in Asia, if you want to have wide access to that market you need to deal with a local or be with a local,” says ANZ’s Vietnam CEO, Thuy Dam. ANZ would happily increase its stake in Sacombank, but it’s at its foreign ownership ceiling.

These foreign houses generally get as involved as they can in their local counterparts. “They have the stake in the bank, they have representatives in the board of directors, they give technical assistance; they are involved in major decisions made by the bank,” says Dam at ACB of the involvement of its foreign shareholders.  That doesn’t, though, go as far as distributing Standard Chartered product, for example. ANZ and Sacombank have a joint venture to provide credit cards in the market, and several ANZ staff are seconded to the local bank, including the head of its treasury operations. Thuy says she plans to sell ANZ product through Sacombank but so far says ANZ has been able to do what it needs to through its own branches. Deutsche says it is building a “framework strategic cooperation and knowledge transfer agreement” with Habubank, which will include exploring partnerships in credit cards, affluent banking and investment products, as well as sharing expertise in treasury and risk management. HSBC has committed US$13.5 million to support technical service assistance to Techcombank over the next five years and says it “intends to explore joint business opportunities”.

Others are likely to follow. “ING is interested in Vietnam,” says Philippe Damas, the bank’s Asia CEO for private banking and retail. “You can clearly see the fast, growing, big population; it’s a nice wealth creation country, although it is far from being as open as Thailand,” where ING is increasing its stake in TMB Bank. “BIDV and Incombank will probably be in a process where they’re going to be looking for strategic partners and we’ve put our name on the list like many other banks to be involved in the process.”

Madan at Citi, which does not hold a stake in a local bank, expects the 30% overall cap to be relaxed in time. “When you take a 10% stake in a company your commitment is very different to when you have 51%,” he says. “Over the long run I think these limits need to be relaxed to enable more technology flows, and for the better health of the system.” He points out that, even if the impact a bank can have as a strategic investor with such a low stake is muted, the stock market performance has been welcome. “So if it works less well on a strategic basis at least it has made a financial return for the investing institutions.”

BOX: BROKERAGE

If mainstream banking is competitive, it could be worse: it could be brokerage.

A few years ago brokerage really just existed among the larger banks like Vietcombank and Bao Viet (whose Bao Viet Securities is the only local name frequently credited as an IPO bookrunner by Dealogic). Then, institutions and even private individuals were permitted to be owners of securities companies. “Then it moved up quite dramatically, to 40 or 45 very quickly,” recalls Kelvin Lee, whose own brokerage, Vina Securities, received in principle approval in December 2006 – roughly the 60^th to be licensed – and formally opened on July 1 2007. “One year on from our licence, there are 74. And we hear it will move up again.”

If Lee’s case is typical, a sizeable industry is evolving by the day: having opened with five people, he now has 80. “That,” he says, “is 10 people a month.” He started out focusing on institutional but plans to target retail in future, partly for branding and partly because he believes institutional clients want him to have the pulse of the market, which requires him to know what retail investors are doing.

Funds management represents a similarly crowded field. “The last two years has been a huge inflow of new funds,” says Chris Freund, managing director at Mekong Capital, which runs four funds and specialises in private equity. “We just updated our list of funds that are exclusively Vietnam-focused. It’s about 60.”

Dominic Scriven at Dragon Capital, one of the few investment firms to have survived the Asian financial crisis, adds: “To some extent one would say there has been an excessive profusion of institutions created, and that’s had all sorts of impacts on the skills market. In the short term that needs to iron itself out.” Dragon had $2.5 billion under management at the end of 2007.

It is often said that there is a multi-billion dollar wall of unallocated capital in funds outside Vietnam still trying to find a home. Local managers tend to regard this claim with some bemusement. “One reads and hears extraordinary figures being bandied around and I’m not sure what the basis for that is,” says Scriven. “There’s maybe a billion or two tucked away somewhere.” Don Lam, CEO of VinaCapital, another long-standing manager with $2.2 billion under management including a newly-raised $400 million infrastructure fund, agrees. “I think mostly it’s a myth,” he says. “If funds were offshore waiting to jump in and buy something, that was last year.”

That said, with every IPO that makes its way to the main boards, the market capitalisation in Vietnam becomes more worthy of attention. “Arguably you could say that supply is growing faster than demand, so many companies are preparing to be listed,” Freund says.

As Scriven says: “Vietnam is moving from the entirely peripheral to the compelling for international fund managers.”

Asiamoney, March 2008

Morgan Stanley announced a new joint venture in Vietnam in February: a landmark, the first of its kind. But it wasn’t the venture everyone was expecting. That one had been canned weeks earlier, in a turn of events that says a lot about the competitiveness of foreign investment banks trying to get a foothold in one of the world’s most vibrant frontier markets.

What Morgan Stanley announced on February 13 was a joint venture with a local firm called Gateway Securities, a Hanoi-based brokerage and investment banking outfit. Morgan Stanley will hold 49% of the venture, which among other things will be able to conduct underwriting, advisory, brokerage, research and principal investing.

It’s an interesting deal, for sure. Gateway is no household name in Vietnam, but that’s hardly the point: it’s the licence that really matters here. “They’ve bought a stake in a licence, they haven’t bought a licence in a firm,” says one observer. “It’s good business for Morgan Stanley: it’s a call option on Vietnam,” says another. “If everything falls apart they can walk away without losing much money. If it takes off, they’ve got the licence to benefit.” Morgan Stanley is believed to like the idea of building a clean new business, without legacy or politics; it is the first time a Western firm has bought a stake in a Vietnamese brokerage. What’s more, the cost is believed to be in the low tens of millions of dollars, a pittance by Morgan’s standards.

But it’s not the deal Morgan Stanley was had been expected to complete  – which would have been a good deal more interesting, influential and lucrative. Last March 19, the bank had announced plans to establish a securities firm with State Capital Investment Corporation – the closest thing Vietnam has to a sovereign wealth fund, and entrusted with the control and restructuring of the country’s state-owned companies (which, in a Communist country, is most of them). SCIC Morgan Stanley Securities, once its domestic licences were in place, had been expected to start operations in the fourth quarter of 2007.

What a deal this would have been. SCIC today has control of 833 companies, and is mandated to decide what to do with them: divest them, list them, sell them domestically or internationally. It has been closely modelled on Temasek and Khazanah, the investment arms of the Singaporean and Malaysian states respectively, and in due course is expected to have responsibility for investing the nation’s reserves too. In a country which has beaten 8% economic growth for each of the last three years, newly admitted to WTO and with 85 million people who are only just discovering banks and consumerism, what better partner could there be to form a joint venture with?

And that, really, was the problem: the deal was just too good to be true. “One can understand the enthusiasm of both sides but they overlooked a rather obvious stumbling block, which is that in that position [SCIC’s] you have to be extremely careful if you are setting up a business in competition with those people who would be your major service providers,” says Dominic Scriven, director of Dragon Capital, one of the country’s longest standing investment firms. “I think the problem in SCIC is that at this early stage of its existence, it is simply so large an institution that it has to be focused on that, rather than on a more diversified set of financial services.”

Those close to the deal say the writing was already on the wall by the middle of last year. And then on January 1 SCIC’s whole leadership changed. Chairwoman Le Thi Bang Tam, who in November had given the keynote address at Morgan Stanley’s annual Asia Pacific summit at Singapore’s Mandarin Oriental, was replaced by minister of finance Vu Van Ninh as chairman, with his deputy Tran Van Ta as CEO. This ended any chance of the deal’s redemption, and in February an SCIC spokesman confirmed the deal was scrapped.

But what’s really striking is why it was scrapped. It wasn’t because of an objection elsewhere in Vietnam’s public sector apparatus, which can after all be labyrinthine, with different ministries and agencies often appearing to have overlapping responsibilities in the financial world. Instead, it was because of the carping of other investment bankers.

“Morgan Stanley and SCIC did sign the agreement for the JV,” says one well-placed observer. “But then they had a lot of resistance, from various sources but mainly from other international investment banks. They complained: ’you cannot be a player in the market and a referee at the same time’.

“You cannot have an investment banking or securities company owned by SCIC, which is also the direct representative of the government owning shares in Vietcombank, Bao Viet and so forth. You have a conflict of interest: you would definitely give the mandate to the investment bank you have a joint venture with. And that’s how the thing got scrapped.”

Another adds: “It was nothing to do with politics. It was other investment banks explaining to the government the implications of this JV. Every Joe Blow on the street was doing it: every time they saw the Ministry of Finance or the State Bank they just kept hitting the same points, all the time, until the government said: well, you must be right.”

(SCIC’s deputy director general, Le Song Lai, responded in writing to Asiamoney’s queries. On Morgan Stanley he said only: “Although the planned JV between SCIC and Morgan Stanley did not go through as scheduled due to some reasons, we do still find each other good partners. Given the growth potential of Vietnam’s economy, there are plenty of other promising opportunities that we could do together.”)

In one sense Morgan Stanley was perhaps naive in ever expecting such a steal of a deal to go through, although nobody in the industry is blaming them for trying. But the fact that the weight of momentum against the deal – a signed, announced, confirmed deal authorised at the highest levels of the Vietnamese government –came from rivals is perhaps an indication of the ferocity of competition among foreign investment banks.

In mainstream banking, there’s no shortage of opportunities: only 10% of the country has a bank account and economic growth is beaten only by China. It’s little wonder that long-standing fixtures like HSBC, Standard Chartered and ANZ have applied for local incorporation in order to be more deeply engaged with the country and its consumers. For principal investment, too, possibilities abound. But in investment banking, the opportunities are nothing like as clear.

They should be; indeed, they’ve long been expected to be. In late 2006, many well-informed observers of Vietnam were confidently expecting as many as seven listings of landmark state-owned companies, at a value of a billion dollars apiece or more, in the following 12 months. This was supposed to be the tipping point, when the markets had enough securities of sufficient size and depth for global institutional investors to pay greater attention to the country; and when the advisory and (in time) overseas underwriting mandates for foreign investment banks would begin to repay the considerable effort invested in the place over recent years.

It is the moment all foreigners face in Vietnam: the flicker of indecision while crossing a road as four hundred motorbikes bear down on them with varying pace and direction. The head says: keep walking, they’ll anticipate my movements. The heart says: I’m going to die. And I’m going to die with tread marks up my nose.

But perhaps – and we recognise this is a big ask – in that moment of pending doom, we should think of it not as a threat to mortal existence but as an economic indicator.

Granted, the Asiamoney Likelihood of Being Smacked in the Teeth by a Moped Index (ALBSTMI) will take a while before replacing GDP as the benchmark for economic fortitude. But there’s something in it. Your correspondent, visiting Vietnam after an absence, found Ho Chi Minh City was just as heinous a place for a pedestrian to cross a road as ever, but that Hanoi, from a more sedate starting point, had become its near equal. Perhaps this reflects the growing commercial presence of Hanoi as opposed to just being a centre of government; or the increasing wealth and disposable income that comes with Vietnam’s 8.5% economic growth, and Hanoi’s of 11.5%.

After all, it’s the economic indicators you can see that really matter. Residents of Bangkok argued that the way they could tell economic progress was returning to Thailand after the Asian financial crisis was not because of any questionable government statistic but because the traffic jams were back on Sukhumvit Road.

And informal indicators have been whackier still. Asiamoney can recall being told earlier this decade that a suitable indicator of M&A activity in South Korea was consumption (and, indeed, dispersion) of tear gas. One doesn’t have to go back too far in Korean corporate history to recall the controversial bank merger in which employees barricaded one of the chief executives in his office for three days without food and water, periodically threatening to set themselves on fire. Riot police were often called into action around this time. Tear gas sales up? There must be mergers afoot.

One useful quirky indicator that is likely to stick was devised by CommSec, part of the Commonwealth Bank of Australia, in the spirit of the Big Mac Index. The BMI – or Burgernomics, if you must – was devised by The Economist to illustrate purchasing power parity, or the theory that a dollar should buy the same amount in all countries and that consequently exchange rates between currencies should move to a point where everything costs the same everywhere. The Economist picked the Big Mac, produced in over 100 countries, as a suitable vehicle for comparison; if a Big Mac costs more in, say, Malaysia than America, then there’s an imbalance in dollar-ringgit exchange rates.

CommSec’s innovation was to bring the index into the 21^st century. A Big Mac index is flawed: the burger is manufactured all over the place, so prices are distorted by labour laws, transport and trade barriers. Instead, it settled on the iPod: almost as universal, but almost exclusively manufactured in one place, China, which takes everything other than freight costs out of the picture. A while ago, iPods cost twice as much in Brazil as Canada, for example, with the dollar (US and Hong Kong) at a similarly low level. That appears to demonstrate that the dollar is undervalued.

Perhaps we can go further and work out the likelihood of being flattened by a Hanoi motorbike whose rider is wearing an iPod at the time of impact. That should bring consumer spending, GDP growth, purchasing power parity and the Vietnamese dong cross-rate into a single handy indicator. You can’t get more practical than that.