Archive for December 2010


Shaky Economy Proving Challenge for Vietnam’s Leadership

December 27th, 2010 — 5:06am
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Having been one the fastest growing economies in Asia over the last decade or so, recently Vietnam has been experiencing a number of serious headwinds, raising questions about the government’s ability to manage the situation the economy now finds itself in.

On Thursday last week, Standard & Poor lowered Vietnam’s sovereign credit rating, citing concerns about the nation’s banks. The Wall Street Journal reports S&P said the move also reflects Vietnam’s low-income economy, developing financial system and other issues that increase its vulnerability. It said Vietnam’s banking system is susceptible to a financial or economic shock that could significantly test government resources as it will increase borrowing costs for both the government and enterprise.

S&P Thursday lowered Vietnam’s foreign currency rating to BB- from BB and the local currency rating to BB from BB+, also maintained a negative outlook on the Southeast Asian nation’s long-term credit ratings. It affirmed the short-term ratings at B and the recovery rating at 3. S&P credit analyst Kim Eng Tan warned that the firm could lower Vietnam’s sovereign credit ratings if its financial stability weakens further or if lending growth outpaces economic growth.

Moody’s, citing rising inflation, along with the risk of a balance of payments crisis and the debts of nearly-bankrupt state-owned shipbuilder Vinashin, also downgraded Hanoi’s bond rating this month. Bloomberg reported Vietnam’s five-year bonds dropped the most in a month last week as inflation accelerated to a 22-month high.

This follows The Wall Street Journal reporting on Friday that beleaguered Vietnamese shipbuilder Vinashin has defaulted on a loan to international lenders and has told them it will make only interest payments.

The Vietnamese government has been struggling to restrain inflation that’s being stoked by economic expansion, higher food costs and a weaker currency. Growth in consumer prices quickened to 11.75% in December, the fastest pace since February 2009, according to figures from the General Statistics Office (GSO) in Hanoi.

The government has devalued the dong three times since November last year. The currency’s depreciation is playing a “significant role” in the acceleration of inflation, according to the International Monetary Fund. The central bank raised interest rates on Nov 5th. Average dong deposit rates are 12.44% while average lending rates are 14.96%.

S&P quotes an analyst saying Vietnam’s central bank needs to have a “clear and consistent” message on monetary policy to re-establish its credibility.

The GSO said consumer prices would likely rise 9.2% in 2010, well up from 6.88% last year and higher than the government’s target ceiling of eight per cent. In December alone, prices rose 11.8 per cent against the same month last year and two percent from November, according to the GSO.

The hike has been led by soaring food costs. Official data shows food prices were up 10.7 per cent year on year in December, and 3.3 per cent higher from the previous month.

The World Bank said in a recent report: “Rising prices of commodities and manufacturing products remain the key drivers of the recent hike in the inflation rate.” The Bank has also said that inflation is historically high in Vietnam due to the government’s traditional policy of emphasising growth over macroeconomic stability.

At an annual meeting of donors earlier this month, Japanese ambassador Yasuaki Tanizaki spoke of “growing concern” at the country’s currency and price rises (Japan is Vietnam’s biggest bilateral donor).

“It’s a priority for Vietnam to adopt effective measures to restore public confidence in (the) dong and improve communications with the market to stabilise its currency,” he said. The dong has been devalued three times since late last year and has lost nearly a third of its value against the US dollar over the past three years, according to a recent World Bank report.

Vietnam remains burdened by entrenched inflation—which reached 11.09% in November, the fastest pace in 20 months—and a trade deficit which the government expects to reach $12 billion this year. Combined, they have undermined the Vietnamese dong and triggered three devaluations of the local currency since late last year.

After the State Bank of Vietnam lifted its benchmark rate on dong-denominated loans by one percentage point last month, the government has unveiled a series of new policies to ease the pressure, but to little effect. Economists say the country’s worsening problems, and the impact they could have on its dwindling currency, might also worry textile and agricultural producers in countries like Thailand and Indonesia which compete with Vietnam in those sectors.

Vinashin, formally known as Vietnam Shipbuilding Industry Group, was among a series of state-owned conglomerates that expanded rapidly in recent years in a government-led effort to keep key sectors of the Vietnamese government in state hands. Because the financially strapped company has state backing, lenders consider the dispute a litmus test of the creditworthiness of Vietnam’s sprawling state enterprises as well as its overall economy.

Vinashin borrowed aggressively with the encouragement of the government in the hope of becoming a global player in the shipbuilding industry. The global financial crisis hit Vinashin hard when clients cancelled billions of dollars in orders, leaving the company on the brink of collapse this summer with around $4.4 billion in debts.

In defaulting on the debt, Vinashin has added to a catalog of problems afflicting Vietnam. Some analysts see Vinashin’s default as potentially a make-or-break moment for Vietnam. By choosing not to bail out the company, says Kevin Grice, an economist with London-based Capital Economics, Vietnam’s government is sending a message to other large state-owned enterprises to put their own houses in order and to root out the inefficiency that plagues the state sector here.

Reducing the moral hazard might be on the government’s mind, but so too might be Vietnam’s paltry foreign reserves. The $14 billion the IMF reported Vietnam as having at the end of September is “barely enough to cover short-term debt of around $6 billion to $7 billion and a wide trade deficit of $12 billion” that the government projects for this year, notes Ju Wang, a credit-markets strategist with UBS AG in Singapore.

The Asian Development Bank foresees risks centred on any premature easing of monetary or fiscal policies, or a perception of looser policy by financial markets and domestic investors.

“An early easing, or the perception of a relaxation, could derail the macroeconomic stabilization efforts, putting inflation on an upward trajectory and pressure on external accounts,” it warns.

The World Bank and the IMF, among others, are urging the country’s leadership to put the brakes on rapid economic growth and focus instead on curbing inflation and buttressing the dong, which has also been taking a beating in recent weeks with the black-market rate for dollars sometimes reaching 21,500 dong compared with Friday’s official rate of 18,498 dong—a premium of around 15%.

The Agency France-Presse reports rising food prices are expected to push Vietnam’s inflation rate to more than nine per cent this year, data showed Friday, piling pressure on the country’s leaders to restore economic stability.

Meanwhile, the AFP also reported on the weekend that around 24,000 workers at two South Korean plants in Vietnam have gone on strike over pay, bonuses and lunar new year holidays. In principle, workers need permission 20 days ahead of time before going on strike in Vietnam, where all labour confederations are state-controlled.

At the Tae Kwang Vina footware company in southern Dong Nai province, almost 20,000 employees refused to work Thursday and Friday, a company employee told AFP, declining to be named. She said management had agreed that the Tet lunar new year holidays could last eight days “but have not said anything regarding the requests for an increase in basic salary and Tet bonus”.

Tet falls on February 3 in 2011 and is the most important holiday for Vietnamese people. The employee said basic salary at the South Korean owned plant is now 1.3 million dong a month (65 dollars). This is roughly in line with what the government says is the country’s average monthly income of 1.365 million dong.

At a second South Korean-owned factory, also in Dong Nai province, 4,000 workers from the Namyang garment company did not turn up for work on Thursday in a demand for higher wages, Thanh Nien newspaper said.

At the Communist Party’s Congress which begins Jan 11th, Vietnam has a chance to change course and adopt a more prudent growth trajectory. The congress is set to select a new party chief and also recommend a new president of the country’s rubber-stamp legislature while determining whether the key figure, the premier, Mr. Dung, keeps his job for a second, five-year term. It will also set the country’s economic-policy direction for the next five years.

Those familiar with the party’s policy discussions, however, say the country’s top rulers are unwilling to make a break from their high-growth policies. “The changes at the top—if there are any—won’t mean a thing if the policies remain the same,” says a person with knowledge of the deliberations. Vietnam’s leadership seem unable to learn the lessons of loose credit policies from earlier crises in the region, with the central bank estimating credit will expand 28% this year from 2009.

Economists say part of the problem is that the party promotes officials based on their ability to hit growth targets, fill quotas and complete five-year plans. Often they hit these targets with little regard for the inflationary consequences or the spread of corruption that many analysts say is endemic here.

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No Representation Without Taxation?

December 27th, 2010 — 3:54am
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In a development with potentially huge ramifications, The Phnom Penh Post reports that a new national property tax would be implemented from January next year. The National Assembly passed the law for a tax in November 2009 on all real estate, including land, houses, apartments and other infrastructure constructed on that land.

This timely revenue producing levy should help to address the government’s budget deficit, but will only amount to around US$4 million to start with.

A committee for property evaluation would now be convened, the Real Estate Division chief at the Ministry of Economy and Finance, Norng Piseth, told The Post.

“We have prepared the prakas to establish a committee for property evaluation and we will start implementing tax collection on property from early 2011 next year, as the National Assembly requires,” he said.

According to the Prakas, the property tax will be calculated annually at 0.1% of the value of the property as based on market prices. Only those properties worth 100 million riel (US$25, 000) or more will be taxed. So a property valued at half a million dollars would only pay US$50 per year.

In its yearly assessment on Cambodia for 2010, the IMF said that long-term fiscal stability for the Kingdom required a broadening of its current very narrow tax base that is currently over-reliant on tariffs.

MEF deputy PM, Keat Chhon, is quoted by the Post as saying last year the new tax would help establish a “tax culture”, where the populace became accustomed to contributing to the government’s coffers. At the time, he said about 180,000 households would fall under the requirements to pay the new tax.

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The Christmas Message: Bah! Humbug

December 23rd, 2010 — 2:14am
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The first thing to recognise is that Christmas began as a pagan holiday when tree-worshipping Druids decided that they needed a festival to celebrate the winter solstice. After all, they needed something to takes their minds off the misery of the depth of winter in their northern fastness, with its long, freezing nights and short days. Feasting and getting sozzled only needed a rationale.

Thus was born what modern environmentalists refer to as “The Annual Fir Tree Massacre,” or Vegetarians as the “Yearly Mass Slaughter of Animals”, which has now been Americanised into an orgy of consumerism, overeating and road rage.

Actually, it all started in the early 4th Century, when the Roman Catholic Church, in its attempt to lure pagans away from their godless festivals, appropriated and re-branded the ‘birthday’ of Sol Invictus to make it acceptable to the Church.

Despite there being no evidence that Jesus Christ was born in December, the holiday became a celebration of his birth.

During the 16th and 17th centuries, the Puritans sought to remove the remaining pagan elements of Christmas as part of their total war against pleasure. The English Parliament even banned the celebration of Christmas entirely during this period, considering it “a popish festival with no biblical justification”, as well as a time of wasteful and immoral behaviour. Of course, they were right.

Today’s version of Christmas has come a long way since then.

In 1843, Charles Dickens helped revive the ‘spirit’ of Christmas when he published his hugely popular novel A Christmas Carol. Superimposing his secular vision of the celebration, Dickens emphasized many aspects of Christmas we recognise today, such as family gatherings, seasonal food and drink, dancing, games, and a festive generosity of spirit. Even ‘Merry Christmas’ was popularised following its appearance in the story.

The modern image of Santa Claus as we understand it today was, however, created in the United States, particularly New York. At his first American appearance in 1810, Santa Claus was drawn in bishops’ robes but as new artists took over, Santa Claus developed more secular attire. The German-American Thomas Nast drew a new image of “Santa Claus” annually, beginning in 1863. By the 1880s, Nast’s Santa had evolved into the robed, fur clad form we are familiar with now. The image was further standardized by advertisers in the 1920s, particularly in Coca Cola ads.

Modern variations of the folk legend associated with Santa Claus claims that he lives at the North Pole with his wife Mrs. Claus, a countless number of magical elves, and eight or nine flying reindeer. Another legend, popularised in the song Santa Claus Is Coming to Town, says that he makes a list of children throughout the world, categorizing them according to their behaviour (“naughty” or “nice”) and that he delivers presents, including toys, candy, and other gifts to all of the good boys and girls in the world and, sometimes, coal to the naughty children, on the single night of Christmas Eve. He accomplishes this feat with the aid of the elves who make the toys in the workshop and the reindeer who pull his sleigh. All this is of recent vintage.

Robert L. May created “Rudolph the Red Nosed Reindeer” in 1939 as an assignment for US retailer Montgomery Ward. May considered naming the reindeer “Rollo” and “Reginald” before deciding upon using the name “Rudolph”. 2.4 million copies of May’s story were distributed in its first year of publication alone. The story is written as a poem in the meter of “Twas the Night Before Christmas“. Then May’s brother-in-law, Johnny Marks, decided to adapt the story into a song, which was popularised by Gene Audry in 1949 and, a year later, by Bing Crosby .

Today, family reunions where people who have managed to avoid each other all year come together to get drunk and make fools of themselves are a modern feature of the festival. The exchange of gifts, usually things bought at bargain basements and received begrudgingly, are a widespread ritual, and usually takes place on Christmas Day in most countries.

One of the consequences, according to the new litmus test for everything, a new Facebook survey shows relationship splits spike dramatically during Christmas http://www.theglobeandmail.com/life/holiday/the-christmas-breakup-dropping-the-mistletoe-bomb/article1831953/ . Many people apparently discover they just can’t face their ‘significant other’ in the atmosphere of forced merriment of the festive season. The disinhibiting effects of alcohol is often a factor.

Increasingly, Christmas Day is celebrated as a major festival (but not necessarily as a public holiday) even in countries whose populations are mostly non-Christian. In some of these, former colonial powers introduced the celebration. Others, such as Japan and Korea, have adopted many of the secular aspects of Christmas, such as gift-giving, decorations and Christmas trees as their own, encouraged by department stores. Again we probably have the Americans to thank for this.

In yet other countries, such as India and Indonesia, merchants trying to cash in on the Christmas spirit have met resistance from local nationalists and religious hardliners who see Christmas as an alien import. 

“Festivus for the rest of us”

Even in the West there has been resistance from secular groups or non-Christians who resent the religious overtones of the celebration. One of the lighter-hearted versions is Festivus, a anti-commercial, secular ‘holiday’ celebrated on December 23, created by writer Dan O’Keefe and introduced into popular culture via TV’s Seinfeld http://www.youtube.com/watch?v=c8g4Ztf7hIM , as part of a comical storyline on the show. Some of the holiday’s unique characteristics, as shown on Seinfeld, include an unadorned aluminum “Festivus pole“, practices such as the “Airing of Grievances” and questionable “Feats of Strength,” and the labeling of easily explainable events as “Festivus miracles“.

Finally….

Just before Christmas, an honest politician, a generous lawyer and Santa Claus got into the lift (elevator) at the Ritz Hotel in London. As the lift traveled from the 5th floor down to the ground level, one-by-one they noticed a £50 note lying on the lift’s floor.

Which one picked up the £50 note, and handed it in at reception?

Santa of course, the other two don’t actually exist!

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Buying Friends and Influencing People

December 23rd, 2010 — 1:50am
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Former Far East Economic Review journalist, Shawn Crispin writes that special concessions ceded by Lao to China as a quid pro quo for the official aid, grants and non-interest loans now include the right to import unskilled Chinese labour for Chinese-funded projects.

With China’s generous financial aid influencing government policies in Beijing’s favour, it has made its deepest investment inroads in states governed by similarly authoritarian regimes, namely Cambodia, Laos, Myanmar and Vietnam. However these are countries often desperate to create jobs for their own populations.

Laos, he says, is fast emerging as the model that Chinese mercantilism may take across the region – part of new outward wave of Chinese migration of potentially historic proportions to relieve population and resource pressures at home in China. Whether this can be successful without arousing a nationalist backlash in these countries – as has often happened before – is a risk China may be underestimating.    http://www.atimes.com/atimes/Southeast_Asia/LL23Ae01.html

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China: Soon to be Number 1? Maybe

December 22nd, 2010 — 7:54am
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China has every reason to feel proud of its economic achievements in 2010. While the US, the EU and many other countries were still struggling for economic recovery in the aftermath of the GFC that started two years ago, China has replaced Japan as the world’s second-largest economy.

According to a 2011 Social Blue Paper issued on December 15 by a top Chinese think-tank, the Institute of Sociology under the Chinese Academy of Social Sciences (CASS), China’s gross domestic product (GDP) may have grown about 10% in 2010, to reach 37 trillion yuan (US$5.56 trillion) – with per capita GDP amounting to around US$4,000.

Personal income also grew. In the first three quarters of this year, per-capita disposable income for urban residents reached 14,334 yuan on average, up 7.5% year-on-year after inflation. Per-capita cash income for rural residents was 4,869 yuan during the period, up 9.7% after inflation.

The Economist reports that the Conference Board, a highly respected economic research association (www.conference-board.org), is predicting China could become the world’s largest economy as soon as 2012 on a purchasing-power-parity (PPP) basis.

However, economists disagree on how to measure PPP, with many arguing that America will only really be eclipsed when China’s GDP outstrips it in plain dollar terms, converted at market exchange rates.

Moreover, Vice Premier Li Keqiang, widely expected to become the country’s next premier, acknowledged a few years back that China’s GDP figures are “man-made” and “therefore unreliable”, according to a diplomatic cable recently released by Wikileaks.

Nevertheless, when Goldman Sachs made its first forecasts for the BRIC economies (Brazil, Russia, India and China) in 2003, it predicted that China would overtake America in 2041. Now it says 2027. In November, Standard Chartered Bank forecast that it will happen by 2020.

This is partly the result of the impact of the financial crisis. In the third quarter of 2010 America’s real GDP was still below its level in December 2007; China’s GDP grew by 28% over the same period. If real GDP in China and America continued to grow at the same annual average pace as over the past ten years (10.5% and 1.7% respectively) and nothing else changed, China’s GDP would overtake America’s in 2022.

But crude extrapolation of the past is a poor predictor of the future: recall the forecasts in the mid-1980s that Japan was set to become the world’s largest economy. China’s growth rate is bound to slow in coming years as its working-age population starts to shrink and productivity growth declines.

Moreover, even as sales in China continue to soar, margins have been meagre for Chinese businesses. These have been on a protracted slide that shows no sign of stabilising, says Macquarie’s Asia strategist, Michael Kurtz, reported in The Economist. Exporters’ margins are often less than 2%, if China’s Minister of Commerce is to be believed. Firms in the southern Chinese manufacturing belt are now being painfully squeezed.

This is because the Chinese government is attempting to phase out subsidies to industry while at the same time relaxing energy-price controls. And workers are demanding higher salaries. Environmental standards, too, are being tightened. All these trends hurt profits, yet the government appearing willing to let them continue. It wants ordinary people to enjoy more of the fruits of growth: happy citizens are less likely to riot or demand the right to vote.

Researchers for the Blue Paper found, despite these changes, ordinary people in China generally feel less satisfied about these developments and more concerned about their future than all the positive statistics would suggest. In fact, most Chinese think their living standards deteriorated rather than improved in 2010, and are losing confidence in the government’s handling of economic, social and foreign affairs.

Dissatisfaction with inflation is a major reason for people’s waning confidence in their government, the result of their incomes not growing in step with the economy, inflation and housing prices, combined with the absence of a comprehensive social security system, as well as the widening wealth gap.

About 75.5% of respondents to a survey in November by the People’s Bank of China (PBoC) said property prices are too high, the highest rate since the central bank started surveying home prices in 2009, with 43.3% of respondents expecting property prices to continue to rise.

Meanwhile, the Shanghai Composite Stock Market Index is the worst performer among major Asian benchmarks this year on concern that monetary tightening will curb economic growth. The measure is down 14% this year.

The Blue Paper says the Gini coefficient, a measure of the inequality of wealth distribution, is now about 0.5, well above the internationally recognized red-alert level of 0.4. In 1984, the Gini coefficient in China was just 0.26. In other words, in 25 years, China has gone from being a country with fair equality to one with great inequality of wealth distribution.

China’s per capita income may have increased a stunning 21-fold over the last four decades, lifting hundreds of millions out of income poverty, yet China was not among the region’s top performers in improving school enrolment and life expectancy.

Public discontent is one of the biggest challenges to social stability and the Communist Party’s control of power. The government is clearly aware of this. Whether they can do much about it is the big question?

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