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Economic Research

Macro Commentary

March 2011

Vietnam

Alan T. Pham, PhD

Chief Economist

VinaSecurities

Sunwah Tower, 5F

115 Nguyen Hue, District 1,Ho Chi Minh City, Viet Nam

T: +848 3827 8278F: +848 3827 8368

E: [email protected]: www.vinasecurities.comBloomberg: VNSC <GO>

Economic Research

Alan Pham, PhD, Chief EconomistNguyen The Cam Hoan, Manager

Huynh Phu Sy, AnalystT: +848 3827 8278

F: +848 3827 8368

E: [email protected]

THE JAPANESE EARTHQUAKE:

ECONOMIC IMPACT ON VIETNAM

I. Background

On Mar 11, 2011 an earthquake measured at 9.0 on the Richter scale

struck the Sendai region in north east Japan. It was followed by a

tsunami wave that hit the shore, causing widespread damage and loss

of life.

At last report, the number of deaths was put at 6,000. Total damages

were estimated by insurance companies at more than USD300 bn.

This number is sure to increase as a more careful survey of the

devastated areas is made by insurance agents. Capturing most of the headlines was a radiation leak at the Fukushima

Dai-Ichi nuclear generator. The danger from this source, if any, is said

to be limited geographically to Japan. But such news tends to carry an

emotional effect, because similar reactors are used in other countries

to generate electricity.

II. Analysis

1. Implication for the world economy

The global impact deriving from this disaster is likely to be limited.

During the Kobe earthquake of 1995, all production facilities were

back in operations within 9 months to 1 year.

There may be disruptions of supplies in electronic components for

industries in other Asian countries. Auto parts for Japanese factories

in Europe and the US may be in short supply for some time. However,

most factories do carry a supply buffer for such an emergency

situation.

The yen grew stronger in the immediate aftermath due to Japanese

investors repatriating capital for re-building the home country.

Insurance companies also sell some foreign investments to bring back

money for paying claims.

There is a short term decline in Japanese demand for oil due to lower

industrial production activity in-country. Japan’s trade balance would

tend to improve, boosting the yen. A fall in Japanese oil demand can

soften the world price of crude, further reducing the country’s oil

import bill.

The BOJ reaction was typical of any central bank in a case of national

emergency: it flooded the market with liquidity to ensure that all

business operations can carry on normally. It stands by to continue

this assistance as long as necessary.

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III. Implications for Vietnam

1. Impact on ODA flows - FDI and FII investment programs.

There would be minimal impact on ODA programs. Compared to the whole budget of this country,

such programs are small. Japan has a major role to play in Asia over a long term, and would fulfillits obligations under these bilateral aid programs.

In 2010, Japan committed USD2.2 bn or 12% of the total ODA amount decided at the CG

(Consultative Group) meeting in HaNoi. The magnitude of this commitment would likely remain

intact.

We note that a rising Yen can increase the DSC (debt service charge) on ODA loans from Japan. VN

will need to get USD to buy Yen for this purpose (the dong being inconvertible vis a vis the Yen).

With the VND depreciating against both currencies, the debt servicing cost is expected to be

higher.

FDI and FII flows are not expected to decline, even though some delay in disbursements can

happen in the short run as an assessment is made of the quake’s total impact. Furthermore,Vietnam has been selected by many Japanese companies as a promising market for their

operations in Asia, after China. Even after the earthquake, Vietnam’s intrinsic merits as an

investment destination remain as valid as before.

After this event, there is increased demand in Japan for basic items such as foodstuffs, especially

rice. Vietnam companies which export these commodities may find opportunities to increase

business due to their geographical proximity to Japan. In 2010, Vietnam ‘s exports to Japan totaled

USD8 bn, comprising mostly of basic commodities with low demand-elasticity. Thus, their volume

and value would likely not change a great deal . In 2010, Japan ranked as the 4th most important

trading partner with Vietnam in terms of combined exports & imports value.

I. TRADE DEFICITUSA

36%

Japan

19%

China

17%

Swizterland

8%

Korea

7%

Australia

7%

Germany

6%

Vietnam Top Exports by country - 2010

China

32%

Korea

16%Japan

14%

Taiwan11%

Thailand

9%

Singapore

7%USA

6%

Malaysia

5%

Vietnam Top Imports by country - 2010

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Economic Research

2. Impact on tourism.

This is one sector where an immediate impact is felt. There are yet no exact estimates, but many

tourist companies have reported cancellations of plans by Japanese tourists in coming to Vietnam.

Saigon Tourist cancelled a tour by about 100 Vietnamese tourists going to Japan for seeing cherry

blossoms in April, with a booking price of 2500 USD per person. Vietnam Airlines would see a decline in its business of flying passengers both to and from Japan.

Japan is its most important foreign market and is closely linked to the tourist trade. After the

quake, shares of the VinPearl Joint Stock company, which owned resort facilities catering to

Japanese tourists, fell 5 per cent. The company estimates that the number of arrivals from Japan

would decline by one third this year.

3. Impact on the garments and sea foods industries.

In the 1990’s Japan was an important customer of our sea foods, buying about 80% of Vietnam’s

sea foods export. From 2000 onwards, with a larger outlet to the US and EU, Japan’s share has

fallen, but till stayed at about 35%. Furthermore, Japan tends to buy the high-end of sea foods

products, with high content value. After the quake, industry sources are expecting a disruption in

these normal trade flows. A precise evaluation is not yet possible, but a decline in near term

shipments is possible.

A similar impact would be felt in the export of garments, foot wear. In 2010, Japan accounted for

USD1.2bn (or 12%) of total exports by this industry. For 2011, initial calculations point to an

increase in share to 18% by Japan. After the quake, all these prospects are in doubt. A short term

result is likely to be cancellation of many export orders, and the industry is bracing for that.

VN also imports more than USD1bn of electronic components from Japan (LED screens, high-end

computer chips and motherboards). The shut down of earthquake damaged factories interrupted

this supply source. As a result, in recent days, prices of electronic products have risen on localmarkets.

Besides the direct effect on export order of garments and sea foods, the quake shut down or

damaged many sea ports on the east coast of Japan. Such transportation disruptions also have an

impact on Vietnam goods that arrive by ships, such as clothing and foodstuffs. Sea foods are

susceptible to rapid spoilage if transportation cannot smoothly convey them to markets. Air

transport is more expensive and would cut into profit margins.

1,154

920

903

894455

3,401

Vietnam Export Goods to Japan (mil USD) - 2010

Textile, sewing products

Electrical wire and cable

Machinery, instrument,

accessory

Seafood

Wood and wooden

products

Others

2,551

1,241

1,027

403

400

3,395

Vietnam Import Goods from Japan (mil USD) - 2010

Machinery, instrument, access

ory

Iron, Steel

Computers, Electronical

products & parts

Articles of plastics

Parts and accessories for

motor

Others

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Economic Research

4. Bottom line

The earthquake will have real impact on Vietnam’s economic relationships with Japan.

Hard estimates are not immediately available.

The total magnitude is not likely to be major, but would be felt in a few particular industries.

ODA programs come from the national budget and is unlikely to be cut back due to (i) its smallrelative size, (ii) Japan’s long term interest in playing an important role in Asia.

FDI and FII flows are motivated by Vietnam’s advantages as a good investment destination. Many

Japanese companies and businesses have affirmed this estimation. It is not likely to be changed

after an earthquake in Japan.

Three industries will be directly affected by a fall in business from Japan.

o Tourism

o Garments, footwear

o Sea foods

A small decline is expected in the short run, but over a medium term, the value of these products

from Vietnam would re-assert themselves, and the decline would likely be reversed.

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