Infrastructure

WE WANT THE RANKS TO GO DOWN (#1 IS THE BEST) AND THE SCORES TO GO UP (5.0 IS THE HIGHEST). SOURCE: WORLD BANK

Infrastructure. Vietnam needs it. Train is not good. Roads aren’t great. No metros. Airports at capacity. Big transport expressways to other countries not great. But this should soon change, at least in the south.

The government is proposing a new road from HCMC to the Cambodian border. At a cost of $459 million, hopefully funded by the private sector in a public-private partnership (PPP). The provinces will pay for the land clearances which are 28% of the total cost. The overall cost is $8.6 million per kilometer (including land clearance, $6.2m without). Recently, construction on an expressway in the north (from the Van Don Economic Zone to Mong Cai) began, also funded by a PPP. That will cost $6.1 million per kilometer, but I am not sure if it includes land clearance, and even if it does, land probably costs less there than around HCMC.

2018 RANKINGS. SOURCE: WORLD BANK

At some point, I want to look at road construction cost in different countries. That’s on my list.

I have been hearing that transport is a real bottleneck for Vietnam. So I wanted to do a little work on where the country is, in terms of infrastructure. I found this Logistic Performance Index (LPI). It is an index created by the World Bank to see how countries are doing in terms of trade logistics.

Where does Vietnam stand? Well, they aren’t that bad and are improving. Hitting well above their weight. The country is something like 159th in terms of GDP per capita, but is 39 on this LPI. Infrastructure is a bit worse than that with a rank of 47th overall, but that’s still not bad, well into the top third. And Vietnam was as low as 64th in the world but has been consistently in the mid-50s for overall and high-60s on infrastructure.

Among its ASEAN siblings, it is ranked very well, better than all except Thailand. On infrastructure specifically, it is a bit worse than both Thailand and Malaysia, but just a bit. I can’t help think that Singapore pulls Malaysia up a bit. Singapore is ranked 7th in the world. Among low-income countries it is the best.

What needs improving? Well, lots of stuff. But according to a survey of logistics professionals, rail needs the most improvement, then roads and warehousing. Ports are alright, airports a bit better and telecom and IT pretty good. And in terms of improvement, 70% of respondents say that trade and transport infrastructure has improved. (See 2018 survey results below).

So while there needs to be big investment in infrastructure, Vietnam is actually doing pretty well. If it continues to want to compete, it probably needs to do even more investment. These PPP projects are probably a good way to help sidestep some of the capex, in the near term.

FOR 2018 LPI REPORT. NOTE: “FOR THIS MEASURE, SURVEYED LOGISTICS PROFESSIONALS ASSESS THE LOGISTICS ENVIRONMENTS IN THEIR OWN COUNTRIES.” SOURCE: WORLD BANK

Scooters!

SOURCE: @MUSICFOX

Ok, got to be honest here, this is not a post about Vietnam. I am endlessly fascinated by the sharing economy, and especially the companies that are in public transportation. In Vietnam, that’s mainly Grab and Go-JEK. Grab has the pole position, but Go-JEK just hired the former head of Facebook Vietnam (who co-founded Misfit, acquired by Fossil in 2015). Plus, there are a lot of smaller companies that are competing. These all have interesting business models that may not be sustainable. I think that the cost of switching these ride-hailing services (from the passenger and the driver perspective) is so low that there is really no barrier to entry. That means if a player pushes on prices or wages, they will win, at least in the short term.

But so far, none of these companies have brought in scooters to Vietnam, which have been the big new thing in the US and Europe. Bird went from nothing to 10 million rides in one year. None of the companies in Vietnam have these scooters yet, but I could see this as a potential market over time, if the unit economics work.

Oh, and scooters do not mean mopeds or bikes, but the tiny things that used to be the exclusive domain of children.

SOURCE: THE INFORMATION, VIETECON.COM

The big stumbling block is the economics on a per unit basis. According to some research, scooters at the beginning of the trend had revenues of just $75 over their lifetime, but cost $550. That is not good. That’s a big $475 loss per scooter.

To answer this concern, a VC, Mark Suster, wrote this Medium post. He is an investor in Bird, the largest scooter company in the US, so he is definitely “talking his book.” His view is that unit economics have been bad, but they are going to get much better. Plus, the technology will be so good that it will mean both a profit and barriers to entry for new competitors. Plus, while it is capital intensive at first, over time that will not be true. A few points:

• I feel like everyone at the beginning of this journey thought that scooters would be like other ride-hailing companies. Not capital intensive, but then realized they need to provide all the scooters. I am sure that is not true, but it kind of seems like it. They need to buy lots of scooters, then buy lots more scooters when those fall apart.

• In the US, there are about 250 million people that live in urban areas, but if you look at those that live in dense neighborhoods, it’s more like 20% of this, or 50 million. If 5% of these people take a ride once a day (which seems fairly high), that would be 2.5 million riders a day.

• Assuming each rider averages 2 rides per day, that would mean 5 million rides. Scooters generally make 5 rides a day now, according to data from the Information and Louisville. That means there need to be 1 million scooters on the road at any time. Over time this will likely fall, as the average utilization could rise from 5 rides per day to 10.

• Scooters are currently expensive. Bird said that it spent $550 at the beginning, and that it wants that to fall to $360 for a more durable scooter. Over time, these costs may fall (as battery prices fall) or increase in order to make them more durable. Suster doesn’t really talk about scooter costs, just that the new scooters are 60% more efficient and durable.

• If there need to be 1 million scooters at an average cost of $360, then that’s $360m for scooters at a time. Assuming these last 3 months, the companies need to spend $1.4bn per year. This could fall to $720m as rides per scooter per day increases and then down to $360m as the life of the scooter increases to 6 months.

We could easily reach a situation where gross margins for scooters are high (based on certain assumptions, I could see them reach 32% after depreciation. And if the numbers are large enough, that would cover staff and R&D (operating expenses outside of COGS). See table above (as you move left, I make changes to the costs/revenues to reflect improvements to see what has the largest impact - at the end, we get high gross profit per scooter).

But one of the problems is that we are going to have some people that ride a lot. Say 3-4 times a day, 5 times a week. If the cost to that person is the current revenue of $3.65 to the scooter company, that means the weekly cost is $73. You can buy a scooter for just 7 weeks of riding. So your power users could just buy their own to save money. Maybe this would only be a small problem, but it would mean that some of your best users may leave the service.

Otherwise, completely outsourcing the manufacturing of scooters, like companies did at the beginning, is not a good model. Bird has to invest, with its manufacturing partner, lots of time and effort to get the right scooter. Other companies will have to do the same, and that will be expensive. Bird is also looking to franchise the model into other countries, in order to lower their capex. Given current unit economics, paying another 20% of revenue would be unprofitable.

Ultimately, I thought that Suster put out a compelling narrative but without numbers. I think it will be interesting how all of this changes over time. I have ridden a scooter in Santa Monica (highly recommend) but it was extremely expensive (more expensive than for an Uber ride over the same ground). I think there is a place for scooters, and it will probably be in cities with good weather, public transport that is good but not amazing (so one needs a scooter for the last mile), and at a reasonable price.

Climate change and what it has already done to us

Usually when we think about climate change, we think about the impact it will have on our children, our children’s children, our children’s children’s children, our children’s children’s children’s children….. Maybe we also think about floods, hurricanes, fires, melting glaciers, all of the things happening now that are caused (in part at least) by global warming. We don’t generally think about climate change as something that has already had a major impact.

NOTE: THIS REFLECTS THE PERIOD FROM 1996-2010 BECAUSE DATA WAS NOT AVAILABLE FOR THE FULL PERIOD. SOURCE: NOAH DIFFENBAUGH AND MARSHALL BURKE.

That’s why I was surprised by a new Stanford study that says that climate change has already hurt economic growth and widened income inequality.

The gap between the economic output of the world’s richest and poorest countries is 25 percent larger today than it would have been without global warming

The theory is that certain temperatures are good for economic growth. Richer countries are actually the colder ones right now, and they have benefited from warming. Meanwhile, many hot countries are poor, so that additional warming actually hurts their economic growth.

The majority of the world’s population is worse off. India’s economic growth is 31% lower in the period 1960 to 2010 than it would be. Other big countries have also been hurt a lot: Nigeria (-29%), and Brazil (-25%). But even China (-1.4%) and the US (-0.2%) are worse off. Colder countries like Canada, Norway and Sweden, and even countries that are not really considered to be so cold, like France and Great Britain have all seen higher economic growth since 1960.

ASEAN has been hard hit. Every country has been impacted negatively. Vietnam’s GDP per capita would be 11% better without climate change, while Indonesia is 16% off. But all of the countries have estimated GDP losses, and all are impacted by climate change. Future warming is going to much worse for these countries as well, because they are already hot.

There are a few questions that I have:

How were colder countries richer, if temperature is so determinative of economic growth. My answer would be that there are a number of reasons why these countries grew rich. Also that the change in climate is more important than levels, especially the changes we have seen already in a short time. There is a small hint of this in the write-up of the research:

The study builds on previous research in which Burke and co-authors analyzed 50 years of annual temperature and GDP measurements for 165 countries to estimate the effects of temperature fluctuations on economic growth. They demonstrated that growth during warmer than average years has accelerated in cool nations and slowed in warm nations.

Also, these are just estimates of potential economic growth (decline), not objective measurements. Scientists have a good idea of how much warmer countries are already, and the researchers estimated how GDP changes for each level of warming. They then ran lots of scenarios and came up with potential ranges, of which these numbers represent the median.

But even with these, it seems like the trends are correct and are scary. We will see if this continues to stand. But it is not good for Vietnam or the rest of ASEAN or the world.

Plastic bags

On March 7, I wrote a small post on a company making straws out of rice flour instead of plastic. Now two chains are using banana leaves to wrap some vegetables.

Vegetables such as squash, spring onions, maize and okra wrapped in banana leaves can be seen in the stores of the supermarket chains Saigon Co.op and Lotte Mart…Le Minh Hieu, a representative of Saigon Co.op, said that many Co.opmart supermarkets, Co.op Xtra hypermarkets, Co.op Food stores and Co.op Smile convenient stores in HCM City are carrying out the practice…“We don’t charge more for vegetables wrapped in banana leaves. You might think that natural wrapping costs more, but, in fact, it doesn’t,” he said. “While we have to employ a machinery line for plastic packaging, banana leaf wrapping requires manpower,” he explained, adding that banana leaves remain fresh for one to two days.

It’s amazing to me that people are trying to move away from plastic so quickly. Of course, I recently listened to a podcast with David Wallace-Wells, who wrote The Uninhabitable Earth, and he said that it was not really a solution. But he said, and I agree, do something, but understand that what you do is of little importance. Because it is a collective action problem, we need a bigger solution than something that any individual can do.

In other environmental news, USAID launched a $183m clean-up of an Agent Orange site. It is an old airbase near HCMC that the US military used to store the chemical:

At Bien Hoa, more than 500,000 cubic metres of dioxin had contaminated the soil and sediment, making it the "largest remaining hotspot" in Vietnam, said a statement from the US development agency USAID, which kicked off a 10-year remediation effort on Saturday…The dioxin amounts in Bien Hoa are four times more than the volume cleaned up at Danang airport, a six-year $110 million effort which was completed in November.

The US is not that great dealing with its past sins. Look at the Native Americans in the US. For Vietnam, it still doesn’t admit a link between the chemical and birth defects. But Vietnam has decided to move beyond that, and the US has started doing a few things to help people. Good.

Finally, a good investment summary of Vietnam can be found here. Conclusion:

Vietnam is still one of the most favoured markets amongst frontier investors given its robust economic growth, stable macroeconomic outlook, ability to attract foreign direct investments and now an increasing consensus that the country is expected to benefit from the trade tensions between China and the U.S.

Happy Easter, belatedly, for all those that celebrate. Happy Passover for those that celebrate that.

South China Sea

This blog has entered into the political realm more than I expected (or wanted), over the past few days. I think it is probably because I am intensely interested in politics, plus, we are seeing that politics are extremely important in economics. For example, the trade tension (war?) between China and Vietnam is having significant effects on all the countries of Asia and the world. Vietnam, in particular, is seeing increased foreign investment because of this. And politics matters a lot to economic growth and therefore predictions of economic growth.

So I was interested to see more news on the South China Sea, specifically, Vietnam has built up 10 islets there. These are in the Spratley islands, which are claimed by China and the Philippines as well. And the government hopes the islets are self-sustaining and are not easy for China to take over easily.

CSIS, the home of the panel I attended yesterday, has a Asia Maritime Transparency Initiative that follows all of this. A recent report from them said:

“Development of military-controlled islands that Vietnam has occupied for decades in the South China Sea’s Spratly Island chain involves landfill work plus installation of solar panels on some buildings, the initiative report says. The report points also to 25 “pillbox” forts that Vietnam has built on sometimes submerged reefs or banks.”

The original VOA story says that any disputes between the ASEAN countries have been easily settled, but the bigger dispute between China and these countries are more difficult. I found two quotes interesting and somewhat mutually exclusive.

• China normally leaves Vietnam alone at sea because they have shown a willingness to “bump shoulders” with Chinese vessels if pushed, he said.

• China and the Philippines have complained occasionally to Vietnam over the years because its islets fall into their claims. But the complaints fade because the other countries do not see Vietnam as a threat, scholars believe.

Foreign policy experts see conflict in the South China Sea as one of the major concerns in the near- to medium-term. Japan and the US have been supportive of the Philippines and Vietnam in their disputes. As we talked about two days ago, the Thucydides trap is real, and South China Sea could be a flashpoint. Vietnam’s strategy of building defensive forts in the sea is probably the best way to go, although the more there are and the bigger they grow, the bigger the threat.

Lots of pictures of these tiny islands in the South China Sea can be found here.

Indonesian Elections

Today, I had the luck to go to a small panel discussion at CSIS on the just-completed Indonesian elections. I know even less about Indonesia than I do about Vietnam (which is saying a lot), and so it was very interesting to me. Also, shame on me for not knowing more about the fourth largest country in the world, and the largest in ASEAN.

It sounds like the results (Joko Widodo won the presidency) were a bit different than the polls, and maybe a bit surprising in terms of trends but not in final results (Widodo was the favorite). The first speaker, Ann Marie Murphy, pointed to a few negative trends in campaigning:

• The rise of Islamic majoritarianism, not just the rhetoric (which was not great), but also the fact that Widodo was forced to take on Ma’ruf Amin as his vice president. (Although, personally as an Arabic speaker and Middle East fan, I feel pretty comfortable in this sort of milieu, plus the names make sense to my ears). One interesting stat was that in 2016, 42.3% of Muslims objected to non-Muslims holding office, which is shocking. More shocking is the fact that it is getting worse: 54.6% objected in 2018. (Murphy sourced this from Mietzner).

• Widodo’s response was to co-opt the Islamic movement by appointing the VP, giving patronage to the NU, and demonstrating personal piety. But he also reacted by banning an Islamist party, targeting Muslim preachers from Prabowo’s camp, and used security forces to stop anti-Joko protests. This last is especially troubling, because it is the first time that the security forces have been used in this fashion since Suharto.

• The decline of political parties. There was a change in 2009 in election laws that moved parties from closed party lists to open lists. Party identification fell from 80% to 10-20% after this change. The impetus behind this was to ensure that politicians were accountable to local voters. But now without party funding, local elites (who fund the campaigns) control the politicians. Also, local bureaucrats are advantaged as well.

The other speaker, Adam Schwarz from Asia Group Advisors, was a bit more positive. His view is that Widodo has the more pluralistic, open and liberal worldview, and he won cleanly. The “more Trump-ian view of the world” held by Prabowo lost.

• One point is that the Indonesian government asked all 240,000 candidates to fill out a small questionnaire with basic data (name, age, marital status, whether you have been convicted of corruption), but also to include a small personal statement on why you are running. 100,000 candidates filled it out the form, and of those 60-70,000 included a statement. But only a small minority made overt appeals to religion.

• Generally, the national candidates leaned on religious rhetoric, but the local candidates did not.

• On the subject of VP Amin, Widodo is very unlikely to use him much. He didn’t lean on Kalla, the previous VP, who had much more experience.

In Schwarz’s view, Widodo’s focus on infrastructure really came through in the first term. He built 10 new airports, 800km of toll roads, 100,000 kms of roads, will get to about 15gw of new power generation. He kept the deficit down (less than 3% of GDP), despite limited tax revenues. In fact, Widodo may have been too conservative (which at first glance I agree with - see my series on MMT last week).

Schwarz’s wish list for the the next term are:

1. Increasing the tax ratio from 9% (see my post from yesterday about Vietnam’s tax ratio, which is almost double).

2. Handle state enterprise growth (which have assets equal to 50% of GDP and are moving into ancillary businesses), which are starting to crowd out domestic and foreign private businesses.

3. Deregulate and loosen regulations to improve competitiveness.

4. Engage more with the global economy (Indonesia is not in the TPP)

5. Greater coordination and control of policy implementation (there needs to be greater focus on implementation than new policy).

There were a bunch of interesting questions from the moderator and the audience (lots of old Indonesian hands attended). The best was on Prabowo. The questioner said that he was the “biggest a$$hole” he had ever met and wanted to know if would he leave the scene after this defeat. Both speakers seems to think that Prabowo would no longer be a force, but that his vice presidential candidate, Sandiago Uno, is now well-placed. Others agree.

I think it will be interesting to see if Indonesia takes a greater leadership role within ASEAN over the next presidential term. Vietnam surely is vying for a bigger role, especially after the Trump summit. But the absence of the most populous country is noticeable.

TAXES!

This is the week for taxes in the US, and I was listening to a podcast on taxes and the IRS and the sh!t-show that is the US tax system. So of course, I started to think about Vietnamese taxes, specifically personal income taxes. Which at first glance seem higher than I expected, although after digging a bit deeper affect very few people. The high end of the scale is 35%, which hits after $42,000. But with standard deductions of VND9m a month plus more for children, it hits very few people. Two simple calculations:

SOURCE: PWC

• High-level expat manager making $150,000 a year. Turns out the expat part is meaningless. She will pay taxes like all Vietnamese. Let’s assume she has 2 kids, and is able to deduct VND3.6m monthly for each, along with a starting VND9m monthly deduction. So that means: VND3480 - (108 + 3.6 x2x12) = 3480. Tax = 60 x 5% + 60 x 10% + 96 x 15% + 168 x 20% + 240 x 25% + 336 x 30% + 2,425 x 35% = VND1066. Ultimately that means 31% of gross income. As you get higher and higher, it gets closer and closer to 35% tax.

• Expat teacher making $30,000 a year. This looks like an extremely high salary, based on what I’ve seen. Assume 2 kids as well. That results in a tax of VND111m, or 16% of gross income.

There are other contributions to be made (unemployment, health insurance). But in some ways those are payments of services, or potential services.

SOURCE: WORLD BANK.

More importantly, the government has a VAT, which is 10% for most goods. The government tried to raise this to 12%, but reversed itself after pushback. A property tax is in the works as well, but of course real estate people are up in arms. Remember, no one likes taxes.

By my calculations, if someone has a $100,000 property, then they will pay just $279 a year. Doesn’t seem that big of a deal, to be honest. And if someone has a $100,000 property in Vietnam, they can probably afford $279 a year.

Anyway, putting this all together, it looks like all taxes are pretty comprehensive, albeit with personal income starting at a fairly high level so poor earners don’t pay that much. Look at the deductible: it starts at VND9m and goes up by the number of dependents. Compare that to the average monthly salary for highly skilled employees of around VND11m. Unskilled is much less than that. So basically, most people don’t pay the income tax.

So it is still somewhat surprising that the government revenue as a percentage of GDP is 17-18% (2010-12, the latest dates for which data are available). Corporate taxes are 20%, plus there are higher taxes on oil & gas and other natural resource enterprises (32-50%). It adds up to a figure well above ASEAN and the OECD levels. The US is only at 12%! Of course these tax figures exclude most social security contributions, which make up a big portion of “tax” payments in developed markets.

In the past 10 years, in 7 of them, the government made it easier to pay taxes (business or personal), either by simplifying them, lowering them or making some other change that “makes it easier to do business” in Vietnam. This is according to the World Bank. So it looks like the trend is for these taxes to go down. And the pushback on VAT and property taxes means it will be hard to raise them.

It will be interesting to see that figure of taxes fall or rise over time. Surprisingly (or not), government expenditures are above 21%, so taxes aren’t fully funding the government; debt and printing money are big portions of it. If it were only domestic debt, that could be fine, but as we discussed in my MMT posts, external debt brings its own issues.

A few items

I’m a bit busy today, so a few things that struck my eye today.

SOURCE: @MELINDAGIMPEL

1) Law firms, litigation and Vietnamese businesses: I am not sure if I am surprised by this, but it does seem a bit weird: The most fashion forward US law firm (Boies Schiller) is joining what appears to be the most aggressive Australian law funder to “help” Vietnamese businesses sue. Basically, they are going to put up $30m in order to fund litigation for small Vietnamese firms that have potential cases. That would presumably include the lawyer’s time but mostly its for the other expenses that need to be paid (expert witnesses’ testimony, etc.). These expenses can be really high.

Some of this will probably be great. Let’s help the poor small Vietnamese businesses! Let’s make these fights fairer! These little guys are getting kicked around by these big firms! Now those baddies are gonna have to face a 10-ton legal gorilla. And for the Australian readers: “That’s not a knife. This is a knife.” [Yes, I know you probably hate that, but I can’t help myself.]

And some of this will be horrible. Some small Vietnamese company will have a too-vaguely worded patent that then Boies Schiller uses to sue a big firm that pays. Most of the fees go to the lawyers/funders, the world is worse off.

I am not so excited about exporting the US legal system abroad. It doesn’t seem the best thing about America. And I didn’t know that Australian law was similar. Learn something every day.

I asked a lawyer friend about it, and this is what he said:

Litigation funding is becoming much more normal - I’ve thought about it in some cases but haven’t used it before.  I know some folks here [at his firm] who have. The thing that’s a little odd here is that Boies Schiller is out in front advertising this with the litigation funder.  I haven’t seen that before.

As I said, fashion forward.

2) More meth: Looks like Vietnam is having its own Breaking Bad. On March 21, 2019 (scroll down to read the post), I wrote about a police seizure of 300kg of meth. Well, looks like that didn’t do much to deter future criminals. There was a 600kg meth seizure on Monday (April 15, 2019) in Central Vietnam. According to the article,

Opium and heroin are the drugs of choice among older users, but youngsters are increasingly turning to party drugs such as ecstasy, meth and ketamine which have flooded the market…Last year seven young people died of suspected overdoses at an electronic music festival in Hanoi.

The laws are already strict, so not sure what the solution is. I generally don’t think laws work that well in deterring drug use. Culture is much better at preventing young people from becoming addicts. Also, I have a hypothesis that legalizing the less addictive drugs, like marijuana, may actually lead to less hard drug use. But the proof isn’t really there. Here’s a study that marijuana use actually decreases injection drug use (in this case heroin, crack, meth and cocaine). One reason for this is that as marijuana becomes legal, people don’t interact with dealers of hard drugs. So if you don’t have access to a dealer with a wide range of drugs, then you won’t go seek them out.

Not to harp on marijuana legalization, there is a second theory that marijuana decriminalization decreases alcohol use. This 2016 survey review seems not to bear that out, because there is also evidence for the competing theory that marijuana is complementary with alcohol use. Here’s a more positive study about how marijuana decreases alcohol use.

So what am I saying? Not really sure. Just that meth ain’t good. And Vietnam may need to look to alternative ways to combat its spread.

3) Vietnam continues to build its Navy. According to Prashanth Parameswaran, the Vietnamese navy has become one of the more capable navies among Southeast Asian states. All of Asia is fearful of a rising Chinese, and a key flash point is the South China Sea. Vietnam already cancelled a contract to drill there because of Chinese pressure. It seems to be building up its Navy as a showy response to this encroachment.

But ultimately, China is going to do what China’s going to do. And Vietnam will just have to take it. The more economic, diplomatic and military resources that Vietnam has should give it a better negotiating position. But it needs to make sure that it doesn’t cuase China to overreact. Weaving that road will be hard.

The US could help, but my view is that the US missed its best chance to build a big block that could counteract China in Asia: the TPP (Trans-Pacific Partnership). It should go back and join it. And it should work harder to build up relations with and among all of the other Asian nations. Vietnam is key to that, and is already predisposed to the US. Trump’s summit with Kim (which I think was kind of stupid), was helpful for improving ties.

A stronger response to China probably is good for both the US and Vietnam, but ultimately the key is to avoid Thucydides’ trap: “when a rising power threatens to displace a ruling one, violence is the likeliest result.”

Employment

DATA: WORLD BANK, CHART BY VIETECON.COM

Following up from my posts last week on MMT, one of the main reasons (as far as I know) that people want MMT and control over their monetary and therefore fiscal policy is so that governments can reduce unemployment. But Vietnam may not really have a problem with unemployment .

Of course, there are some issues in Vietnam.

Youth unemployment: First, while the unemployment rate is low (2.1% in 2018), the youth unemployment rate is significantly higher at 7.3%.

Public employment: The State is actually a big employer at 9.6% of total employment. That probably doesn’t count employment in public enterprises, which add another 10 percentage points (according to the ILO). So about a fifth of the total workforce works for the government in some way, if these statistics are correct.

VULNERABLE EMPLOYMENT - PERCENTAGE OF TOTAL EMPLOYMENT. SOURCE: WORLD BANK, CHART BY VIETECON.COM

Vulnerable employment: A large portion of employment is vulnerable. This is when people are employed by their families or are self-employed but work alone. This figure is actually pretty high at 55.8%, although it has fallen a lot over time. The fall has been the greatest out of the larger South Asian countries (see chart on left), and the figure is approaching Thailand and Indonesia.

Rural employment: Since the rural population is still pretty high (65%), and agriculture is important (16%), that drives down unemployment. Basically, as my economics teacher told me a long time ago, unemployment basically doesn’t exist on a farm: You don’t have a job, you work in the fields. There has been massive urban migration since 1989 - the population was 80% rural then and has fallen to that 65% figure in a short time. This will likely continue, especially because of better earnings in cities. And I would assume that farming will be more consolidated over time, as we have seen all over the world.

Growing population: Finally, Vietnam is a young country. Around 1.6m people enter the labor force every year, and those people need a job. In addition, Vietnam is becoming more educated, but there is a risk that the jobs wouldn’t be appropriate for college-educated workers. We see this a lot in the Middle East, where lots of people graduate from college and have no job opportunities, except for very crappy unskilled jobs that they don’t want.

What does this mean all together. The Vietnamese government actually seems to be taking care of its population pretty well, mainly through direct or indirect employment. This is one of the main advantages of MMT, universal employment. But Vietnam is pretty close to that, helped by fairly de-consolidated agriculture. Over time, we are going to see more urban migration, consolidation with agriculture, and finally greater tertiary education for young people. To be able to deal with that, the government needs to provide employment of some sort, either through their own programs or the private sector. Right now, the big influx of FDI has been a big part of it, but will it continue. Also, should it continue, if it really doesn’t help upgrade the economy. More about this tomorrow.

MMT part three

NOTE THAT THE LEFT-HAND SIDE AXIS REFLECTS BOTH TOTAL RESERVES IN BILLIONS AND RESERVES AS A PERCENTAGE OF EXTERNAL DEBT. SOURCE: WORLDBANK, VIETECON CALCULATIONS

So, yesterday, I was looking at monetary sovereignty, and wanted to see how close Vietnam was to true sovereignty. And as I get more into MMT, I find it difficult to understand exactly how developing countries, actually any countries, can actually get to monetary sovereignty. Does it really just mean autoarky? If so, that’s not that compelling. Countries really do benefit from trade.

Maybe the key is that it exists on a spectrum with few countries actually existing on the side of almost complete sovereignty, with the US being the main example right now. On the other side, you have countries like Ecuador that just use the US dollar. Ironic given that the Ecuadorian government is pretty anti-American, or was (a bit less now).

The European Union, Japan and Canada are all pretty sovereign, basically they may have some non-Euro/-Yen/-CAD-denominated debt, but generally debt is denominated in their own currency. Exchange rates are flexible. They don’t need large reserves, and they are able to print their own money as they see fit. The Euro is a good example.

Emerging economies have not gotten that far, or most of them haven’t. Even China, cares a great deal about foreign (dollar) reserves. Vietnam also cares, and it has tried to keep high levels of reserves. It led us to the hypothesis that the government is trying to increase exports in part to make sure that it can keep high enough reserves in order to maintain export levels - our treadmill. Let me be clear this is just a hypothesis, and something that I continue to examine.

But today, I wanted to look at some of the main components of exports and imports that are basically “required” for the country. One of the main ways to move up the scale of monetary sovereignty is to not worry about imports. That means trying to be self-sufficient in the most important imports necessary for life, but have luxury good prices susceptible to whatever the floating exchange rate is.

Looking at the main points that Kaboub raised as necessary for monetary sovereignty (see my April 9 post for more info about Fadhel Kaboub’s views on MMT), then Vietnam should be mostly independent for food, energy and then try for high-value exports.

POSITIVE = NET EXPORTS. SOURCE: IMF, VIETECON CALCULATIONS

NEGATIVE = NET IMPORTS. SOURCE: IMF, VIETECON CALCULATIONS

So, looking at exports and imports (charts above), let’s see where Vietnam stands.

• Fuel: Not looking good. Vietnam is a net exporter, and its exports of oil have fallen pretty significantly. The oil and gas potential of the South China Sea is quite high, but, as we have talked about before, difficult for geopolitical issues. My view is that the government should go all in on renewables. It’s a sunny country, and it could easily produce enough electricity from that. Then switch to electric scooters, etc. Plus, it has a fair amount of hydro as a fairly reliable base of power production, plus gas.

• Food: Here Vietnam is fine. It’s a net exporter. Of course it would need to import some food, but that’s fine.

• Pharma: This is a category that I wasn’t looking for but is part of the IMF data set, and so it was interesting to see how much it costs the country to import pharmaceuticals. I don’t see this changing.

• High-value manufacturing products: Here, we can see the impact of Samsung’s production. The Korean company accounts for a quarter of Vietnam’s exports. That shows up in telecom equipment exports, but electronics are actually significant net imports.

In summary, Vietnam is doing well in terms of food production, but needs to import fuel, pharmaceuticals and high-value add goods, but is able to pay for it partially through its low-value clothing exports and the help of Samsung.

That’s not the worst situation, but not sure it is the best. Plus, Samsung may be getting the best of that, with the profits transferred up to the parent. According to this older Quartz article, the company imports almost as much as it exports. If a company comes in with all the components and uses local labor for the assembly but without really transferring the know-how, there is little ability for the country to actually move up the ladder of skilled production.

So in terms of moving to greater monetary sovereignty, it seems like the best way to do that would be to heavily invest in renewables and higher value-add exports (as it is doing with its ventures in auto and mobile phone production).

Over time, the government could start to allow the currency to float without worrying about inflation in the most important goods (energy, food). That could allow it to focus more on domestic lending, and would allow it to relax its high levels of reserves.

These are just preliminary thoughts. Now, I want to think a bit more about employment (as I talked about in my earlier posts), but also how sustainable Vietnam’s reserves are currently. This paper by the IMF offers some proposals in gauging reserve adequacy. I might look at these for Vietnam.

Food, glorious Asian street food!

Since I wasn’t able to post yesterday, I thought I would post twice today. Lucky you, dear reader!

SOURCE: @FRANKIESHUTTERBUG (SITE)

But this is just a quick one.

Netflix is doing a new show on Asian Street Food. It will drop on April 26, and since it is created and owned by Netflix, it should be available everywhere, including Vietnam.

It looks like it will cover lots of Asia (see subjects here), which, as the crosswords say, is where most of us live.

Sadly, no Hanoi here, just HCMC. It looks like it will cover snails, pho, bahn mi and com tam.

It sounds exciting, although my only concern is that it is by the same people that did Chef’s Table, which I kind of found dull. Also, if it is similar to that show, you need to really like slow-mo. It seems like it would be hard to make street food in Asia boring, but I wouldn’t necessarily put it past the creators.

More MMT

USD BILLIONS. SOURCE; WORLD BANK DATA, VIETECON CALCULATIONS

So, as I said two days ago, I wanted to look a bit more into what is driving the increase in external debt in Vietnam. It didn’t appear to be the trade deficit, which would be an obvious answer. But I was unsure, so I wanted to extract “primary income” from the calculation and look at just imports/exports (for services and goods) to see. In that case, there has been a deficit but since 2012 the country has been in surplus.

Plus, I also looked at remittances, which is another source of foreign exchange. Remittances have increased drastically in Vietnam, mostly from the US (around 60% back in 2017).

But remember that a current account surplus, actually means that there is more savings than investment. Plus, for the current account to be in surplus, then the capital and financial account must be in deficit. This is just an accounting fact of life: Current Account Balance+Financial Account Balance+Capital Account Balance=0. So we should see a capital account deficit, and this appears to show up mostly in the foreign exchange reserve.

Basically, the country has been exporting a lot. And to make sure the exchange rate is stable, it has had to increase its foreign exchange reserves (although they are actually fairly low at 2.9 months of imports as of May of 2018 - it hops around between 2.5 and 3.5 months).

NOTE THAT THE LEFT-HAND SIDE AXIS REFLECTS BOTH TOTAL RESERVES IN BILLIONS AND RESERVES AS A PERCENTAGE OF EXTERNAL DEBT. SOURCE: WORLDBANK, VIETECON CALCULATIONS

If I am thinking through this correctly, the country exports a lot, more than it imports. And that means that it is saving a lot of that money. Which results in a capital account/financial account deficit. But what is that deficit made up of: a lot of it is foreign reserves, and it has foreign reserves in order to maintain stability in the exchange rate. And it needs stability in the exchange rate to make sure that inflation doesn’t get out of control (for imported items), and so that there is not a liquidity issue because of all of the external debt. Which is being built up to make sure that there are reserves to stabilize the exchange rate. So that there is enough money to pay the external debt.

This is very simplistic and I need to think it over a lot, but I get where these MMT theorists are coming from. With external debt, then you need to keep a stable currency in order to maintain payments on that debt. But that ultimately means that you are saving (by holding large amounts of dollars) and not investing.

The reason why MMT theorists want to implement MMT is to reduce unemployment (or that’s part of it), basically to make sure all human resources are used in an economy. That’s just not Vietnam’s problem, right now. Unemployment is quite low, helped by a very large public sector. I will look into that tomorrow.

But the original point of being on a treadmill to maintain a fixed exchange rate is probably something that needs to be investigated. I want to also look at what is driving imports to see what could be replaced. As I said two days, the big ones for most countries are food, energy and capital goods. Let’s see if that’s the case in Vietnam.

MMT

So I wanted to follow up on the end of my post yesterday where I said I wanted to talk about Modern Monetary Theory (MMT). It is all the rage, as I said. Lots of people are looking into it, some of which looks really interesting, especially for big countries like the US. Current interest rates clearly seem to indicate that deficits don’t matter (and yes, I know that’s not all there is to MMT). But there has always been some concern that MMT cannot apply to emerging markets, to phrase it another way, would these economies be able to implement MMT effectively.

I listened to this podcast by Fadhel Kaboub, a professor at Denison University in the States. He clearly believes that it is possible, but it takes monetary sovereignty.

For him, monetary sovereignty isn’t just about printing your own currency, although that’s part of it. It also means that taxes are paid in the currency, that the currency floats and that the government sets interest rates. The government must be able to purchase anything that is for sale in that currency. Finally, external borrowing is a no-no.

SOURCE: WORLDBANK, INVESTING.COM, VIETECON CALCULATIONS

The last is the hardest, especially in an open economy. As this author argues, most countries will have to borrow at some point. If monetary sovereignty exists on a spectrum, then for Vietnam, the country is only partially sovereign.

1) It prints its own currency, the Vietnamese dong (currently around 23,000 to the USD).

2) It controls interest rates.

3) Taxes are paid in VND.

4) The government can buy most of what it wants in VND. Only imports require other currency.

NOTE: THESE DATA REPRESENT EXPORTS AND IMPORTS OF GOODS, SERVICES AND PRIMARY INCOME (BOP, CURRENT US$) SOURCE: WORLDBANK, VIETECON CALCULATIONS.

5) The currency isn’t really floating. It is “stabilized” with the government keeping it within a band. The central bank has a standing offer to buy the currency at various rates (VND23,200 currently). If the Central Bank is stuck with that, then it means that the country does not have monetary sovereignty. The chart on the right above shows how little depreciation there is compared to inflation. That means the government needs to keep attracting foreign exchange in order to support the currency.

6) And of course it has a lot of external borrowing, as we discussed yesterday.

What’s surprising to me is that there is so much external borrowing, when it really seems like the balance of payments isn’t that bad (based on my calculations). The chart above shows a pretty close balance with exports and imports increasing in tandem. I need to look into this a bit more.

As part of the balance of payments, I want to look at some key drivers for current account deficits/surpluses in emerging markets:

• Energy imports/exports. Vietnam has been an exporter of oil, but it also imports oil and soon gas. As long as the country needs to import energy, it will be hard to have real monetary sovereignty. This ties into my view that the government should just be investing in renewable energy.

• Food imports/exports. Food production is actually pretty strong, especially for rice, which is the main staple. So this is unlikely to be a big threat.

• Imports of high-value equipment. Is Vietnam importing high-value products and exporting low-value products? If so (and probably is true) means that the country will be stuck on this hamster wheel. What I mean by that is that they need more imports to export more, and so they never really get to any sovereignty.

Anyway, just some quick thoughts on MMT and Vietnam. I want to do much more of this, but I personally need to do more research into it. It is an interesting way to look at economies, especially developing economies.

Back! And sovereign debt…

Hope you didn’t miss me too much while I was away on my vacation. It was nice, thanks for asking.

Anyway, this week is spring meetings of the IMF. As part of that, the Jubilee Debt campaign is trying to get people interested in debt service for low and middle income countries. Their point is that “external debt payments by developing country governments grew by 85%, as a proportion of government revenue, between 2010 and 2018.” Of course, this by itself doesn’t mean much. Who cares if debt is growing. US government debt has been increasing by crazy amounts partially because of the budget and partly because of lower taxes. That hasn’t stopped the economy from growing and government spending from increasing. But the Jubilee Debt campaign says that actually for these countries, per capita spending falls as debt service increases.

Jubilee Debt Campaign has also calculated that in the 15 countries with the highest debt payments, in ten of them public spending per person fell between 2016 and 2018. Across the 15, public spending fell by an average of 4%. The largest cuts were in Egypt, Cameroon, Angola and Mongolia, all of which are on IMF loan programmes.

In some cases, more debt could mean more per capita spending. But it looks like for many countries (maybe just lower income countries), more debt means less spending.

PERCENTAGE OF EXTERNAL DEBT PAYMENTS TO GDP SOURCE: JUBILEE DEBT CAMPAIGN (BUT APPEARS TO BE WORLD BANK DATA)

I, of course, wanted to look at Vietnam. What I have been hearing is that the Vietnamese government is trying to bring in foreign investment so that they won’t have to pay for things like infrastructure themselves (and increase deficits/debts). That’s why there has been such a push on public-private partnerships (PPP). PPP has been quite impressive, although lawyers think the legal framework for PPP has not been supportive, according to Giles Cooper, a lawyer from Duane Morris:

From 1990 to 2016, the country completed 84 PPP projects amounting to US$16.2 billion, with 79 percent of the projects in the energy sector. However, since the issuance of the PPP pilot programme in 2011, no PPP project has been signed under this framework. Compared with regional neighbours, foreign investment in infrastructure in Vietnam is lagging behind.

SOURCE: VIETECON.COM, STATE BANK OF VIETNAM, WORLD BANK

But back to debt, Vietnam, at first blush, doesn’t look too bad. External debt payments have been less than 10% of GDP. These were 7.0% in 2018, which is up a bit from the low of 4.8% in 2006, but well below the figure in 1999 of 24.5%. The low and middle-income average is 12.2% and the median is 9.0%. Within lower middle income (the group Vietnam is in), the mean is 13%, so Vietnam is well below that. It’s a bit surprising that it has grown so quickly for Vietnam, given strong GDP growth (meaning that debt has increased quick fast, and faster than GDP), but it still isn’t a crazy high amount. And it is volatile, meaning that it can fall a fair amount year-to-year (but also rise year-to-year).

That’s external debt payments. I wanted to look at total debt to get a sense of how risky this is, and it turns out that things don’t look great. Total debt was around 61.5% of GDP in 2017, with the majority of this composed of external debt (3x as large as local debt). If it were in local currency, there would be a lot more flexibility for debt to increase. While on a global relative basis, it doesn’t look that bad (although it is on the higher end of the spectrum, especially for countries without monetary sovereignty), given that so much of it is external means it doesn’t look great.

Obviously, it is going to be interesting to see how these debt figures change over time. No wonder the government is trying to reduce its external debt. I am not sure how well Vietnam is able to source debt locally, but that would be one solution.

Tomorrow, I want to talk about all of this in the context of MMT (Modern Monetary Theory), which is all the rage these days. But to conclude, it appears that Vietnam’s external debt is concerning, especially since the government has been managing the currency, which adds another dimension to it.

Not April Fool’s Prank: Out Fishin’

Sorry to disappoint all three readers, but I am out of pocket for most of this week. Back to regular programming next Monday, unless I find something interesting to say in the interim.

Thanks!

Education spending

Following up to my post yesterday about R&D spending, education is another area of spending that I feel strongly is determinative of future growth.

SOURCE: WORLD BANK, VIETECON.COM

I thought it would be easy to prove. We could just look at the inputs: years of education and/or government spending on education, and use that as a barometer of education. And those countries with higher numbers should have much higher growth. Vietnam actually has fairly high spending on education, at least as a percentage of GDP. It is up there with South Korea and is much higher than Japan (more below).

But looking into it a little bit more, it is not true that education is the be-all, end-all for economic growth. If you look at literacy rates these days, they just don’t determine economic conditions. For example, Georgia (the country, of course) has a literacy rate of 100% (99.59% to be exact). Kuwait has a lower literacy rate of 96%, but has a national income almost 8x as much. Now of course Kuwait is blessed with lots of oil. So let’s look at Spain: literacy rate of 98%. Much richer than Georgia. The European Union overall has a slightly lower literacy rate than Georgia, but of course it’s much richer.

Maybe it is the change in education rather than the absolute level that drives economic growth. China has one of the highest growth rates in the world, and in 1990 only 78% of the population was literate! That means that almost a quarter of the population was not even poorly educated, just not educated. But China has really turned that around. The literacy rate increased to 95% by 2010, and during that period, as China became much better educated, it had extremely high growth rates.

And here there is some data that backs it up. This article seems to show that increases in educational expenditure boosts growth.

Averaging across all studies, the effect of educational expenditure on growth is positive - albeit modest - in the order of a 0.2-0.3% increase in growth for an increase in expenditure by 1% of GDP.

Of course, that looks at all education as if it is the same. But I think that might miss some differences in education quality. This World Bank paper points to a slightly different conclusion – mainly that the outputs (learning achievements) are more important than the inputs.

So basically, we have three things that probably are important here: the absolute level of education (meaning, how much is spent, how many people actually go through education). Then positive changes in education, the change in absolute levels. Finally, we have the underlying quality of the education: are students being taught well.

Well, where does Vietnam stand on these three measures. Actually, quite well. As shown in the charts above, Vietnam is spending a fair amount. Also, literacy rates are high. So the absolute levels are high.

And we have seen a big change in education in the past 40 years that shows a significant upgrade. The percentage of students that make it to the last grade of primary school is well over 95%, up from 46% in 1978 (the War really destroyed and destabilized generations, something that I sometimes forget when thinking about present-day Vietnam). That’s a big difference.

Finally, in terms of quality, the education provided seems to be good. I looked at the PISA* test results for Vietnam and its Asian neighbors to see how the country is doing relatively. Spoiler: really well. Better than the OECD (read: rich countries) average for math and just behind Korea and Japan. Basically similar trends with slight variations for reading and science as well. Plus, Vietnam is well ahead of its developing South East Asian siblings for all three scores. (Just a note, I don’t think that standardized testing is the perfect measure, but at least this gives some indication of how these countries are doing against each other. To read criticism of the tests, here is a good article.)

Looking at GDP growth figures, maybe this explains the lower volatility of growth of Vietnam than of its neighbors. It also helps that the government has been fairly stable since the end of the war (not always the case for its neighbors) and growing from a much lower base. But this speaks well to the potential of Vietnam over time. If they could also invest in R&D, that would be even better.

*“The Program for International Student Assessment (PISA) is an international assessment that measures 15-year-old students' reading, mathematics, and science literacy every three years.”

R&D spending

I started to think about Vietnam and R&D with the announcement that VinGroup is building its own smartphone (with help from foreign partners). And I was hoping that this is a trend in Vietnam, companies really research and developing their own products rather than just selling commodities or other people’s products.

Plus, in my mind, R&D spending is key to competitiveness, productivity gains and economic growth. If you think of economic growth as being driven by just two things: population growth and productivity growth, then R&D spending can be key to the latter. But then I started to wonder if that is really true, so I worked backward and tried to find something to back up my ill-formed opinion. I quickly found this:

VIETNAM LAGS THE PACK, EVEN AMONG OF DEVELOPING COUNTRIES. SOURCE: WORLD BANK

The panel data analyses show that for the OECD countries examined in the study an increase of one percentage point in R&D expenditure in the economy as a whole results in a short-term average increase in GDP growth of 0.05 percentage points. The time series models for Germany exhibit an even stronger effect that is almost three times as high in the preferred specification.

So it’s real. And it is important. I remember in grad school, a foreign professor said that he thought the US would stay on top is because they invested so much in R&D. And it’s true. The United States spent 2.7% of its GDP on R&D in 2016. Because the economy is so big that equates to USD511 billion. That’s 30x Sweden, which is #10 in total spending.

In Asia, there are a number of countries that are extremely aggressive in their investments into R&D, even going back many years. For example, South Korea in 2016 spent 4.2% of GDP on R&D (that’s almost $60bn). That’s #5 in the world in total spending (in current USD, so doesn’t account for purchasing power parity). But even going back to 1996, South Korea has been a consistently high spender on R&D - it was 2.3% at the time, albeit in a much smaller economy. But that 2.3% probably paid the salaries of a lot of Korean scientists!

Sadly, looking at Vietnam, the figures are not pretty. In 2015 (the latest data point available), Vietnam spent just 0.4% of their GDP on R&D, or just USD852m. Even at purchasing power parity, it is something like USD2.5bn or 1/200th of the US’ spending. Malaysia spends 3x as much as a percentage of GDP(1.3%) and even more in absolute terms, Thailand is also higher (0.6%), and so is Egypt (included here because I have a soft spot for the country, and it seems similarly situated in some respects). Only Indonesia and the Philippines are behind Vietnam.

These numbers are a few years old (mostly 2015 for the developing countries). Vietnam, in particular, has seen significant growth, lots of FDI, and even some national players trying to really upgrade their systems (the aforementioned Vingroup). But they really need to be much higher to drive lots of long-term economic growth.

Japan and Vietnam

Vietnamese are studying and living all over the world, but the big jump in Vietnamese residents of Japan surprised me, or at least made me interested in looking into it a bit more.

VIETNAMESE ARE MOVING TO JAPAN IN LARGE NUMBERS! SOURCE: JAPAN MOJ

First, the numbers around Vietnamese in Japan have just soared in the past few years. Since 2011, the numbers have grown in double digits, and not 11% or 12%, more like 38% or 47%. See the chart to the right. Overall foreign residents have also been increasing at a good pace - 7-8% in each of 2016-2018. In total there are 2.7 million foreigns resident in a nation of 127m.

Japan has a population problem, or let’s say situation. Their population is declining. In 2018, the birthrate dropped to the lowest rate since 1899, when data gathering began. By 2049, the population could be less than 100m, and by 2036, one in three could be elderly (these stats from this article). Japan has a reputation for not welcoming immigrants, but the government is trying to allow more workers in.

JAPANESE INVESTMENT IN VIETNAM ALSO HIGH. SOURCE: JETRO. NOTE: BALANCE OF PAYMENTS BASIS, NET AND FLOW

From the Vietnamese side, it appears to be a lot of technical training, about half, according to this article. And a good amount are also overstaying their welcome - 11,131, up 64.7%!

Overall, ties between Japan and Vietnam are pretty strong, with Japan investing a lot of money in the country. This has been a pretty consistent upward trend since about 2000 (except for a big jump in 2012 and 2013 that reverted back in 2014).

Japan was the largest investor in Vietnam in 2018, and it has been in the top 5 for many years and lead for overall investment in Vietnam.

JAPAN’S INCOME FROM ABROAD IS INCREASING FASTER THAN DOMESTIC INCOME IS. SOURCE; WORLDBANK. NOTE: THIS TAKES GNI OVER GDP (USING CURRENT PRICES FOR USD)

This leads me to a tangential question about Japan itself. With a declining population and little appetite for a big increase in foreigners (still below 3% of the total population, and many of them not treated perfectly), one response would be to invest abroad and repatriate the profits to support the domestic population. Basically, move the capital to the population, but then have the returns come back to the mother land. And we have seen that more and more.

I pulled some data on the ratio of GNI to GDP. GNI measures all income for a nation (including income from investments abroad), while GDP is just what is produced locally. Over time, we have seen a pretty big increase in this ratio (mean more production outside) for Japan. It still is not to the level of the UK back in the seventies (where the ratio reached 1.084), but there is a noticeable upward slope. I also looked at the US, where the ratio sits right around 1.00 with some oscillations.

The data on Vietnam is a lot more volatile, and I am not sure why. But it does appear that now GDP is much higher than GNI (the GNI to GDP ratio is 0.95, or like the UK back in 1995), the reverse of Japan. It will be interesting to see if Japan's figures continue to move in this direction. Given the population, I don’t see how it wouldn’t.

And Vietnam is well placed to get investment from Japan, which will push this ratio up. I think that’s what ties these two ideas together: more Vietnamese in Japan means there are more Vietnamese than understand Japan and Japanese people. They can go back to Vietnam eventually and work for Japanese companies there. They will be the bridge between the two cultures, or, to mix metaphors, they can be the funnel that takes Japanese investment and makes it work in Vietnam. Let’s see if it works.

Baby got (buy)back

SHARE BUYBACKS. SOURCE JONG-COOK BYUN & PHAN BAO TRUNG, INVESTING.COM, VIETECON.COM

There were a few reports out today about how big share buybacks were in the US in 2018. Goldman had expected as much as $1 trillion in share buybacks, but that was a bit too optimistic (pessimistic? depending on your viewpoint), and only $806.4 billion. That’s a lot! Of course, it was helped by the corporate tax cuts . And it turns out that there just isn’t that much to invest in, or most corporate managers don’t think so. If you are looking, you see that in the big volumes of money chasing Lyft right now - investors are looking for anything to invest their money in.

As I was reading all this, my mind started to wander to Vietnam, as it is wont to do, and I wondered what the trend has been here. Surprisingly, I wasn’t the first to look at this. There is a good report (here) that examines share buybacks from 2005-2014 in Vietnam. It turns out that there weren’t that many buybacks (122 firms bought back in that period). Interestingly, the authors reach the conclusion that the main reason Vietnamese managers buy back stock is because the value is low. And that shares outperform after the buyback. The subsequent outperformance was quick but didn’t persist for small firms, but for larger firms it took longer but lasted.

If this is still true, here’s a way to make some easy money: buy when companies repurchase shares! Simple as that. If you do, you will outperform the market, at least according to this data. (Note that some of the outperformance is due to the period studied, including up to 5 days before the buyback announcement - so maybe you have to know a buyback is happening, which is harder to do).

In undergrad, a portfolio manager for a small fund came through and said that their whole strategy was similar. They just bought with insiders and sold with insiders, with the heuristic that managers know their companies better than investors do.

Counterpoint: Enron. (See this story titled: Enron workers lost everything.)

I will have to do more work on this to see if it persists to this day. But it is an interesting data trend. Companies continue to buy back shares in Vietnam, so something to watch out for.

Cryptocurrencies in Vietnam

Vietnam is going to have a cryptocurrency exchange. Right at the end of the bitcoin hype cycle, so at least they are on trend!

SOURCE: WALLETHUB.COM MORE DETAILS HERE

It is quite difficult to understand exactly what is going on with this exchange, but it appears Kronn Ventures want to do something about high exchange rates between currencies. That seams a worthy goal. If you look at the cost of converting money, it is outrageous. If you do it carelessly, it could cost you more than 15%.

But cryptocurrencies don’t seem to be the best way to solve that problem, because it can be quite expensive to use them in exchange. The problem right now is that you would have to pay the exchange fees on two transactions. Let’s say you have money in Vietnamese dong, but want to visit Thailand and need baht. First, you need to convert Vietnamese dong to bitcoin or whatever cryptocurrency is created/used. Then transfer that to an account either in Thailand or in Vietnam. Then convert your bitcoin into Thai baht. Of course there are probably ways to bypass all of this if the service just automatically made the exchange behind the scenese using the cryptocurrency as just the base. The could potentially set low transaction fees as long as they weren’t taking too much risk.

Basically if there were too many dong coming into the exchange but not enough baht, then the currencies wouldn’t be netted out at the end of the day/hour/minute. The exchange itself could be unwittingly long dong, and it would need to somehow offload this risk in order to make sure that they weren’t just a passive speculator on currencies.

International currency exchange companies already do all of this pretty well. All it would take is to charge a bit less for their service to compete with this new exchange. And wouldn’t someone just go to the more reputable brand?

THIS LEVEL OF VOLATILITY IS A TOUGH SELL.

I follow Matt Levine religiously, and he has this view that most cryptocurrency uses could just as easily be done by a robust and trusted centralized database. Of course there are some cases when having a distributed ledger is actually an improvement, like here.

But back to Vietnam, the actual press release is pretty vague, and I doubt that anything will come of this. The government made cryptocurrencies illegal after $660m were stolen from hapless Vietnamese investors. That’s a crazy amount for Vietnam. And a little less than a year ago, the government shut down the largest bitcoin exchange, Bitcoin.vn.

Plus, isn’t Bitcoin over? Prices of all cryptocurrencies are down 85%, and the chart itself looks scary. It was worth almost $20,000 and now is worth less than $4,000. There have been so many scams, including the death of someone that resulted in $137m in cryptocurrencies stranded/lost. Or that was the initial story, and then maybe the currency was already gone from the account…and maybe the guy didn’t die…

Anyway, there is a lot of sketchy behavior around ICOs and cryptocurrencies. Plus a lot of very strong opinions on both sides. My view is that having a deflationary currency is a bad idea. Plus, if bitcoin is only going to be used for ransom, then no thanks.

Maybe the Vietnamese government will ultimately decide that they do want to lead the world in cryptocurrencies, and they will start an exchange. But given how untraceable cryptocurrencies generally are, then it seems unlikely that the Vietnamese government will be so excited about it. Let’s see.