Movement in SE Asia

Most of the world is in shut down now. I am in shutdown, you probably are too. I have been going out a bit, mostly to get essential goods or when I have to get something from/for work. Otherwise, I am a homebody. Oh, and I have been running a lot. A lot! Like 10 miles one day, 7 another, 5 on the reg. It helps keep the weight down, since I am self-medicating with food and drink.

And Southeast Asia is doing the same. Google put out data that puts numbers to what’s happening. The company used anonymous location data it collects from Android (remember that more than 85% of phones shipped use Android). It broke out places by different categories, including residential and workplaces, and it did it for all places over the world, including my SE peeps.

Lots of interesting things here in the data, which shows movement to March 29 against a baseline trend.

• Vietnam is mostly in the middle of the pack. It isn’t going full out in terms of social distancing, but it isn’t the worst by far. Laos is the worst, but Singapore, surprisingly, isn’t too far behind Laos. Maybe because of a very strict testing regime there that allows people more leeway.

• Retail & recreation and transit have seen the biggest hit, in terms of where people are going, or not in this case.

Source: Google, chart by Vietecon.com

Source: Google, chart by Vietecon.com

• Parks are still plenty busy in Singapore, but almost everywhere else they have seen massive declines.

• Grocery stores have seen the second lowest decline (after workplaces), which is kind of surprising. The grocery stores I know (and I have intimate accounting knowledge of one in the US, ooh la la) is doing gangbusters, but that’s a function of both more tickets (customers) and bigger baskets (how much each customer buys).

• Transit stations have declined the most, as mentioned above. In Malaysia and the Philippines, that means an 80%+ decline. Basically no one is traveling by bus or train, if they can help it.

Source: Google, chart by Vietecon.com

Source: Google, chart by Vietecon.com

• Workplaces are surprisingly busy. Or at least, they haven’t declined as much as I would have expected. Factories have been kept open so far. This is the most surprisingly finding for me. The US has seen a 38% decline, which is more than most of SE Asia, and not all of the States were/are locked down.

• Residential mobility has increased, of course. The number is low, but that’s probably because people already spent a lot of time at home. Just sleeping means that you spent at least a third of your time at home. And it probably is around 50-60% regularly. So to increase it by 26% like the Philippines means everyone is staying home most of the time.

Source: Google, chart by Vietecon.com

Source: Google, chart by Vietecon.com

A big caveat here: Google explicitly says we shouldn’t compare different countries, so take my international comparisons with a hefty dose of salt. But I think the country data, on its own, is interesting.

Toilet paper; what SARS can tell us; electricity prices

It’s Friday. Thank god. I am already tired of quarantine, and we have a long slog ahead of us.

Toilet paper: I really liked this article on the toilet paper shortage. Basically, most people say that the shortage is due to hoarding. Why? Well, people’s use of toilet paper hasn’t increased, so people must assume that people are buying more than they need. Oremus’ theory is that it is actually because people are using toilet paper at home (40% more than they would normally) rather than in the office/restaurant/bar/school/etc. Then commercial and retail toilet paper is different (different sizes, different inputs), so it is hard to sell the commercial stuff retail.

Think about it this way. Normally you can always find toilet paper. And let’s say that most stores have about a week’s worth of supply on its shelves at a time. Well, if people come in and realize they need 14 rolls instead of 10 a week, then that week’s supply on the shelves will get bought out very quickly. Put it another way (and I am making up the number): let’s say the rolls on the shelves serve as a 10% buffer against normal demand, the problem is that people are using 40% more than they need. Where are they going to get the extra 30%?

And the article goes on to apply this theory to lots of other products: bananas, beer. I can think of flour, which is probably stuck in 50lb bags at wholesalers. The problem is that someone needs to bag it up and slap a price on it, and the wholesales aren’t good at that.

Some of this will be worked out, and hopefully we will get out of this quarantine before it is needed. In the meantime, break into your old school and steal some toilet paper (j/k).

The experience of JD.com and Alibaba during SARS: Yesterday, I wrote about MWG and its increase in online sales. My view is that the company should be able to use this occasion to raise its online profile. Support for this comes from examples of two Chinese companies during and after SARS. JD.com and Alibaba saw massive increases in online sales during and after the SARS outbreak back in 2003.

JD.com didn’t have any online sales - it was a small chain of retail electronic stores. The founder closed most of the stores and had to resort to selling goods online, but without any of the infrastructure. It appears he learned a lot, because it is now one of the largest online retailers in China.

Alibaba was a B2B e-commerce site, and it got a massive jump (3-5x) from SARS. It also used the opportunity to start a B2C and C2C site. It quickly became the largest C2C seller in China.

Data for September 2019. USD per kWh for households. Source: GlobalPetrolPrices.com

Vietnam cutting electricity prices: The good news about a somewhat planned economy is that things can be done centrally. The government is planning to cut electricity prices by 10% is probably good, since it helps everyone deal with bills during a time when little income is coming in.

Prices in Vietnam are already relatively low, especially compared to its ASEAN neighbors. This implies subsidies, given that FiT are higher than this (the government is paying wind producers 8.5c per kWh). So the subsidy will have to increase. This is probably the right time for it.

Separately, the government announced it will give poor households and those who lost jobs due to COVID-19, VND1m a month (a little over $40). This isn’t much (if this is your only income, you will be under the poverty line), but hopefully it can help tide some people over. This is supposed to be for all of 2Q.

MWG report and EU deal

First, a quick update. The EU has concluded/ratified the free trade agreement between the EU and Vietnam. Now the ball is in Vietnam’s court to ratify the deal. This should happen at the beginning of the next congressional session. I have talked about this a lot. You can read about it here and here.

Source: Vietnamese Customs, EU; chart by Vietecon.com

The next congressional session is supposed to be held in mid-April. Let’s see if it works out. Maybe they will go online, like the rest of us.

But a reminder, the EU is a big partner of Vietnam already, with a big surplus.

I assume both side want more trade and the EU definitely wants more exports. The fall in tariffs should help all sorts of companies to compete. I can’t wait for the French wine to start to get more reasonably priced. Same for Austrian wine, an often overlooked wine region. And Portugal! Duoros! Plus Italy. I love barolos! Ok, I think I need a drink. .

But the real thing I wanted to talk about was what my beloved MWG is doing through the COVID-19 crisis.

• March sales were up yoy to VND8.5tr. Of course a lot of that was due to BHX, the grocery division..

• The company had contingency plans for different types of store closures. Now that we are at the highest level (everyone stays home except for essential services), the company has moved into case 3.

• It will furlough some employees, and move most of the rest to work in BHX (the grocery).

• They have also increased online services both for BHX and the other stores (with products to be delivered after re-opening).

• MWG is negotiating rent with landlords during the closure time - 50% off. And it is willing to be pretty hard-core: it will leave stores if the landlords aren’t flexible.

• Dividends are up in the air.

• Short term loans are down 25% to below VND10tr by my estimate. It is working with lenders to reduce rates and to increase the duration of these short-term loans and pushing out payments.

Source: Company data, chart by Vietecon.com

Overall, my biggest concern with MWG was the very high debt balance, which had gone up a lot. Most of this was due to an inventory buildup, and the company has quickly reversed this. I expect it will continue to deplete inventory as quickly as possible without replenishing it. This should dramatically help operating capital - by my estimate 1Q cash from operations could have been as much as VND4tr, if the company did drastically reduce inventories.

Long term, the company is pushing hard into online and grocery. It will be interesting to see what happens post-COVID. I would assume that online ordering will go up, as people get used to it. But it could be the reverse. I personally am very excited about going outside and shopping in a store at some point in the future.

Same with groceries: will people, now after having to cook for themselves for weeks, be better equipped and willing to cook at home post-crisis? Or will they, like me, just want to get out and go to a restaurant where there are people (if there are any restaurants left).

Overall, it seems like MWG is being extremely transparent and forward-looking. It helps that the grocery business acts as a stabilizer in times of crisis: as the economy gets worse, people spend more on groceries than eating out. And this time in particular, with restaurants closed, it benefits.

Renewables and some other good news

Some good news, or potentially good news, out of Vietnam.

First, it seems like COVID-19 cases aren’t spreading. According to Johns Hopkins, there are only 218. That’s barely up.

Second, the Vietnamese authorities are re-considering their rice export ban, which is a good thing for other countries and for rice farmers. It turns out that there is probably enough rice for everyone. Farmers say they will be able to export 3m tons, compared to 2019 exports of 6.4m tons.

Third, CPI figures for March came in, and they show only a small decline of 0.58%. There’s no price gouging, and generally prices are stable. I mean, it could be much worse.

Fourth, there are a bunch of announcements of new renewable projects in Vietnam.

• There is a new wind farm with high-end turbines from GE. A Filipino conglomerate is making the investment of $80m. It will capacity of 40MW for a cost of $2m per MW. And the project hopes to benefit from the wind feed-in-tariff of 8.5 UScents per kWh.

• Construction is beginning on a new gigantic solar farm in Ninh Thuan province to start generating power in 4Q. Total cost is VND14tr ($593m) for 450MW or $1.3m per MW. This is actually a bit expensive, based on what I have looked at (and I don’t know much). US utility-scale projects are $1.06-1.13/watt.

• Super Energy Corporation, a Thai company, will acquire four solar projects in Vietnam for a price of $457m. Capacity is 750MW. That’s a great price per MW. All four plants are under construction, so presumably everyone is happy about this - the builder gets some money and Super Energy gets the assets. These projects will get a FiT of 7.09 UScents per kWh.

This article about air pollution in Vietnam just reinforces my view that more renewables are needed, that along with electric vehicles, better public transport and more green spaces. Right now, though, air quality is not so bad in Vietnam!

Chinese lending - hidden risks

I still need to go back to PNJ’s valuation, but this NBER paper on Chinese funding was very interesting and something that might become more important if this COVID-19 crisis extends for more and more months.

The thrust of the paper is that much of China’s external lending has been hidden from the world (this paper came out in 2019 with data that ends in 2017), and because of that, the risks of the financial systems of a number of countries may be understated.

An important thing to know about Chinese loans is that the lenders in China (mostly the state) are looking for something different from what most Western capital is looking for. The majority of Western capital wants yield above all else. Chinese loans have multiple goals: yield, influence, securing commodities, commercial interests, or all of the above.

I found some of the historical analogies interesting, like this one:

“China’s overseas loans share many features with French, German and British 19th century foreign lending, which also tended to be market based, partially collateralized by commodity income, and characterized by a close link of political and commercial interests.” [Italics mine.]

And then looking at how it could play out, lending in the 1970s:

“With a view to financial stability, another relevant historical analogue is the lending boom of the 1970s, when resource-rich, low-income countries received large amounts of syndicated bank loans while commodity prices boomed. The Chinese lending flows during 2008 to 2015 share similarities with the 1970s lending cycle, which did not end happily once commodity prices, export revenues, and economic growth slumped across many of the countries that had gone on a borrowing spree.” [Italics mine.]

Quick aside: One of China’s goals, I would imagine, would be to help internationalization the RMB, the Chinese currency. The US has massive influence and gains a lot of rewards (seigniorage, lower capital costs, ability to punish actors) from being the reserve currency. There are some downsides too, namely that the dollar becomes the safe haven in times of global turmoil, hurting exports. China has wanted to make its own currency more global, but it has largely failed. And it doesn’t seem to be using its lending to accomplish this. The majority of its lending (about 70%) is in USD.

Back to the data: Of course, the first thing that I looked at was Vietnam, and it turns out that they don’t have that much debt. The bigger worries are Cambodia and Laos.

Source: Horn, Rainhart & Trebesch data, chart by Vietecon.com

Source: Horn, Rainhart & Trebesch data, chart by Vietecon.com

Source: Horn, Rainhart & Trebesch data, chart by Vietecon.com

As of the end of 2017, the data shows Vietnam with just $7bn in debt to China, or 3.2% of GDP. The trend was down (for Vietnam and in aggregate). Cambodia is much much more exposed with about the same absolute level of debt ($6.5bn), but that’s 30% of GDP. Laos has much less debt at $4.4bn, but that’s a high percentage of GDP at 26%.

Thailand, Indonesia and the Philippines have Chinese debt that equates to less than 1% of GDP. Malaysia saw a bit pick up in 2016, when it jumped from $0.7bn in debt to $11.9bn, and went up again in 2017. This is about 4% of GDP. I wonder if 1MDB is any part of this uptick.

A point that I want to make again is that much of this has been hidden - about 50% according to the article. For Laos, total “official” external indebtedness goes up from a little over $2bn in 2016 to over $8bn!

Vietnam is intricately linked to China: imports, exports, FDI, and debt. They have competing interests (South China sea) but also similar interests (free trade). It is much like Mexico and the US, or the EU and its smaller non-EU neighbors. But it has mostly stayed away from adding too much debt to this, at least in large figures. It could easily pay down this debt through reserves.

What makes me so nervous is that Vietnam’s neighbors are so closely tied to China, and this new debt data shows that it is even worse than feared. ASEAN is supposed to be, in part, a counterbalance to China, but Laos and Cambodia, two (albeit small) members, have little flexibility when it comes to China, especially in times of crisis. Worst case: Laos and Cambodia can’t pay the debt, then China could take over assets (if these are collateralized) or force other demands in exchange for forgiveness. It could also make it difficult to get funding from Western institutions, like the IMF and World Bank.

And I doubt that Vietnam wants China to have even more influence in its two closest neighbors.

Where we are now

Sorry, but I am going to have to be short today. I was busy with me real job. {Actually maybe let’s call it my real-ish job, anyway I was busy.)

Basically all I can think about is COVID-19, so I wanted to do a quick check on where we are:

1) The number of cases in Vietnam is now 203. All updates here.

2) There are two main clusters. The Buddha Bar and Grill in HCMC, and the Bach Mai hospital in Hanoi. The latter reminds me of Italy and China, both of which suffered because sick people went to the hospital (in their initial fears) and spread it in those systems. Both countries probably need more primary care facilities.

3) Case 17 is going home, along with many other patients. That’s great news!

4) The markets are crap, at least in Vietnam. VN-Index down almost 5%, HNX-Index down almost 4%. The US is up, surprinsingly. JP Morgan called the bottom.

5) GDP growth in the first quarter was just 3.82%, the lowest in the past decade. That’s not as bad as I expected it to be, to be honest. Although I don’t really understand how they can have a reading when the month and quarter are not over yet.

6) This just amuses me, but this interview with Richard A. Epstein in the New Yorker is amazing. The guy owns himself so hard. He continues to pump out a lot of “information” about how bad quarantining and social distancing is, based on Darwinian economics, whatever that is. A good takedown of him here.

More tomorrow.

Diving into PNJ

SOURCE: VIETSTOCK.COM.VN, VIETECON.COM Note this fixed FPT - I made an error in the last post.

When I wrote about consensus a few days ago (here), I was a bit surprised to find that one of the most loved stocks out there is PNJ. That shows how new I am to the market. The company has been voted one of the top 50 best listed companies in Vietnam. [I actually mis-remembered this - I thought it was the best listed company, not “in the top 50”, so…a bit less impressive. Not even sure the point still stands - suffice it to say, it is a listed company.]

Source; Vietstock.vn, chart by Vietecon.com

The company is pretty well held, and in sizeable amounts, with 12% of Vietnam Holding’s assets in PNJ. The stock has generally trended up over the past five years except for back in June 2018, when a board members was wrapped up in the Dong A corruption case, which I don’t really know anything about. And then of course, recently when it fell almost 44% from its high pre-Tet.

Plus the company just announced that it was closing some stores in Hanoi, HCMC and Danang and will do so until the government says it can reopen them.

This isn’t great for a retail store. By this I mean not retailing. But I feel strongly that it’s temporary. We can’t all stay in our homes forever. And when the economy stops hibernating, retail sales will start again.

So I thought I would look at PNJ’s results over the past few years and see how they’ve done. Now let’s get down to bullet points:

Source: PNJ, chart by Vietecon.com. Note that 2020t figures reflect company targets that were issued prior to the recent shut down.

• Sales have been steadily up. They have grown 14% on average since 2012, with only a slight hiccup in 2015 and 2016 when sales weren’t so good.

• Gross margin has been steadily higher. In fact, when sales slipped in 2015 and 2016, margins rose as did overall gross profit. For example, revenues were VND9.2tr in 2014, with gross profit of VND889bn. In 2015, sales fell to VND7.7tr, but gross profit rose to VND1.17tr. So it was a good trade off.

Source: PNJ, chart by Vietecon.com

• EBITDA margin has generally trended with gross margin, although not rising as quickly. The company has been working on cost control, and we saw that a bit in 2019, when EBITDA margin rose to 9.5% from 8.7% in 2018.

• The company has been consistently opening new stores and stores-within-stores. It now has 348 stores (as of end February), up from 145 in 2012. The big jump happened in 2017 and 2018, when the company opened 50 and 55 stores, respectively. I don’t really have a sense of when it will reach saturation, but as the country gets richer, PNJ can go into smaller cities.

• Same store revenue, since a correction in 2013 and 2014, has generally trended higher. I bet that same-store sales will start to trend up again as the company slows down on opening new stores. We saw that a bit in 2019. It would be helpful to have same-store sales in stores that have been opened 12 months or more, but I wasn’t able to find it in a cursory search.

• Net profit is up 25% annually since 2012! That’s crazy. It is very impressive. They were up 24% in 2019, but the target for 2020 was just a 13% increase. That was prior to stores shutting because of COVID-19.

• It is also a consistent payer of dividends, to the tune of VND343bn in 2019, up from VND268bn in 2018. That’s about a 3% dividend yield based on current prices.

Now let’s talk about some of the less exciting things.

Source: PNJ, chart by Vietecon.com

• Cash flows have been pretty dismal. By that I mean that cash from operations have been mostly negative. For example, 2019 was negative VND661bn, and 2018 was negative VND302bn.

• The company’s store count has increased as well, that costs money. And it appears to be more and more expensive to open stores. For example, capex was VND87bn in 2016, and the company opened 29 stores (net). In 2019, capex was VND223bn, and PNJ opened just 22 stores (net). Of course, there is capex related to its current stores in there too, but it seems like it is more and more expensive to open stores.

• So operating cash flow is negative, and so is investing (which is normal). That means it needs to be financed somehow. In this case, it is mostly debt. Total debt rose from VND1.5tr in 2016 to VND2.6tr in 2019.

• The main driver of the negative operating cash is very high inventories. Look at how they have trended over the past few years. The company used to hold a fairly low level of inventory (47 days back in 2012). It has gone up to 161 days! This takes into account the higher sales and, to some extent, the stores.

But having said that, net debt to EBITDA is still relatively small at 1.5x (meaning the company could pay off all debt in just about 18 months). Debt-to-equity is pretty high at 57%, but the ability of the company to throw off cash is good. It just needs to slow down on purchasing inventory.

On Monday, I want to look at how PNJ stacks up to other companies in the luxury space. Right now, the only comparable that I can think of is Tiffany, which is being acquired by LVMH at a nice multiple. PNJ looks about a third as cheap! There used to be a Dubai-based jeweler, Damas, but it is now owned by a larger Qatari-company after some ownership-shenanigans. But I am sure I will find something. Watch for it.

A few items: no 20 person meetings, exports, Ford and currency manipulation

I am working on a bit longer piece that won’t get done today, so I thought I would just go over a few items that caught my attention.

First, now all meetings above 20 people are prohibited. So basically, Vietnam is moving towards total shut down, like we saw in Wuhan (although not yet that drastic). There is a good New Yorker piece on the quarantine in China here.

Second, export contracts are falling, at least for the seafood industry.

Vietnam's seafood exporters have seen up to 50% of their export contracts cancelled or delayed due to the coronavirus outbreak, the country's seafood exporters association said on Tuesday.

Source: Vietnamese Customs, chart by Vietecon.com

This is surprising to me, because food sales in the US, at least, are way up as people eat at home much more. I wonder if it will reverse.

My favorite seafood provider, Minh Phu, which usually has monthly updates, hasn’t provided any yet this year. The last one was in December. I always feel this is the wrong decision. Transparency is better! People are going to expect the worst, if you don’t give them anything to hang on to.

I assume that we are going to see a drastic fall in exports, but it hasn’t shown up in the numbers yet. Exports in the first half of March were up yoy (16.4%), and there was a trade surplus.

Third, Ford has stopped production in Vietnam, along with production in India, South Africa, and Thailand. That doesn’t count the main production halt in North America.

Think of the car sales process as a pipeline. Suppliers to factories to car dealers to customers. Right now, there aren’t any, or are very few, customers. No one is taking cars off the lot, so dealers are seeing a build up of inventory. So they stop ordering cars: Nah, we don’t need any more Tauruses. If no cars are going out, then there’s no point to making more. Once the market comes back, cars will start to leave the lots, and factories can start pushing out more product. But until then, it makes sense to shut down production.

But that’s not great for workers (some of which won’t be paid). And it is bad for suppliers or their workers that will definitely not be paid.

Fourth, here is a long post by Brad Setser at the Council on Foreign Relations that looks at whether Vietnam is manipulating its currency. His view is that Vietnam now definitely meets the US Treasury’s definition of currency manipulation, and that previously he would want the US to take it seriously, but given COVID-19, he argues that it makes sense to back off for now.

Remember when I have written about this before that it is backward looking - the April report looks at what happened in 2019. I would say that the whole world is completely different and that it doesn’t make sense to hurt Vietnam during this time.

Treasury will put out a report in April - it is a statutory requirement by the US Congress. And it will probably not look great for Vietnam. But the process takes a very long time, and Treasury could say that it is not in the interest of the US to label Vietnam as a currency manipulator.

Anyway, it is very interesting. Also, he talks about Thailand and Taiwan, both of which probably can skate throughout without the label, given some changes on their end.

More tomorrow.

Causes of inequality according to Paul Krugman

I listen to a lot of podcasts, and one is Capitalisn’t, which is two economists talking about economics, sometimes with a third. The most recent podcast was with Paul Krugman, arguably the most famous economist in the US, maybe the world.

Source: Pew Research Center

In it they talk about a lot of things, but I was most interested to hear about why Krugman thinks the US economy has become more unequal over time. You can see in this chart by the Pew Research Center that income by the Top 1% has grown in the US.

So Krugman’s current view is that this has mainly been caused by political changes. Specifically he says that globalization is responsible for 5% of the increasing inequality, 10% from automation and the rest from other, mostly political changes. These include thing like changing regulations, declining unionization, etc.

That’s very different from the sense I get from other economists. I think economists would put much more weight on globalization and automation. Silicon Valley puts the majority of the blame on automation - that’s why so many of them have been proponents of Universal Basic Income (UBI), because they expect future automation will mean less work overall

Source: World Bank

Anyway, what does this have to do with Vietnam. I wasn’t really sure, because I thought that Vietnam is actually a place where people are being lifted out of poverty. And they are!

Looking at the data, the poverty figures have been falling steadily. I particularly like the one that shows the percentage of people living on $5.50 a day or less. This seems a more realistic or common-sense way of thinking about poverty. That’s just $2,000 a year, which is something that would be hard to live on but is doable. Now less than a quarter of Vietnam’s population lives under that level. Great news! In terms of abject poverty ($1.90 a day), that has fallen to just 1.9%, which is even better.

So the country is doing a good job getting people out of poverty. But are rich people getting a bigger share of the pie? In some ways, not so much. Looking at the income share figures, the top 10% take in 27.5% of total income as of 2018. That’s up since 2014 (26.8%) but below 2010 (30.9%). Even back in 2002, it was higher at 29.8%. But the lowest 20% now only take in 6.7% of all income, compared to 7.8% in 1992 and 8.0% in 1994.

Source: Oxfam

It doesn’t seem like inequality is that bad, at least on this one measure. But Oxfam put out a report that contradicts it. It is from 2017, but these trends don’t change that quickly, or at least I don’t think so. You can see from the chart on the right that there has been tons of income growth per capiata at the rich end but not much at the poor end.

And of course there is a lot of regional inequality, with cities like Ho Chi Minh and Hanoi rich, but the Central Highlands and the Northern Mountain regions poor. We have seen the result: rising urbanization. This is just as true in the US as well and globally. Cities are getting richer and richer.

Source: Oxfam

And there are other stats that are just as important for society, besides just income. For example, the ability to jump from one income group to another. This has fallen in the US (and it was/is part of the American dream: anyone can become rich). Vietnam appears to be on same trend.

One hope is that with all of the manufacturing jobs moving to Vietnam, there will be more and more unskilled or semi-skilled work that pays well. That could be very helpful in raising income at the lower end.

But these are hard issues to deal with. The US has been unable to do anything to reverse the tide. Hopefully Vietnam does better.

No more rice exports, and looking at VC money

Vietnam is shutting down, just like the rest of the world.

The big news is that Vietnam has stopped exporting rice. That’s not great for the rest of the world, since Vietnam is the 3rd largest exporter of rice in the world, with 6.58m tons Much of this goes to the Philippines (2.1m tons), with Ivory Coast, Malaysia and China also big markets. It looks like the Philippines will be hurt the most, although the country consumes about 12m tons annually, so it definitely gets rice from elsewhere (domestically and probably more imports).

Ho Chi Minh City is also shutting down, with all restaurants, bars, and any places related to entertainment and beauty. Lots of people are in quarantine - everyone coming in internationally is quarantined for 2 weeks.

In a break from COVID-19 news, there is a new report out on venture capital that had some interesting stats.

Source: NVCA

First, venture capital is just not that important in terms of overall investment flows. Specifically, total US venture capital assets under management (AUM) are just $444bn, which is a big amount, but not that big. It is not as big as the biggest US private equity firm, and two hedge funds are close in size. Apple has $100bn in cash right now, or almost a quarter of total VC AUM.

This represents US and Global VC deal flow. Source: NVCA

Second, US venture capital is still the biggest game in town, but its share is falling significantly. Back in 2004, total VC global deal flow was just $26bn, and the US made up 84% of that. Since then it has been on a decline to just 52% and less than 50% in some recent years.

We have seen a big rise in global VC firms, which is great. Even in the US, VC money is too concentrated - California makes up $257bn of the total VC AUM, or 58% of the total. Sure California is great, and the cluster of companies there makes for a very competitive market. But it can’t be the only place where ideas are hatched.

Source: Google Temasek & Bain

This brings me to Vietnam, which is actually doing alright. I have written up the Google Temasek Bain report on the SE Asian internet economy previously here. It is interesting to put it in comparison to the global figures. Looking at 2018 (which was a very good year) , there were 137 deals for a total of $350m in Vietnam. That represents a bit more than 0.1% of all deals. Ouch.

Total SE Asian funding was $14bn, or a bit less than 5% of the total global deal flow. Let’s say SE Asia represents a 8.4% of the world’s population, then it actually isn’t too bad. But most of the money goes to Singapore, and some of it is then used to invest in other SE Asian countries.

It will be interesting to see how these trends move over time. There is a real startup scene in Vietnam, but ultimately it is small because the Vietnamese economy is relatively small. As Vietnam grows, hopefully its startup scene will grow too.

More on dollar strengthening

Sorry for not writing last Friday. My car was hit by a drunk driver (luckily I wasn’t in it), and it totally ruined my day. And ruined the car. All I can say is that: Thank goodness no one was hurt.

I wanted to follow up on my post from last Thursday about dollar strengthening. This is still an issue around the world - the dollar hasn’t strengthened much over the past few days, but it continues to be very strong and there has been no reversal.

The US Fed has been aggressive and has extended swaps to other central banks, which are using them. This is the same play book that we saw in the last financial crisis. Adam Tooze, which wrote a good book about the financial crisis called Crashed, has a post on this. (Long-time readers may remember his name from this post, where I wrote about the book and the difficulties of dollar-denomination of the world.)

In his post, Tooze talks about how the swaps are being used. He fears that it will not be enough, given “comprehensive and violent capital flight.” In Southeast Asia, Malaysia and Thailand have suffered. The MYR is down about 3% in the past 5 days and 6% since the beginning of the year. Thailand is down 2% in the past 5 days, but 8% since the beginning of the year.

Vietnam hasn’t seen currency pressure (or at least the currency hasn’t changed, even if there is pressure). But we don’t have daily reserve figures (or at least I don’t) to see how the SBV is dealing with all of this.

Vietnam has done a pretty good job of de-dollarizing the economy. Here is an article about how the SBV has implemented new measures to reduce dollarization. The first was in April last year, when it stopped short-term loans for importing goods for domestic demand. The second was:

“Most recently, Circular No.42/2018/TT-NHNN dated October 1 revealed that the SBV would prohibit foreign currency loans to importers in both the mid- and long-term. This decision applies for domestic and international lenders. The SBV aims to reduce the proportion of foreign currency in total outstanding debts below 7.5 per cent next year, and below 5 per cent in 2030.”

Ultimately, if something like 8-10% of total outstanding debt was in foreign current previously, that would mean something like $45bn at the high end. I assume this is only private, with the remainder public That seems about in the right area (although I would love to just see the number, and but it is very hard for me to find - I assume I just don’t know where to look). Lots of this is long term, as can be seen in the external debt figures.

2018 figures. This includes public and publicly-guaranteed external debt. Source: World Bank

External debt in total was $109bn in 2018 (the last data available). Short term was $20bn, and long terms was $88bn. Of the long term, $53bn was public or public-guarantees. Short term decreased from 2017 to 2018, but it was way up in 2017.

Surprisingly, while the portion that was in USD is high (57%), a good portion was in JPY (27%), with a small bit in SDR (8%) and 4% in Euros. (See chart to the right - this is just the public and publicly-guaranteed debt.)

And remember that Vietnam has reserves of close to $80bn, or did as of December. So it seems like it should be fine, especially with the current account surplus (at least through the first two months of the year).

Ultimately, Vietnam probably does need to continue to decrease dollar-funding in the economy, in order to decrease risk to the currency and the underlying indebted companies in Vietnam. Basically, to reduce the risk of default by the sovereign or companies due solely to changes in the currency. The SBV is well-placed now for the current crisis, but it might not last if the pandemic (and the response to the pandemic) continues for a long time, hurts trade (resulting in a deficit) and hurts companies (making it difficult for them to pay back loans).

Dollar strength: risks to companies with FX-debt and -revenues

Another bad day in the markets. The main index was down 2.9%. The US markets are down too, and, no surprise, unemployment claims rose.

A big move has been in the currency markets. The USD is strengthening around the world, as people flee to safety. And the dollar is the only safe asset, at least according to most investors. Even gold has fallen from its higher levels.

But the in move in currency has significant repercussions (that we have talked about before). Looking at the six charts of major currencies and VND versus the dollar, the VND really stands out! No movement.

Source: Yahoo finance, charts by Vietecon.com

Of course, we all know that. The government allows little movement in the currency over time. It is able to do this by selling dollars and buying VND. But you have to have dollars to sell, which is why the country has such large reserves.

Source: Vietnamese customs, chart by Vietecon.com

In fact, Vietnam ended 2019 with a USD reserve of $80 billion, of which $20 billion was bought in the fourth quarter. So it should be able to maintain currency stability, at least versus the dollar, for some time. That is helped by very small trade surpluses in the first two and a half months of 2020.

It will be interesting to see how the trade balance changes over time. Short term, probably both imports and exports will fall, and the reserves will be sufficient to promote stability.

Longer-term, there is probably going to be a continued push to move manufacturing out of China, just to help diversify away from one country. That should be helpful to Vietnam. Against that, I imagine that some developed countries will try to provide incentives for companies to re-domesticate their supply chains. We are seeing problems with drugs, face masks and other essentials in the US that are mostly imported from China.

Source: World Bank, chart by Vietecon.com

But back to the dollar strength, there is limited risk that Vietnam will run down its reserves. The bigger issue is that companies and banks in Vietnam that have depended on dollar funding, will be at risk.

I can only find external debt figures through 2018, but I can’t believe that they didn’t go up in 2019. So these charts on the right are probably a bit scarier now than they show.

While the country was growing, the higher debt burden looked manageable. But now that the economy is at a standstill, interest and principle payments will be much more difficult to manage. I assume the banks (which have mostly VND-deposit funding) will be fine, and the government is very likely to step in. Companies will be in greater risk.

Another risk is that exports will fall given VND strength against most currencies. A year ago, a Euro bought 26,300 VND. Now it buys 25,000 for a 5% decline. So now everything from Vietnam is more expensive. Total exports to Euro countries were $4bn in the first two months of 2020, or more than 10% of total exports. China was almost $6bn, and the VND is 6% stronger than a year ago.

Looking back at my post on Monday, I need to look at both domestic and non VND-denominated debt. If the debt is denominated in foreign currencies, risks are higher. And then I should look at foreign currency revenues as well, because they are likely at risk, just because of the stronger VND.

Maybe that’s what I will try to look into over the next few days, at least for the companies with the highest debt balances.

How much worse?

It is getting hard to find something to write about other than COVID-19. A few headlines that hit me over the day about the virus in Southeast Asia:

• Cases in Vietnam have increased to 75. Spread in the country continues to be linear, not exponential, which is a good thing. The government is really controlling this, and is being even more aggressive over borders.

• Other Southeast Asian countries aren’t doing as well. The WHO is calling for aggressive actions.

• Malaysia has seen a massive increase - 790 cases in total, with 117 confirmed in the last 24 hours. The prime minister has banned overseas travel. (Although the border with Singapore might be partially opened).

• Singapore has done a fairly good job containing COVID-19. But now it faces a different crisis: the estimated 400,000 daily commuters from Malaysia won’t be able to cross. There were long lines on the causeway before it closed, and some opt to be in Singapore. The government is figuring out ways to house them. The rest won’t be able to come over. The government says it won’t face food shortages, which is good.

• Laos, which has no confirmed cases, has closed most of its borders. It seems very unlikely that the country doesn’t have any cases, but maybe they were lucky.

• Cambodia has had a number of cases, and it won’t allow Western tourists, but it is going ahead with military drills with the Chinese.

There are a number of stories (here and here) about passenger airplanes being used for cargo, which is interesting.

I was also surprised by these pictures of very busy airports in Vietnam. We saw them in the US, and it seemed very unsafe to me. Same here.

But the Vietnamese are basically closing the border entirely, so these will be the last ones to come in or go out. Probably none too soon.

Stimulus

The Vietnamese government, like every government, is starting to get serious about stimulus. Right now, there are 66 confirmed cases (updates here), and still no deaths. That’s all great news. Vietnam is doing very well, potentially helped by the fact that it doesn’t seem like COVID-19 spreads well in the heat (although you can still get it even if it is hot outside!).

What exactly is the government doing?:

• The State Bank of Vietnam (SBV) has cut the refinance rate from 6% to 5% and the discount rate from 4% to 3.5%.

• The cap on short-term rates by banks has been lowered from 6% to 5.5%.

• SBV reduced the cap on interest rates on VND deposits to 4.75% from 5%.

• The government has told banks to lower interest rates and waive fees for VND250 trillion ($10.7bn) worth of loans.

• It may defer tax payments that total VND30tr ($1.3bn).

When I talked about debt yesterday, I was worried about cash flows overall. These are all helpful, but they don’t necessarily solve the problem of cash flows, except the deferral of tax payments. That is the most stimulative of all of these for consumers, in my opinion.

For companies, the SBV issued a statement that was pretty interesting as well (Word doc in English here). It looks like if you can prove that your business is hurt by COVID-19, then you get to defer interest and principle payments. That should keep a lot of companies in business, or at least allow them to stay out of bankruptcy for the time being.

I do wonder, though, if the debt balances are sustainable for a number of businesses now. At the least, companies may not be able to take on new debt, because their future cash flows (even in an optimistic scenario) may not allow them to. The same calculation may hold for deferring debt as well.

Let’s put some numbers around this. For example, a few years ago, you built a 500-room hotel at a cost of $50k per room, for a total cost of $25m. But you have actually paid off some of the debt you got to build it, so you only have $15m in debt now.

Stylized hotel income statement. Source: Vietecon.com

Before COVID-19, you made $5m in operating profit, but $4.1m in net income after interest ($1.1m) and taxes (20%, $1m). This is very good return on your initial investment Let’s also say that you have kept a healthy cash balance of $2m.

Even with doing just a minimal amount of work, you probably still have something like $3m in costs that you have to cover, from some salaries and overhead, maintenance capex to keep the hotel in good shape for reopening and some staff that you just can’t fire. And social insurance payments for the staff you do have to let go.

So this year, you will probably run through your $2m in cash quickly and need to increase your borrowings by $1m. You get a deferral on taxes from last year and your interest, but you still have to pay them at some point. Your debt goes from $15m to $17.1m ($1m from the interest deferral and $1m from op expenses you can’t get out of) plus another $1m to the tax authorities.

Your interest expense increases to $160k in future years because of the deferral. The next year, you have to pay off your tax, you need to pay $1.3m for interest, and you expect revenues are going to be down by 50%. Overall, you have operating profits that don’t cover your interest expenses or even your past due tax bill.

In that case, it would be better for your shareholders and employees to get the deferrals, but then file for bankruptcy after drawing down your cash reserves. In bankruptcy, renegotiate the loans - maybe a principle write-down and lower interest rates. Unless banks are willing to refinance once again, we might see a wave of bankruptcies go into next year, even if the banks are very aggressive about lending now.

Of course if demand picks back up to pre-COVID -19 levels, then the new debt load will be fine. Cash flows will be low at first, but should be enough to cover past taxes and the higher interest.

My view is that the companies should take the banks money, use it to give cash to staff and to smaller suppliers, and then let the government help the banks deal with the bad debt, if necessary, in the future. That would help keep money in the hands of people that need it most right now.

Looking at balance sheets

It’s getting weird all over. Canada just announced that it was closing its borders to all except Canadians, permanent residents and Americans (as an American, this seems like a bad idea for Canada). And Canadians can’t get on a flight to Canada if they have symptoms. The EU is doing something similar.

In Vietnam, there are 61 cases, mostly Europeans or people coming from Europe. Schools still shut down.

I don’t know what will happen, but it does seem like cash flows are going to be an issue globally. Maybe with China going back to work, we could see more exports there, but it seems like the slowdown will continue.

I wanted to start looking at companies and see how well-equipped they are to ride out the downturn. For Vietnam, I decided to start with the bigger companies (by market cap) and look at a few metrics.

I took a dozen companies and put together a comp table with some interesting stats. I didn’t include banks in this, although I do have some data on banks.

My quick conclusion is that these bigger companies were pretty well-situated at the end of 2019.

Metrics based on 2019 YE figures (for BS items) and 2019 IS figures for sales and earnings. Source; Vietstock.com, Vietecon.com

Key takeaways:

• Overall valuation metrics aren’t that high (these are trailing figures) but they also aren’t that cheap. VIC skews it a bit - excluding the stock, P/E comes down to 12.6x. The median P/E is only 11.1x. Of course this is after the massive declines we have seen.

• Debt-to-equity is 58.9% on average (the median is similar at 58.6%). Novaland (NVL) looks the worst out of this, although its interest coverage ratio isn’t too bad. And liabilities to assets is high, but not crazy.

• The current ratio is 1.8x (better if it is higher), but the median is actually 1.2, because it really varies a lot. MSN and VRE look the worst on this. It’s basically a measure of how easily you can fund your shortest-dated liabilities using just your short-term assets.

• Interest coverage is around 38x on average, but the median is more important here at 11x. And there are some that are much lower at 3-5x.

Source: Vietecon.com

I did a little exercise where I ranked everyone from 1-12 for each of these metrics, with 1 being the best and 12 being the worst. I then added up all these rankings to get a total number - with the lowest score possible 4, and the highest 48. It is pretty clear that two of these (GAS and SAB) are very well situated, helped by having very little debt.

On the other hand, MWG, NVL and VIC are riskier, with higher debt levels. MSN has a high score, but its debt is lower (58%) and interest coverage is almost 5x.

Specifically on VIC, it was spending a lot to build up its new businesses, and it has stopped that. It sold Vincommerce to Masan and closed Vinpro. It has some good recurring cash flows businesses that should be able to help support it like Vincom, but it also has resorts that have been shuttered. So it is going to be messy if Vietnam remains shut down.

More on balance sheets and such tomorrow. Stay healthy!

Counterprogramming: IP cases

First, obviously everyone is worried about COVID-19. That’s all I read about. A few updates:

• Vietnam is at 47 patients tested positive. Case 17 really seems to be a center for a bunch of cases now.

• The country has cancelled visas on arrival for Americans (so I heard). I can’t see this online, but I heard from a source.

• Schools closed through April 5.

• A Vietnam Airlines flight attendant tested positive for COVID-19.

Now, I want to talk about a story that caught my eye a few months ago and I didn’t get a chance to look into: Intellectual Property Protections.

Like most Westerners, I have a somewhat cynical view of intellectual property (IP) protections in Asia. China has a bad reputation for it, and it is one of the things that the US is pressing in its trade negotiations.

In this survey of US CEOs, more than 20% said Chinese companies have stolen their IP in the past year, and more than 30% in the past decade.

Vietnam is on the Watch list for IP theft in the last report by the US Trade Representative. At least it isn’t on the “Priority Watch” list.

Of course, looking historically, emerging markets have always stolen IP. The US did! A business doesn’t have the intellectual know-how; they need it ; they try to get it through all sorts of ways. This can include joint ventures, hiring experts, sending students to work and study abroad, and stealing it.

This article goes into the history of China’s IP theft, and I found this interesting:

For example, decades ago Japan, South Korea, and Taiwan were each perennial Section 301 violators until they reached a per capita GDP of about $20,000-$25,000.

The authors’ view is that China is making real progress on protecting IP, with lots of courts, where foreigners have actually fared pretty well. I am not sure I have the same view, but still, it definitely looks like progress is being made in China.

Vietnam is another matter. I expected that IP protection would be way down the list of priorities of the government, but it turns out I was wrong. This article actually talks about new enforcement of corporate criminal liability, including IP violations. On January 14, a Vietnamese company and its director were required to pay compensation to another Vietnamese company for unauthorized use of its branding.

The total fines were over $100,000, including a VND500m ($21,600) fine levied against the director.

I don’t want to be a pollyanna , but I see this as definite progress. Let’s see if foreign parties are also able to win in these courts, but this is a good step.

Foreigners in Vietnam

It looks like all over the world, countries are shutting borders and restricting travel by foreigners. The US is the prime example, with President Trump blocking travel by people that have been in European countries in the past two weeks.

Source: Kate Taylor, Business Insider

In Vietnam, we have seen this since the beginning of the spread of COVID-19. It is interesting to see how it has moved from Chinese to now Europeans. Here is a story about the sign on a bar that says it won’t serve Chinese - that was back in late February.

Now those with the virus are Europeans coming in to the country, spreading the disease all over. And the Vietnamese are starting to be unhappy with them too! In that vein, I wanted to highlight these two stories.

First, here’s this story about foreign tourists not wearing face masks! It’s a bit schizophrenic: it goes from shaming these tourists to praising them for visiting historical sites.

Second, the HCMC government is “hunting” this man. Not great imagery. Looks like this movie. Anyway, it looks like they talked to him on his mobile, but he wouldn’t tell them where he was. I guess he didn’t want to be quarantined. Sounds like an a$$ to me.

Entry into the country by Europeans is being restricted, with Brits and other European nationals not allowed in visa-free. I assume visitors from the US will be next. Australia has more than a hundred cases, so that could be another

I really don’t think the economic impact is the most important, but this is an economics and finance blog. The economic situation appears increasingly negative everywhere. While China seems to have gotten a handle on it, it still will suffer if others aren’t buying and logistics are slowed.

The financial markets globally are down again today, and I don’t know when the decline will stop. Looking at China, it took about 3 months or so for the virus to die down. But that took massive restrictions in movement. The US had its first case in January 20, but it wasn’t until late February or early March before it really started spreading. Similarly for the UK and some other European countries. So by the end of May, maybe all of this will be over! That might be optimistic!

Until then, there is going to be massive volatility in the markets. That’s about all I can say with certainty.

TNG and how markets don't move like you expect

The more I look into the Vietnamese market, the less I know. The main thing is that Vietnamese stocks are really not expensive. I mean, some can be sort of pricey, but the P/E ratios that I have been looking at in the US or other emerging markets are very high. But the small cap stocks in Vietnam, well, they are just very cheap on a P/E basis: 3-6x. That’s nothing. That means for some companies, in 3 years, you earn back your investment. Plus, return on equity can be quite high, as we saw with MWG.

Source: Yahoo finance, chart by Vietecon.com

And today, my conceptions about the market affect of COVID-19 have been totally blown away. First, let’s set the scene. In the US, the markets are a mess. The S&P 500 is down 11% for the year as of the close yesterday (and trading down another 3.5% today when I last looked). But there are some stocks that have done well:

• Zoom Technologies: Up 7.1x since the beginning of the year. This is a online video meeting platform. It is very well liked. It is profitable. And lots of people are using it now as remote work becomes important.

• Co-Diagnostics, Inc: This is a company that makes tests for COVID-19. It’s up 7.6x! And no duh. It makes the thing that literally every single American wants right now.

• Clorox: In the US, this is the main brand of bleach and disinfectant. It is up 12%, but on a relative basis it is up about 25% compared to the rest of the S&P, so it’s doing fine. It is a very large company (market cap of $21bn), so it has a lot of products that don’t benefit as much from the virus, and that’s probably why it didn’t rise as much as the others.

Ultimately, these moves kind of make sense. Zoom is able to sign up a lot of new businesses. A friend told me a lot of colleges are using it for teaching. And many of these are going to be sticky customers. For Co-Diagnostics, it will sell any tests that it makes immediately, and probably can require money upfront. Plus, it may be able to use whatever test they make now as a basis for other tests in the future. Clorox is going to benefit from a renewed wave of cleanliness in the US.

Source; Vietstock, chart by Vietecon.com

So I was extremely surprised to see how TNG has performed. This is a maker of surgical masks, used all over the world and based in Vietnam. It announced that its sales are up 65% in February alone! And it has lots of orders. How has see the stock performed, you ask? Not well.

In fact, it’s fallen 23% since the day before the Tet holiday. And it is down 29% yoy. So the stock isn’t all that exciting.

Source: TNG, vietecon.com

But the operating performance is very good: revenues up 34% annually since 2016, with gross margins mostly flat (down 60bps over the same period). Operating margins actually improved from 4.9% in 2016 to 6.3% in 2018. All of this has resulted in improving returns on equity - they were 25% in 2019.

Plus its cheap. It’s trading at less than 4x trailing P/E, and

Ultimately, the company’s performance is very good. It is a low margin business, but one that is starting to result in much higher returns. Liabilities have grown just 14% annually since 2016, compared to a 27% increase in equity. Debt to equity is high at more than 1.3x, but it has fallen from 2.1x in 2015. Basically the trends are all in its favor.

The only things that makes me nervous are:

• Free cash flows aren’t great. The company probably had more cash from operations than capital expenditures (it is hard to tell from the current financials), but barely did in 2018 and didn’t before then.

• Most liabilities are short-term. Short-term borrowings and leases make up 53% of all liabilities. This is down from 63% in 2016. The company is slowing moving these to long-term, but it is taking some time. And the general trend is for assets (and therefore equity) to grow much faster than liabilities.

• The company doesn’t have a long track record of dividends. TNG paid a cash dividend of VND800 per share last year. (It often gives shares as dividends, which doesn’t count*.) That’s not a bad dividend at 6.2% yield. But it doesn’t have a long track record of paying the in cash.

• A large number of shares being issued. This probably isn’t a big deal, but the company had less than 30m shares back in 2015 and now has 65m. Lots of these appears to be share dividends (more on this below). Management holds a third of all shares.

I think another dividend this year, say VND1,000 per share, would go a long way to quell these concerns. And if the company could move more liabilities to long term, just to ease some pressure. I think that would be helpful. Growing revenues and order book should allow this to happen.

Of course, I might be missing something obvious. Also the fact that the market cap is so low ($37m) means there probably aren’t tons of professional investors looking at it. We will have to see, but I am bullish on the stock.

* For example, say you own 100 shares, which equates to 10% of all shares, which means that there are 1,000 total shares outstanding. The company gives you a “dividend” of 1 share for every share you own. You now own 200 shares, but the total number of shares has increased to 2,000. Do the math. Yep. You still own 10%.

Tourism stats, salinity in the Mekong, bird flu, bus rapid transit and a great data tool for COVID-19

My mind is occupied with COVID-19 and the stock market right now (I thought there would be a bigger bounce in Vietnam today - the US markets ended up almost 5% higher). But there are other things going on in the world besides the delay of my early retirement (or any retirement):

Source: HCMC Department of Tourism via Vietnamplus

Tourism stats out: The year wasn’t starting that bad! In January, HCMC hosted 833,000 tourists, up 6% from January 2019. But February, the fall off was really drastic: -52%. Still the city was able to make VND21tr, $915m in tourism revenue in the first two months. That isn’t that bad, although March is going to be extremely bad.

What can we read from this? First, it really seems like the long term trends are in Vietnam’s favor. We will have to see what happens with tourism because of COVID-19, but right now, I think we could see a return to growth pretty quickly, once the panic recedes.

Second, I feel that Vietnam is getting a lot of credit for its ability to fight the spread of the virus. Or at least it was until the resurgence over the weekend. I still think that halo should help it attract tourists, but also investments, going forward.

Source: Worldstopexports.com

Rising salinity in the Mekong delta: I have written about environmental issues around the Mekong a few times (here and scroll down to Feb. 20). I see this story as a small part of the bigger environmental story of the Mekong. It is simple: hundreds of thousands, if not millions of people, depend on the Mekong either directly or indirectly. The reason that Vietnam is the third largest exporter of rice in the world is because of the Mekong.

But the problem is that, like we saw in 2016, rising salinity is threatening agricultural land and drinking water. In total 33,000 hectares of rice fields and 70,000 households have been affected so far.

The government estimates that 362,000 hectares of rice fields and 136,000 fruit trees in the Mekong Delta will be affected by drought and salinity this year. The net result is that more than 120,000 families will experience water shortages.

The impact on Vietnamese people’s lives will be vast, but it could also impact the rest of the world, since the country is the third largest exporter of rice by value. In 2018, it made up almost 9% of total world rice exports, so any hiccup could result in higher rice prices globally. As I wrote last Wednesday, rice exports were a glimmer of hope among mixed agriculture export news. This may be difficult if the drought is as bad as government expects.

Five provinces have already declared a state of emergency. The government needs to come up with a plan on how to counteract this.

More bird flu: From the coravirus to bird flu, Vietnam can’t get a break.

More than 137,000 poultry across 13 provinces and cities of Vietnam have been culled so far this year in an attempt to prevent bird flu outbreaks, the country's Ministry of Agriculture and Rural Development said on Friday

This seems to be worse than last year. According to this story, the government had killed only 23,000 as of July last year. So this year’s figures are not good. But the impact is fairly limited to the bird owners. It doesn’t look like anyone has caught bird flu in Vietnam since 2014, and even from 2004-2014, when it was endemic, only 127 people were infected, although 64 of these died.

Also, swine flu isn’t over either, with almost 20,000 culled so far this year.

Bus rapid transit: Two years ago I went to Colombia, which has a great bus rapid transit system. What that means is dedicated lanes for buses that can travel express all over the city without getting stuck in traffic. It is much faster than riding in a car (at least at rush hour), and it is a lot less expensive for cities than building metros or trams.

HCMC is now building a bus rapid transit system using electric buses, which would be extremely environmentally friendly. It wouldn’t be cheap at $137m. But put that in context: authorities approved a budget of $1.87bn for metro line 1. Just 17 train cars cost $370m. So this is a bargain!

Ultimately, the city needs to come up to a solution to its traffic problems. It can’t be Grab and Go-Jek, although I love ride hailing personally. Ultimately, it needs to include public transit, and a part of that needs to be buses.

Finally, if you want a good overview of COVID-19 cases, here is a great interactive database from Johns Hopkins University.

Oilpocalypse

The markets are crashing: the S&P 500 is down more than 7% now, while the Vietnamese markets are down about 6%. The markets are down because people are worried that COVID-19 will have a bigger economic impact than they previously expected. And specifically in Vietnam, six new cases popped up over the weekend, which scared people anew.

Source: Investing.com

While I have been saying that markets have not been reacting enough, especially because of the impact on specific sectors like tourism, etc, I now think that maybe we are over-reacting. It’s hard to quantify this, but I have the sense that markets start picking up later this week. Just a gut feel.

However, one of the things that is compounding the virus fears and can have a very big impact on the world economy is the drastic fall in oil prices (down 23-25%). This is the lowest price since 2015 (it was just one month back then). Before that, it was 2004 when it was this low. That’s a long time ago!

Why is the oil price so low? Basically because Russia and Saudi Arabia are fighting over supply issues. Plus, both have gotten sick of US oil companies, mostly shale companies, producing so much oil. The goal from Russia’s perspective is two-fold: 1) to get Saudi Arabia to lower production, 2) to send the shale producers into bankruptcy, because at these oil price levels, their production is not profitable. Saudi has similar reasons: 1) to get Russia to limit production (at least this is what I suspect) and 2) to bankrupt shale companies.

Ultimately, this is not great news for parts of the US like Texas and North Dakota that are dependent on shale oil. There is a high likelihood that companies will go bankrupt.

Source: Vietnamese customs, Vietecon.com

What does this mean for Vietnam? Well, Vietnam is both an exporter and an importer of oil and petroleum products. Historically it has exported more than it imported (although it was never really a big player), but that has changed over the past few years.

The country imported 3.6m tons of crude oil (or almost 25m barrels) for a net cost of $1.6bn in 2019. That’s not that much, but it is up 3x from 2018. Adding in petroleum products and LPG, the country imported almost $10bn worth of oil or petroleum products, or $6.5bn on a net basis. These imports are about 4% of all of Vietnam’s imports.

But now this is all cheaper! The average price of brent crude was around $64 last year. If it miraculously stayed around $35 for the remainder of this year, the country would look for a 45% cut in costs, or $4.5bn. That would be cut the import bill by almost 2%. That would be great for consumers and would also mean a bigger trade surplus, all else being equal.

Of course, the positive effects of lower oil prices will mean nothing if demand generally contracts, and will depend on two things: 1) how bad is COVID-19 and 2) how bad are the measures to stop COVID-19?

My view is that it will be bad for another month or two, and then slowly things will pick up. But at this point, who really knows.