Economic Research

Macro Commentary
March 2011 Vietnam

THE JAPANESE EARTHQUAKE: ECONOMIC IMPACT ON VIETNAM

I.

Alan T. Pham, PhD Chief Economist

Background
On Mar 11, 2011 an earthquake measured at 9.0 on the Richter scale struck the Sendai region in north east Japan. It was followed by a tsunami wave that hit the shore, causing widespread damage and loss of life. At last report, the number of deaths was put at 6,000. Total damages were estimated by insurance companies at more than USD300 bn. This number is sure to increase as a more careful survey of the devastated areas is made by insurance agents. Capturing most of the headlines was a radiation leak at the Fukushima Dai-Ichi nuclear generator. The danger from this source, if any, is said to be limited geographically to Japan. But such news tends to carry an emotional effect, because similar reactors are used in other countries to generate electricity.

II.

Analysis
The global impact deriving from this disaster is likely to be limited. During the Kobe earthquake of 1995, all production facilities were back in operations within 9 months to 1 year. There may be disruptions of supplies in electronic components for industries in other Asian countries. Auto parts for Japanese factories in Europe and the US may be in short supply for some time. However, most factories do carry a supply buffer for such an emergency situation. The yen grew stronger in the immediate aftermath due to Japanese investors repatriating capital for re-building the home country. Insurance companies also sell some foreign investments to bring back money for paying claims. There is a short term decline in Japanese demand for oil due to lower industrial production activity in-country. Japans trade balance would tend to improve, boosting the yen. A fall in Japanese oil demand can soften the world price of crude, further reducing the countrys oil import bill. The BOJ reaction was typical of any central bank in a case of national emergency: it flooded the market with liquidity to ensure that all business operations can carry on normally. It stands by to continue this assistance as long as necessary.

1. Implication for the world economy

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Sunwah Tower, 5F 115 Nguyen Hue, District 1, Ho Chi Minh City, Viet Nam T: +848 3827 8278 F: +848 3827 8368 E: sales@vinasecurities.com W: www.vinasecurities.com Bloomberg: VNSC <GO>

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Alan Pham, PhD, Chief Economist Nguyen The Cam Hoan, Manager Huynh Phu Sy, Analyst T: +848 3827 8278 F: +848 3827 8368 E: economics@vinasecurities.com

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III. Implications for Vietnam

1. Impact on ODA flows - FDI and FII investment programs.
There would be minimal impact on ODA programs. Compared to the whole budget of this country, such programs are small. Japan has a major role to play in Asia over a long term, and would fulfill its obligations under these bilateral aid programs. In 2010, Japan committed USD2.2 bn or 12% of the total ODA amount decided at the CG (Consultative Group) meeting in HaNoi. The magnitude of this commitment would likely remain intact. We note that a rising Yen can increase the DSC (debt service charge) on ODA loans from Japan. VN will need to get USD to buy Yen for this purpose (the dong being inconvertible vis a vis the Yen). With the VND depreciating against both currencies, the debt servicing cost is expected to be higher. FDI and FII flows are not expected to decline, even though some delay in disbursements can happen in the short run as an assessment is made of the quakes total impact. Furthermore, Vietnam has been selected by many Japanese companies as a promising market for their operations in Asia, after China. Even after the earthquake, Vietnams intrinsic merits as an investment destination remain as valid as before. After this event, there is increased demand in Japan for basic items such as foodstuffs, especially rice. Vietnam companies which export these commodities may find opportunities to increase business due to their geographical proximity to Japan. In 2010, Vietnams exports to Japan totaled USD8 bn, comprising mostly of basic commodities with low demand-elasticity. Thus, their volume and value would likely not change a great deal . In 2010, Japan ranked as the 4th most important trading partner with Vietnam in terms of combined exports & imports value.

Vietnam Top Exports by country - 2010

Australia 7% Germany 6%

Vietnam Top Imports by country - 2010

Malaysia 5% Singapore 7% USA 6% China 32% Thailand 9% Taiwan 11%

I.
Korea 7% Swizterland 8%

TRADE DEFICIT
USA 36%

China 17% Japan 19%

Japan 14%

Korea 16%

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2. Impact on tourism.
This is one sector where an immediate impact is felt. There are yet no exact estimates, but many tourist companies have reported cancellations of plans by Japanese tourists in coming to Vietnam. Saigon Tourist cancelled a tour by about 100 Vietnamese tourists going to Japan for seeing cherry blossoms in April, with a booking price of 2500 USD per person. Vietnam Airlines would see a decline in its business of flying passengers both to and from Japan. Japan is its most important foreign market and is closely linked to the tourist trade. After the quake, shares of the VinPearl Joint Stock company, which owned resort facilities catering to Japanese tourists, fell 5 per cent. The company estimates that the number of arrivals from Japan would decline by one third this year.

3. Impact on the garments and sea foods industries.

In the 1990s Japan was an important customer of our sea foods, buying about 80% of Vietnams sea foods export. From 2000 onwards, with a larger outlet to the US and EU, Japans share has fallen, but till stayed at about 35%. Furthermore, Japan tends to buy the high-end of sea foods products, with high content value. After the quake, industry sources are expecting a disruption in these normal trade flows. A precise evaluation is not yet possible, but a decline in near term shipments is possible. A similar impact would be felt in the export of garments, foot wear. In 2010, Japan accounted for USD1.2bn (or 12%) of total exports by this industry. For 2011, initial calculations point to an increase in share to 18% by Japan. After the quake, all these prospects are in doubt. A short term result is likely to be cancellation of many export orders, and the industry is bracing for that. VN also imports more than USD1bn of electronic components from Japan (LED screens, high-end computer chips and motherboards). The shut down of earthquake damaged factories interrupted this supply source. As a result, in recent days, prices of electronic products have risen on local markets. Besides the direct effect on export order of garments and sea foods, the quake shut down or damaged many sea ports on the east coast of Japan. Such transportation disruptions also have an impact on Vietnam goods that arrive by ships, such as clothing and foodstuffs. Sea foods are susceptible to rapid spoilage if transportation cannot smoothly convey them to markets. Air transport is more expensive and would cut into profit margins.
Vietnam Import Goods from Japan (mil USD) - 2010

Vietnam Export Goods to Japan (mil USD) - 2010

Textile, sewing products 1,154 3,401 920 903 455 894 Wood and wooden products Others 400 403 Electrical wire and cable 2,551 Machinery, instrument, accessory Seafood 1,027 3,395

Machinery, instrument, access ory Iron, Steel Computers, Electronical products & parts Articles of plastics 1,241 Parts and accessories for motor Others

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4. Bottom line
The earthquake will have real impact on Vietnams economic relationships with Japan. Hard estimates are not immediately available. The total magnitude is not likely to be major, but would be felt in a few particular industries. ODA programs come from the national budget and is unlikely to be cut back due to (i) its small relative size, (ii) Japans long term interest in playing an important role in Asia. FDI and FII flows are motivated by Vietnams advantages as a good investment destination. Many Japanese companies and businesses have affirmed this estimation. It is not likely to be changed after an earthquake in Japan. Three industries will be directly affected by a fall in business from Japan. o Tourism o Garments, footwear o Sea foods A small decline is expected in the short run, but over a medium term, the value of these products from Vietnam would re-assert themselves, and the decline would likely be reversed.

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