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Investors turn away as gold loses its sheen

Update: July, 27/2015 - 08:00

After falling for a week, both the global and domestic prices have picked up slightly since July 20. In fact, on that day prices were up by 200,000 per tael to VND33.15 million ($1,520). — Photo doanhnhansaigon

Compiled by Thien Ly

Do not tough gold" is advice that many experts are giving Vietnamese investors amid a relentless fall in the prices of the metal both here and globally.

July 16 was an unusual day for gold prices as they changed 50 times on jewellers' electronic signboards and ended up nearly VND1 million ($45.7) lower.

A tael, or 37.5 grammes, of State-owned SJC's gold closed at VND33 million (US$1.511.3), though international prices fell by only VND100,000 per tael.

Analysts said that this precipitous drop was also a rare phenomenon in Viet Nam.

But there was little increase in buying.

Usually, considering gold is one of the most popular and stable asset classes in Viet Nam, demand for it has an inverse relationship with prices.

But this time, though prices fell off the cliff, buying accounted for only 30 per cent of gold shops' transactions.

Analysts have attributed the sharp drop in the prices of the precious metal to several reasons, but say the main cause is the US's reiteration that interest rates are likely to rise this year, which will push up the value of the greenback.

Many others believe however that the reasons for Vietnamese prices falling 10 times higher than global rates are domestic.

The Vietnamese people's habit of parking their savings in gold has shrunk significantly, dragging down demand, since the central bank adopted several measures to reduce speculation in and the use of gold.

After falling for a week, both the global and domestic prices have picked up slightly since July 20. In fact, on that day prices were up by 200,000 per tael to VND33.15 million ($1,520).

Again, the recovery did not cause any increase in demand.

Analysts attributed this to the fact that gold has somewhat lost its sheen since Viet Nam's economy is looking up, improving people's trust in the dong as well as economic prospects.

In the first half of the year the country's GDP grew at the fastest rate in five years, inflation remained low and the exchange rate was stable.

Banks are paying reasonable interest on deposits in real terms considering inflation is low.

The property market is showing definite signs of recovery after many years and the stock market is headed for multi-year highs to take the shine off gold.

Hence the analysts' exhortation.

Increase capital

For economists, 2015 represents a boom year for mergers and acquisitions (M&A) in the banking system since there will be at least six of them this year, all involving Vietnamese banks.

They are a key part of the State Bank of Viet Nam's efforts to restructure the industry in 2011-15 to help local banks improve their efficiency and strengthen their finances.

Under the scheme, the central bank had planned to reduce the number of banks from 35 to 17 by this year while making them bigger and more competitive so that they can be ready for competition when Southeast Asia becomes a single market in the form of the ASEAN Economic Community.

However, as of June the number had reduced by just five to 30.

Of them, seven banks have a prescribed capital of over VND10 trillion ($458.72 million) while 11 have VND5-10 trillion ($229.36 million and $458.72 million); the remaining 12 have a combined capital of just VND40 trillion ($1.83 billion).

With such modest resources, they will be unable to widen operations, extend their network or improve their management or technology.

To ensure the restructuring process is successful and the goal of reducing the number of the banks is achieved, analysts said the central bank should raise the minimum capital for domestic banks from the current VND3 trillion ($137.6 million) to at least VND5 trillion ($229.36 million).

To increase their capital, normally domestic banks issue shares or sell stakes to foreign strategic partners to take advantage of their deep pockets and tap their management experience.

But only major players are guaranteed of success with either option.

For small, weak banks a merger with other banks is the only route likely to be left.

The analysts also said banks should focus on improving management and human resources.

Overall, the mergers and acquisitions will benefit the economy by helping address the fact that there is no Vietnamese bank large enough to take on international giants.

Besides, consolidating the banking system is going to be a critical factor in transforming the country.

Building industry's threat

The Duc Thanh Technology and Investment Company in Ha Noi is one of few Vietnamese businesses involved in the production of unbaked bricks.

For many years the company has been investing in new technologies to improve its products and enlarge its share of the domestic market.

However, its efforts do not seem to have paid off.

Company bosses said that the Government, acknowledging the many good aspects of unbaked bricks, has many policies to encourage people to use this product.

But the product has not become popular because people still prefer to use baked bricks though their production seriously affects the environment.

More trouble is around the corner for Duc Thanh and other adobe brick manufacturers with the market to be opened up to imports following the establishment of the ASEAN Economic Community (AEC) at the end of this year.

This will transform ASEAN into a region with free movement of goods, services, capital, and labour.

Since most of the technology and equipment used in manufacturing unbaked bricks in the country is imported, production costs remain very high.

Meanwhile, the imports will not only be cheap but also diverse since they are manufactured using advanced technology and highly skilled human resources.

Bruising competition is expected not only in the unbaked bricks market but also many other building materials markets like ceramic tiles, cement, terracotta, and paints.

Viet Nam has more than 200 paint companies, many of them large foreign ones with famous global brands.

The number is predicted to rise further with the country's deeper integration, meaning fiercer competition.

Construction companies too are expected to face severe competition due to the country's global integration, with many of them thought to be very weak in terms of marketing, professional skills, production capacity, and management.

Analysts said the Government's current open policy is aimed at creating a new playing field for local businesses including those in the building materials and construction industries.

These firms, particularly those in construction, should improve in all aspects so that they can sharpen their competitive edge and survive, they said. — VNS

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