In this interview, Michael Kokalari discusses how escalating tensions in the Middle East and disruptions in global energy flows could impact Vietnam’s economy, markets, and investment outlook.
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So,firstly, you happy for me to record this? Yeah.
Go ahead.
Yeah.
Fantastic. so basically I just sort of want to run through your uh, economist note and I have a few sort of follow-up questions on that.
Yeah. Good. Good.
Where I sort of wanted to start with right at the top, you sort of said you’re expecting there’s a 80% chance that it will last for two to three weeks, two three weeks longer. So I’m just kind of wondering how you came to that sort of conclusion.
I just pulled that out of the air.
And my — the reason why — I’m — okay, so first of all, I’m not stupid, I understand there’s all kinds of polymarket type, you know, stuff going on, but I’m just looking at it from a too big to happen point of view.
I don’t think there’s been a full understanding or recognition of how much, in fact — whatever I wrote in the report is even — I have to tone down a little bit for, you know, because we published the report and stuff — if it’s — if this uh happens, that the supply ofof fuel, of LG, of fertilizer, of helium, of — if all that gets cut off to Asia, this will be worse than COVID. This will be like COVID plus the GFC. I mean, it will be absolutely horrendous, and that’s the reason that I think it cannot happen. So, I just made that number out of the air.
Okay, cool. Cool. Well, I’m just wondering then like, does that impact sort of your investment decisions or —
Of course, we’re raising cash.
Yeah, but I’m like you’re saying it’s going to be two to three weeks. Are you making decisions based on that sort of time frame or — ?
Sure
Sure. Yeah. Okay, cool.
Because, by the way, once once things are settled and things start flowing again, there’s going to be an enormous surge in all stock markets, not just Vietnam’s — there’s going to be a huge, you know, rebound rally, and the one way to see that is that, look at how resilient stock markets — certainly in the US — there’s an in, there’s a — we look at what’s called the VIX, uh, which is like volatility index, the VIX has barely gone above 30 the whole time — so, the stock markets have been really resilient, and and we think that once it’s clear that things are starting to, you know, approach something getting back to normal, there’ll be a a huge surge in markets everywhere.
Sure. I mean, I guess like two to three weeks is quite short, is what I’m thinking. And I’m going if this drags on for months, the impacts could be huge.
Well, okay, we should be a little bit careful and clear. And you’re — it’s a good point you’re making, and I’m — you’re not the first one to say that. So I’m like, will the war keep happening? Will there still be all kind of, you know — yeah, that’s — could — that’s likely, but the only thing that matters for the economy is whether the oil and other things will flow through the street of foremost. That’s it. Nothing else matters.
So whether there’ll still be some, you know, missiles going back and forth or whatever — yeah, that could be — that’s probably a one year or two year story, something like that, but as long as the flow of energy and other products is happening — and I think — so I think the resolution, unfortunately, from a US point of view, this is going to be — you’re probably a little bit too young to remember all this stuff, but when I was a kid we used to talk about the Suez Canal crisis, uh, which was like in the 50s, and the Suez Canal crisis is sort of the end of the UK empire, when it was a really dramatic — so I do think that in the US will be forced to capitulate. Well, Iran is obviously going to control that area.
They’re going to charge a $2 million toll, you know, for stuff to go through.
And later this will be a point that people recognise, like, oh, this was really terrible for the American Empire, you know, but uh but that’s not what we’re talking about in any of this. I just mean that, you know, it has to unclog very quickly, or it’s going to be like, like one of the worst economic events in my lifetime, basically.
Sure. Cool. Okay, cool. So now that we sort of established that, I want to go to the numbers you sort of put forward, or you think GDP growth is going to take a 1.5 percent hit.
Yeah.
Based on my reading of — is based on it being two to three weeks longer before things start to open back up — basically ending kind of now type thing.
And the point there is that even if it ends kind of right away, it’s still going to have a pretty dramatic impact. You know, that’s going to last for basically the rest of the year.
So I’m curious, have you forecast beyond what happens if it goes more than two to three weeks? Have you forecast beyond what you think? What — like, sorry, if it goes beyond two to three weeks, have you forecast?
Okay, that’s a great question, and that’s actually relatively easy to do.
You would be surprised that that’s actually not that hard.
Coming up with the 80% number is kind of just out of the air.
But coming up with that stuff, actually, there’s about — so 20 million barrels flows through the Hormuz, right, that you could probably divert maybe 10ish of that.
So Saudi Arabia has got this pipeline that goes across the countries.
It can have five million coming via the Red Sea, etc, etc.
But, so that stuff you can just flip on in one day.
But there’s been about 10 million barrels of oil that’s been in that field, in the EMP field, they call it shut in.
So shut in means you pour concrete and you plug up the well, and you — that you cannot just turn back on.
So you have to — once you shut in a well, you have to very gradually get it back online.
So that’s one thing.
And then the other thing is that some people who — much more knowledgeable than us, and, you know, there’s this guy Jeff Curry I like, who’s I’ve been following them for years.
Several people talk about this idea that there will be, and there’s there’s a very clear pattern, that when you have one of these big disruptions, people don’t — it’s not just that they want to restock, like because they just had this trauma — the the global oil demand will be probably about three million barrels per day higher than it was, you know, just because people are like so freaked out, and, you know, not only do I want to restock, but I want like even more, you know, like, for example, Vietnam the oil reserves is very low here, so that will be certainly be one of the first priorities, and that’s in a played out scenario all across the world.
So you do some calculation, it can figure out that oil is not going to come back to a a equilibrium supply and demand equilibrium at least for five or six months, and so then you can kind of map out like, okay, realistically, and I — we did it in the report, I can’t remember the exact numbers, but it’s whatever the — it’s like a hundred until this thing kind of opens up, and then, you know, high 70s after that, do some back of the envelope calculation, and you find out that the average this year will probably be 85 or 87, something like that.
Something I did not get into in the report, because just otherwise it’s going to get too long, is the idea that if I — if if if people — if someone had told you in advance like here’s all the things that’s going to happen in the oil market, someone told you, you know, could three three months in advance like the straight’s going to be blocked and, you know, Trump’s going to be acting like a retard and, you know, this Europe and this thing, that if someone told you all those things in advance and they say well what would the oil price be, every single person come that I know that’s knowledgeable comes to the same conclusion, should be 200, so so the fact that all that stuff happened and it’s still like in the low hundreds, what that means is that after things start flowing and and things kind of start going back to normal, the price of energy is going to collapse, like really collapse.
And so what we’re setting up for is for 2027 to be — the price of energy is going to really collapse.
It’s going to be huge boom in the world economy.
And now, with all this tectonic plate stuff shifting around, Vietnam’s going to be like at a great position to, you know, take advantage of all that.
So it be very difficult this year, but then after, you know, and these are all kind of relatively easy to calculate out and figure out, you know.
Sure. So, break this down for me. Vietnam’s position, you said, is going to be really uh this is going to be in a really good position. What sort of ways…
We’re friends with everyone basically, you know?
About like any particular sector or like what —
Well, I’ll come back to it in a second, but just to make sure I really nailed this point home, let’s think about the countries that benefited the most from World War II.
So obviously the US, because we won, but Switzerland, you know, this was a big — you know, they were kind of the in between, right, so what what you will see here — you’ve already, you know, been seeing it for a couple years now — is more and more intense FDI coming here, because you can feel safe that if you manufacture products here — and that’s a, you know, a continuation of an existing trend — more manufacturing of more high-tech products, the buildout of local supply chains for all those FDI companies, and then — so that’s kind of the primary driver, and what happens in all of these emerging market countries is very predictable, is as the emerging middle class start to prosper, then there’s all kind of predictable things that they want — they want better health care, they want to travel, they want better housing, blah blah blah, so when you say sectors, it’s like first it’s, you know, more of the same, more intense on manufacturing — right now about almost 40 percent of the population of the workforce, sorry, is still employed in agriculture.
That’s absurdly too high a number, you know.
So, you’ll see that number shrinking over time, people moving from the farm to the factory.
And then just more and more spillover to, you know, drive the emerging middle class.
Yeah. Sure. So, more of the same of what we had before?
Yeah.
Right. Right. Right. Okay. Cool.
I also wanted to touch on inflation. Similar thing, you said 5 to 5.5%. I’m wondering how you think this will be managed or how you think it should be managed.
Well, they already started, and they’re very clever. We have to give them credit because the GDP, you probably know that the stats came out over the weekend —
Yeah I did —
And you can very easily calculate that, had they not, you know, put kind of suppressed the price of petrol going higher, it would have been like five and a half or so percent CPI, but because of that it was like, I think the print was like 4.7 or something like that.
So when they subsidize petrol, they’re kind of achieving two things.
One is they’re stopping inflation from, you know, getting too high, but also that’s like the best way to — they have to respond to everything that’s happening with stimulus, and, you know, this is the most obvious place that they should be spending money. I mentioned in the report, in the past they never really spend much more than a half a percent of GDP on petrol subsidy, compared to like 3% or something in Indonesia, so this is the most obvious thing that they should be doing to help support the economy, but they’ll also have to, at some point, you know, do some measures directly to help households, maybe some sort of a mortgage interest rate subsidy or something like that.
They’ll have to do much more aggressive measures to support the economy than they have in the past.
Sure. But I still feel these measures are sort of still going to create inflation, right? Particularly household subsidies. You’re going to pump more cash into the economy. You’re going to have higher inflation.
I guess what I am wondering about is things like Forex reserves and things like that, which, as I understand, it’s only about two months worth of imports at the moment and like are you anticipating that they will spend more foreign exchange reserves or do you think they’re going to raise interest rates like what sort of macro policy do you think they’re going to – macro steps do you think they’re going to take?
Higher rates, yeah, I don’t think they’ll raise policy rates, but they will let deposit rates go higher.
Yeah, okay.
It was something that happened last week, where there was a lot of publicity around the fact that one-year deposit rates were all going up above the 8 percent level.
Normally in Vietnam, the 7 to 8 percent level on one-year deposit rates is — that’s the kind of level that people start to take money out of the stock market.
Normal retail investors more aggressively take money out of the stock market.
And in our understanding, we’re not — this is just like what we heard from in the interbank market and whatnot — but it seems that they kind of encouraged the banks to dial it down a bit.
And you saw several banks go from like 8.1% to like 7.9, you know, just get under that magic like 8% number.
So there will be — yeah, rates, interest rates are going to go higher. That that’s that’s unavoidable, unfortunately.
You think that’ll be the sort of central —
— won’t be a policy rate, just like I mentioned that last week they kind of, in our understanding, they called the banks and said, “Hey, can you get this back under 8 percent?”
They won’t be doing that for much longer.
Maybe they’ll do that one or two weeks, and then finally they’ll just capitulate and say, “Okay, just let it go wherever the free market is”, because the rates need to be higher in Vietnam.
Do you think they’ll let the dong go higher?
It’s a very good question.
So there seems — we’ve never had sort of official confirmation about this — but they’re really, it’s very evident that they have a strong interest to protect the investors.
So they are very focused on not letting the USD VND rate depreciate too rapidly.
They claim to be managing against a basket of currencies that are like Vietnam’s trading partner, whatever, but the evidence suggests that they’re kind of more focused on keeping investors comfortable, you know, that if they invest their money here they’re not going to, you know, set up a factory, you’re not going to lose, like with everyone — think about the old Indonesia time, you know, the currency went down by 50% in a year, so so if they did let the currency depreciate, I I think what you would see is like very small steady increments, not all at once, to try to make it very smooth, to make investors feel comfortable that if they put the money here, they won’t, you know, it’s not at risk kind of thing.
Practically speaking, do investors uh do they like this policy?
Yes.
As opposed to a free-floating —
Of course.
It’s great.
Sure.
How do you feel? You put — you spend a billion dollars, like set up some factory or something, and like in Indonesia, that’s what they were doing, and then boom, you lose half your money, and one like, oh my god, it’s a disaster.
No, no, this is — actually, where they got this idea from is, if you look back to the Asian financial crisis in 97, when you have these huge collapses in Indonesia, Thai baht, etc.
China made an enormous effort at that time to keep the peg.
It was very difficult for them at that time, but they made a big effort to keep the peg in place.
And they suffered — their own citizens suffered as a result of that — but what the Chinese policy makers, uh, clearly had in mind, they said this openly, was that we want to make sure that investors feel protected if they bring money into China.
So that wasn’t the only reason that there was an explosion of FDI, you know, in the early 2000s, obviously low wage, etc, etc, but one of the factors that, you know, kept that made investors feel comfortable to put money into China was that they knew that the government had their back on the FX rate, and so I think the Vietnamese are kind of more or less copying that strategy.
If you look around 2015, when you had that big depreciation in the Chinese currency, it had a big impact on Vietnam, and that’s the time that they kind of switched the regime, switched here, and focus more about trying to protect the investor’s interest.
I guess the reason I ask is I always think of it, as when things are free floating, you can kind of predict what’s going to happen.
For example, oil prices go up, you know that there’s going to be inflation, you can sort of invest for that. Whereas when you have a currency that’s pegged or semi- pegged, crawling pegged, whatever you want to call it, it’s a little bit different, right? Because now you’re relying on the State Bank of Vietnam to sort of tell you to make decisions about where the currency is going to go as opposed to just going, “Well, I know the market’s going to do it, so I’ll follow whatever the market does.”but that’s why I wonder from an investor perspective if they kind of go —
Okay.
So, it’s a really good point that you’re making.
I mean, you know, when they when they look at everything in front of them, they have multiple, sometimes conflicting objectives, and what we should keep in mind is that every year there’s like 5% of GDP worth of FDI that comes into the country.
That’s the priority.
This is the first priority, to make sure that money keeps coming in every year.
But you’re right, there’s other factors.
You know, a lot of times you’ll hear people say, which is an intelligent point, that, oh, why don’t they let the currency appreciate, you know, so that they can improve the export competitiveness, but actually we don’t need to worry about that because the wage is like half compared to China.
So, you know, multiple things that they’re trying to think about, but the first priority is to make sure that money flows into the country every year, and from an investor’s point of view that’s what makes them feel more comfortable.
Okay, cool. Yeah, that’s super interesting, man. That’s pretty much all of my questions. Did you have anything you wanted to add?
What’s your — is your your publication is for like people that doing like real business here, or who who is your target?
I mean mainly foreign investors and things, people who want to do business in in Vietnam.
I don’t know — I don’t know if you look at it much, but there’s kind of a lot going on there.
But yeah, mostly —
Joel Weiden: Mike’s not on LinkedIn, so so he doesn’t see your daily.
I noticed that. That’s why I got in contact with you, Joel.
Like, yeah. So, yeah, broad broad spectrum.
Yeah.
Okay, cool. Well, very good to meet you.
It’s been very interesting.
Yeah, you too, guys.
Always happy if anyone’s reading our — Oh, by the way, I have an interview on the — Do you ever look at the Viet — ? Well, I guess a little bit your competitor, but do you ever look at the Vietcetra channel on YouTube?
I did. I watched it today (see here), mate. Yours.
I got to get my views up — Share, like, and subscribe and share.
Good stuff.
All right, gentlemen.
Thank you very much for your time.
Take it easy.
Bye.
Bye.