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Vietnam Today

Balance found

Released at: 08:01, 21/01/2018

Balance found

Photo: Viet Tuan

An absence of under or overheating in Vietnam’s economy puts the country in good stead.

by Mr. Michael Kokalari / Chief Economist, VinaCapital

Vietnam’s GDP growth accelerated remarkably throughout 2017, driven by improvements in manufacturing and the trade balance as the year progressed and supported by high consumption growth. Interest rates, inflation, and the value of the Vietnam dong (VND) were all stable, thanks to some wise macroeconomic policies by the State Bank of Vietnam (SBV) and because of a very favorable global economic backdrop.

Economists use the term “Goldilocks economy” to describe an economy that grows rapidly enough to significantly boost the prosperity of its citizens and to generate attractive investment returns, but not so rapidly to stoke inflation. The term comes from a children’s story about a young girl named “Goldilocks” who likes to eat porridge that is “not too hot, and not too cold … but just right!” 

2017 in review

Vietnam’s GDP growth accelerated from 5.2 per cent (annualized) in the first quarter of 2017 to 7.5 per cent in the third quarter, driven by an acceleration in the growth of the country’s manufacturing activity from 8 per cent year-on-year in the first quarter to 14 per cent in early December, which was reflected by strong performance in Vietnam’s PMI readings throughout the year.

This remarkable acceleration was supported by 12 per cent year-on-year growth in disbursed foreign direct investment (FDI) inflows, by the launch of certain new, large industrial facilities, including Formosa’s mega-steel mill, and by the rebound of Samsung’s smartphone production from the second quarter, following issues related to the Samsung Galaxy 7 phone that led to a 38 per cent drop in Samsung’s first-quarter production.

Purchasing managers’ index (pmi)

Sources: Nikkei, Markit, 2017

We estimate that Samsung now accounts for about 2-3 per cent of Vietnam’s overall GDP. Vietnam’s high-tech exports, which account for one-third of its overall exports, grew at about a 33 per cent year-on-year pace as at early December, and we believe Samsung’s rebound played a key role. This lifted the country’s overall year-to-date export growth above 20 per cent in early December, which helped flip Vietnam’s trade deficit from 2.3 per cent of GDP in the first half of 2017 to a trade surplus of 1.4 per cent of GDP as at the end of November 2017 (trade deficits depress GDP growth, while trade surpluses boost growth).

Finally, the growth of domestic consumption, which accounts for 64 per cent of Vietnam’s GDP, also accelerated somewhat as 2017 progressed, with real retail sales (a close proximity for consumption growth) improving from a 6.2 per cent year-on-year pace in the first quarter to 9.5 per cent growth for the first eleven months of 2017, supported by record high consumer confidence in Vietnam, as measured by Nielsen.

VND official vs free market exchange rates

Sources: State Bank of Vietnam, VinaCapital Research, 2017

CPI (% yoy)

Source: General Statistics Office, 2017

Outlook for 2018

We expect Vietnam’s economy to grow by 6.5-6.7 per cent next year, with similar growth dynamics to those that propelled GDP growth in 2017. Manufacturing growth is likely to accelerate to a 14-15 per cent pace in 2018, given the 12 per cent pace of disbursed FDI inflows in 2017, and we expect consumption to continue growing at a circa 8 per cent pace, driven by increased manufacturing employment / urbanization and by the growing availability of consumer credit.

Consumer credit grew by well over 30 per cent in 2017, although that heady pace is likely to decelerate somewhat in 2018, partly because banks’ ability to grow their loan books will be increasingly constrained by their stretched liquidity and falling capital adequacy ratios, which is in turn due to 18-19 per cent system-wide credit growth in 2017 (versus 16-17 per cent deposit growth).

One notable difference between our outlook for 2017 and 2018 stems from the fact that an 11 per cent decline in oil production volumes lopped more than 0.5 percentage points off 2017 GDP growth, but we don’t expect this to happen again next year. Instead, we expect stable (or possibly higher) oil production next year owing to our expectation that global oil prices will increase by about 15 per cent in 2018.

Trade balance ($ billion)

Source: General Department of Vietnam Customs, 2017

Annual oil production

Sources: PetroVietnam, National Assembly`s Budget Committee, 2017

Stable economy

Vietnam’s macroeconomy was very stable in 2017, thanks to prior prudent policy decisions by the SBV and because of the favorable macroeconomic backdrop in the global economy, which facilitated credit growth to consumers and businesses.

The economy’s stability is best illustrated by the performance of the USD/VND exchange rate. The free market value of Vietnam’s currency appreciated by 1.6 per cent year-to-date as at early December, and the free market value of the VND was about 1.5 per cent stronger than the official value for most of the year (the free market value of VND has traded as much as 10 per cent weaker than the official value at times of distress in the past).

This stability of Vietnam’s currency is attributable to several factors, including: (i) the SBV’s adoption of a very successful “floating peg” currency management regime at the beginning of 2016, under which small adjustments to the exchange rate are made on a daily basis; (ii) the SBV’s purchase of $7 billion of reserves as at early-December, which brought the central bank’s reserves to a record high of $46 billion (although this is still only equivalent to 2.7 months’ of imports, versus the three-month minimum recommended threshold); (iii) the weakness of the US dollar, as evidenced by the circa 9 per cent year-to-date drop in the value of the US dollar index (DXY) as at early December; and (iv) Vietnam’s low, stable rate of inflation in 2017.

Inflation fell from 5.2 per cent year-on-year in January to 2.5 per cent in July before settling at around 3 per cent in the second half of 2017, with the core consumer price index (CPI) - excluding volatile food and fuel prices - just above 1 per cent towards the end of the year. We expect inflation to remain stable in 2018 despite our expectations of a 15 per cent rise in average global oil prices next year, which we estimate would add 1.7 percentage points to the country’s headline CPI rate. In 2017, medical prices were hiked by over 30 per cent, which contributed 1.6 percentage points to the country’s inflation rate, and we do not expect another bout of large administrative price hikes next year.

We also expect inflation pressures in the region to remain muted next year (inflation in Emerging ASEAN was below 3 per cent towards the end of 2017), and we note that the current low level of inflation in Vietnam and the market’s anticipation that this will persist next year, drove five-year Vietnam Government Bond (VGB) yields down 90 basis points to 4.6 per cent as at early December. This record low level of VGB rates, coupled with banks’ ample liquidity, indirectly facilitated the flow of credit to consumers and businesses.

Finally, some observers are concerned that monetary tightening by the US Federal Reserve could destabilize Vietnam’s economy somewhat in 2018, but market participants only expect one rate hike next year, versus the Fed’s guidance for three hikes, because inflation is stubbornly low in both the US and the EU. Also, the Fed plans to shrink its balance sheet by about $400 billion next year, but the Bank of Japan (BoJ) and the European Central Bank (ECB) appear on track to flood the market with $1.3 trillion of new quantitative easing in 2018.
Positive policy developments 

Several government policies mentioned above helped foster the “Goldilocks economy” that Vietnam is currently enjoying, and some additional policies announced in 2017 concerning the banking sector and State-owned enterprise (SOE) reform are also likely to have a meaningful, beneficial impact on the country’s economy going forward. These new policies include: Resolution 42, which empowers banks and the Vietnam Asset Management Company (VAMC) to seize and auction the collateral related to non-performing loans (NPLs); new regulations strengthening the corporate governance of Vietnam’s banks; and new regulations enabling the “book building” method of equitization preferred by foreign investors.

Strengthening Vietnam’s banking system should be the government’s top priority, in our opinion, because a healthy, functioning banking system plays a vital role in a vibrant economy by channeling capital to the parts of the economy with the highest growth potential. Vietnam’s banking system still suffers from serious deficiencies, as evidenced by the fact that only about 20 per cent of the NPLs transferred to the VAMC have been resolved as at late 2017 - a full five years after the depths of the country’s banking crisis. 

Furthermore, Vietnamese homebuyers pay mortgage rates that are about 5 percentage points above the rate that the government pays to borrow money for 10-15 years, which is much higher than the spread homebuyers in developed markets pay, and Vietnam’s mortgage rates are not fixed, so they can go up at any time. The development of a more effectual banking system, as well as the development of real estate investment trusts (REITS), would help alleviate this issue.

We believe that foreign investment can and should play an important role in providing the capital and the expertise needed to strengthen Vietnam’s banks, but in order to attract the commitment of high quality strategic partners for local banks the foreign ownership limits that currently restrict foreigners from owning meaningful stakes in those banks need to be raised.
While 2017 got off to a slow start due to global political and economic uncertainties, the performance of Vietnam’s economy - as well as its stock market - over the course of the year amply demonstrated its resilience and potential. We believe the country has the ingredients necessary to ensure that its “Goldilocks economy” continues into the new year.

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