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HSBC: Inflation to rise, current account into deficit

Released at: 09:35, 04/12/2015

HSBC: Inflation to rise, current account into deficit

Inflation forecast at almost 5% by end-2016 in Vietnam at a Glance report, with a current account deficit equal to 1.6% of GDP.

by Minh Tuyet

HSBC released its Vietnam at a Glance report on December 3.

Inflation forecast

The report forecast inflation to rise from a record low 0.5 per cent in 2015 to nearly 5 per cent by end of 2016, with rising domestic demand to stoke higher inflationary pressure. “Thanks to lower global commodity prices, average headline inflation looks likely to slow to a record low 0.5 per cent year-on-year in 2015 from 4.1 per cent in 2014,” the report stated.

The November CPI offers tentative signs that inflation is beginning to bottom out. After briefly slipping into deflation in the early fall, headline inflation ticked up to 0.3 per cent year-on-year in November, driven by a smaller drag from energy prices and a pick up in core inflation to 1.6 per cent year-on-year from 1.4 per cent. (Chart 10)

“This isn’t exactly cause for alarm bells at this stage,” the report noted. “However, with strong growth likely to continue in the quarters ahead, we see inflation rebounding to 3.1 per cent year-on-year by the end of the first half of 2016, partly on the back of base effects,” the bank said. The report predicted that inflation would accelerate to 4.9 per cent year-on-year by end-2016.

It also forecast that State Bank of Vietnam (SBV) would have to shift to tightening mode next year and expected the central bank to increase interest rates by 0.5 per cent in the third quarter of 2016, taking the open market operation (OMO) rate to 5.5 per cent.

Account deficit

The report also forecasts the current account balance to slip into a deficit equivalent to 1.6 per cent of GDP from an estimated 0.2 per cent surplus in 2015 and a 5.1 per cent surplus in 2014.

In the first quarter of 2015 the current account balance fell into a $1 billion deficit, the first shortfall in nearly four years, but the drop was said to be partly seasonal. HSBC’s view is that deficits are likely to become more commonplace in the coming quarters, based on its outlook for stronger domestic demand and an attendant widening of the trade deficit.

“The likely return of current account deficits in 2016 means that the balance of payments may remain under pressure in 2016 and into 2017,” the report stated. Vietnam’s macro risks are limited for the time being, but the SBV may choose to tighten monetary policy next year to maintain a sustainable growth path.

On the funding side, HSBC expects robust foreign direct investment (FDI) inflows to continue supporting Vietnam’s overall balance of payments, but this may not be enough. As Chart 12 shows, the balance of payments has been under pressure of late, due to a combination of a thinning current account surplus and short-term capital outflows.

The strain on foreign exchange markets following the heightened volatility of the Chinese Yuan in August added to pressure on the balance of payments. Though complete third quarter data on the balance of payments are not yet available, data from the IMF shows that Vietnam’s foreign exchange reserves declined by $6.7 billion in the third quarter, falling to $30.3 billion as at end-September, or an estimated 2.1 months of imports, from 2.6 months in June. (Chart 13)

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