Vietnam at a Glance report recognizes importance of SOE divestment plans and flexibility in bond issuance.
October was a good month for reforms, according to the Vietnam at a Glance report released by HSBC Global Research on November 4, such as the government announcing plans to divest from several major State-owned enterprises (SOEs) and the Ministry of Finance (MoF) possibly regaining some flexibility in its bond issuance. The signing of the TPP was also a highlight.
Good news on reform front
October brought some good news for two of the greatest long-term challenges facing Vietnam: the widening fiscal deficit, which the MoF has struggled to finance due to low demand for government bonds, and the crowding out of efficient private sector enterprises by SOEs, which lowers overall productivity.
Three developments are worth highlighting, according to the report. Firstly, membership of the TPP has raised Vietnam’s attractiveness as a manufacturing hub, boosting foreign direct investment (FDI). FDI inflows have been picking up over the last few years in anticipation of the TPP and other free trade agreements being signed, including the EU - Vietnam FTA. “Annual disbursed FDI is on track to reach $14 billion this year, up from $12.5 billion in 2014,” the report stated, with the figure predicted to exceed $20 billion by 2020.
Secondly, the government is increasing efforts to reform SOEs. In 2015 it targets equitizing 289, with 94 having completed the process by September. In a directive dated October 14 it announced it would divest from ten enterprises, including giants such as Vinamilk and FPT Corporation, whose shares are held by the State Capital Investment Corporation (SCIC).
Thirdly, the government’s decision to speed up divestment may be tied to its budget woes. According to media reports, the divestment from the ten SOEs may bring in as much as $4 billion to State coffers. “The funds are expected to be put to use for vital public investment projects at a time when the MoF is struggling to raise debt levels due to a ban on the issuance of shorter-dated government bonds, which came into effect this year,” the report stated.
After a sharp dip in manufacturing activity in September it stabilized in October, the bank wrote. “Both the PMI (Purchasing Managers Index) and output inched back up to the 50-point threshold, which marks a leveling of activity,” the report noted. This offers some comfort that the deterioration seen towards the end of the summer was not the beginning of a prolonged downward slide.
Even so, HSBC predicted that export growth, which slowed to 8.5 per cent year-to-date year-on-year in October, from 9.6 per cent in September, will likely slow further towards the end of the year. “The ongoing deterioration of the employment sub-index to seven-month lows also reflects the cautious outlook of manufacturers,” according to the report.
Price pressure, meanwhile, remains subdued. “Headline inflation was unchanged at 0.0 per cent year-on-year in October while core inflation slowed further to 1.4 per cent year-on-year, from 1.6 per cent in September. For now, low inflation and a benign outlook for global energy prices should allow the central bank to keep rates steady,” the bank believes. But it also forecast that as price pressure builds next year it expects the State Bank of Vietnam (SBV) will take the open market operation rate to 5.5 per cent from 5.0 per cent currently in the third quarter of 2016.