Bank report notes that domestic activity will pick up the slack despite global headwinds.
Stronger-than-expected Q3 GDP coupled with a nascent pick up in bank lending and domestic demand led HSBC to increase its 2015 GDP forecast to 6.6 per cent from 6.3 per cent and its 2016 forecast to 6.7 per cent from 6.5 per cent, according to HSBC’s Vietnam at a Glance report, released on October 2.
The report stated that since the 2011 banking crisis put an end to excessive credit growth and consumption, Vietnam’s economy has been driven by its resilient export sector. While the external sector has continued to perform well, contributing strongly to Q3 2015 GDP, the September Purchasing Managers Index (PMI) is a reminder that Vietnam is not immune from the slowdown in the global trade cycle. The headline index slowed to 49.5 from 51.3 in August - the weakest reading since August 2013. The sharp deterioration in the new export orders suggests that a quick turnaround is unlikely. “We expect export growth to slow towards year-end,” the report stated.
Taking up the slack is the non-manufacturing sector, which drove the acceleration in Q3 GDP growth to 6.8 per cent y-o-y, from 6.5 per cent in Q2. Domestic demand has been gradually reviving, led by stronger activity in the construction industry, according to the bank. This is also reflected in credit growth, which is expected to exceed the target for this year.
The acceleration, though consistent with seasonal patterns, may come as a bit of a surprise given that the last time Vietnam’s PMI was stuck below the waterline, growth was languishing at around 5 per cent. But the difference is evident once one digs into the details of the report. As usual, growth was driven by the strength of the manufacturing sector, which expanded 10.5 per cent year-on-year in Q3.
However, Table 2 shows that the manufacturing sector is not adding to growth at the margin. Its contribution to headline GDP has remained steady at 1.6 percentage points (ppt) for the last three quarters. What accounted for the nearly 1 ppt growth improvement between Q1 in 2015 and Q3 2015 was stronger activity in the construction industry (0.5 ppt) and service sector (0.3 ppt). In other words, domestic demand is back.
Watching the trade deficit
The combination of slowing exports and recovering domestic demand has meant that Vietnam’s trade balance has fallen back into deficit. Though not yet alarming, what is worrying is that the deterioration has been driven by the widening deficit in the domestic sector (Chart 8). As opposed to foreign-invested firms, whose imports are used as inputs in Vietnamese shipments abroad, domestic enterprises primarily import to serve domestic consumption.
In the past, the trade deficit of domestic firms, especially State-owned enterprises (SOEs), has widened on the back of credit-fuelled consumption and investment, putting pressure on the currency and posing challenges for the economy. “For now, we think Vietnam’s macro risks are limited, given the central bank’s prudent management of monetary policy,” HSBC concluded.