Three Main Vulnerabilities
The first risk pointed out by HSBC report is the country’s thin foreign reserves. It is considered to be insufficient to protect against unanticipated event risks, which include possible devaluations of the Chinese yuan.
Vietnam’s forex reserves are believed to have recovered to around $33.6 billion, or 2.5 months of goods and services imports at the end of March this year, from $27.9 billion, or two months of imports as of end-2015, the authors cited the latest IMF data and their own calculations.
“However, these are still low levels especially in the context of RMB volatility risks, which could put pressure on the VND,” they said.
is gradually rising, which could limit the scope of further monetary easing.
While core inflation remains manageable, fluctuating between 1.6% and 2.0% over the past year, it is likely to continue rising gradually on the back of solid domestic demand and robust credit growth.
“We expect inflation to pick up more convincingly in 2017 and see headline inflation reaching 4.9% by the end of the year. This limits the window for further SBV easing, in our view. As such, we expect the central bank to keep rates on hold before delivering the first hike in 3Q 2017,” said the researchers.
Third, the country’s budget deficit remains elevated, requiring the government to improve revenue collection while keeping a lid on current expenditures.
The UK bank has projected Vietnam’s fiscal deficit at 6.6% of GDP
this year, compared to 6% in 2015, 6.7% in 2014 and a peak of 7.4% in 2013.
“The still-wide budget deficit means that the government debt to GDP ratio will likely breach the National Assembly’s limit of 65% [of GDP] in 2016. Tight state finances could limit the ability of Vietnam to respond to future economic shocks,” they noted.
Three Bright Spots
On the other side, HSBC highlighted three improvements of Vietnam’s economic fundamentals.
First, while 2Q 2016 growth was unchanged on a y-o-y basis at 5.6%, this masks some positive developments such as a modest rise in the agriculture sector, a pick-up in the manufacturing sector, and a rise in the service sector.
“The 2Q 2016 GDP numbers confirm our view that the target will be very difficult to achieve. But authorities are likely to take steps to boost demand and spur investment, for example, by delaying the tightening of credit for real estate lending,” the authors said.
Second, Vietnam continues to receive robust FDI inflows, which should help keep the overall balance of payments in surplus and facilitate a recovery in forex reserves.
“With new factories commencing operations this year, we expect FDI to drive further gains in Vietnam's global export market share, allowing shipments to continue growing at a high-single digit pace even as global demand slows,” they said,
Third, there has been some progress in banking sector reforms, with the Vietnam Asset Management Company (VAMC) having announced that it will begin cash purchases of non-performing loans (NPLs).
The switch to a “true-sale” – even if only partial – could help accelerate the reduction of NPLs and boost banks' loss-absorption capacity at the same time, according to HSBC.
The bank forecast Vietnam’s headline inflation to approach the government’s 5% target by the end of the first half of 2017. HSBC keeps its 2016 and 2017 GDP forecasts unchanged at 6.3% and 6.6%, respectively.