ese government’s confirmation of its 6.7% GDP
target raises the risk of a looser-than-expected policy stance, HSBC
Global Research has said in its latest report, suggesting the need for cautious fiscal and monetary policy.
As the new cabinet has confirmed the original 2016 GDP target of 6.7%, “we think this is going to be difficult to achieve, given the weakness of the Q1/2016 growth number and larger-than-expected headwinds to exports,” says the report.
Larger-than-expected headwinds to trade mean that domestic demand will have to pick up very strongly to make the growth target a reality. The government's seemingly pro-growth stance suggests the central bank is likely to let credit growth, which was running at 17.3% y-o-y as of April 2016, to run closer to 20% in the second half of the year.
Greater pump-priming will lead to a build-up of risks when Vietnam's macro buffers are still running relatively thin. These include (i) low foreign exchange reserve buffers, (ii) a banking sector that is still grappling with the legacy of the 2011 domestic financial crisis, and (iii) manageable, but steadily rising inflation.
“All of these factors point to the need for cautious monetary policy stance, in our view,” the researchers caution.
Meanwhile, Vietnam’s fiscal policy space is similarly constrained, due to a steady reduction in revenues, caused by a fall in state oil revenues amid the slump in global commodity prices, and a slowdown in non-oil tax revenues.
The country’s non-oil fiscal revenues will continue to come under pressure in the years ahead due to its participation in a number of free-trade blocs such as the ASEAN Economic Community (AEC) and the Trans-Pacific Partnership (TPP).
As such, HSBC forecasts Vietnam’s budget deficit to widen again in 2016, to 6.6% of GDP.
With a widening budget deficit, slowing inflation and Vietnamese dong (VND) depreciation, Vietnam’s debt-to-GDP ratio is projects to rise to 64.5% of GDP in 2015, close to the parliament-approved limit of 65%.
Source: CEIC, MoF, HSBC estimates.
Investors have raised concerns about the possibility that the government may try to have the 65% debt to GDP target lifted, the report notes.
The report adds that latest data releases of the country’s manufacturing and exports offer further evidence that Vietnam has emerged from its recent soft patch.
Lingering El Niño effects will likely continue to weigh on agricultural output, solid manufacturing and service sector output is expected to lift Q2/2016 GDP growth to 6.1% y-o-y, from 5.6% in the previous quarter, says the researchers, who keep the full-year 2016 GDP forecast unchanged at 6.3% y-o-y.