The outlook for the Vietnamese economy remains positive in the medium term as a number of key sectors are expected to continue to hold up in the coming quarters although the country’s GDP posted a softer-than-expected performance in the first half of this year, HSBC
said in a report.
The bank said in a flashnote titled “Promising signs despite tough times” that Vietnam’s agricultural output took a hit in the first half of this year due to the worst drought in three decades.
However, once weather patterns return to normal, agricultural output as well as farm incomes should start to recover, Frederic Neumann, an economist at HSBC noted in the report.
Other key sectors such as manufacturing and services still performed robustly and there are signs they will follow a positive pattern in the upcoming quarters, says the report.
Vietnam’s Manufacturing Purchasing Managers’ Index (PMI) came in at 51.9 in July, marking the eighth consecutive monthly improvement in business conditions for the sector.
“It should be noted that at the regional level, Vietnam’s manufacturing sector activity also continues to hold up well. The expansion seen in its manufacturing sector in July was still the strongest among the emerging Asian economies, with India a very close second,” says the report.
In addition, exports and foreign direct investment (FDI
) remained strong. Exports rose 5.3% year-on-year in the first seven months of this year, versus a 0.9% decline in imports.
As growth in the Vietnamese economy continues to outpace much of the region, strong FDI flows have in turn helped the economy capture greater share of the global export market even as global demand slows, the report notes.
HSBC notes that the official GDP target of 6.7% for the full year in unlikely to be achieved as Prime Minister Nguyen Xuan Phuc has acknowledged that it “will be hard to achieve” an expansion of 7.6% in the second half.
“This may not be a bad thing, as a blind push for faster economic growth could lead to uncomfortably high inflation, weakness in the Vietnamese dong and an inefficient allocation of resources - particularly credit - over the medium term,” says the report.
In the medium- to long-term, the Trans-Pacific Partnership (TPP
) could give Vietnam’s already relatively robust trade profile an even bigger boost.
Importantly, should the TPP once more gain momentum, Vietnam may be forced to implement structural reforms at a faster clip. These include the development of infrastructure as well as the restructuring of state-owned enterprises, both crucial if Vietnam wants to fully capitalize on the TPP.
The bank points out the country’s inflation will accelerate, fueled by the government’s plan to raise healthcare costs and education fees in the coming months, hot weather placing upward pressure on food prices, and strong credit growth.
“The statistics office expects 2016 inflation to beat the government’s estimate of 5%. The upside risks to inflation also mean that the room for monetary easing is rather limited. In fact, come 3Q17 we think the State Bank of Vietnam (SBV) will likely raise the OMO rate by 50bps to 5.5%, to rein in inflation,” it adds.