Vietnam Economy Growing on the Right Track

Vietnam economy’s growth has been on track with the expectation, with 6.2 %-6.4 % growth in the second quarter (Q2) of 2010 estimated by the government, after reaching 5.8 % in Q1. The month-on-month inflation stays between a very benign range of 0.1 % to 0.3 % for the past three months. 

 

The trade deficit, which registered US$6.5 billion in H1-2010, is also moving in line with the full-year forecast of US$13 billion. A moderation in import growth and acceleration of export growth is helping to keep the trade deficit in check. Meanwhile, growth in disbursed (actual inflow instead of pledged amount) foreign direct investment (FDI) and remittance flows are also conducive to the country s external payment position.

 

According to research of Standard Chartered, industrial production (presented in real terms by the government) and retail sales data reflect firm domestic fundamentals. The improvement in the monthly export growth figures from zero in the first two months of the year to an average of 30 % compared to the same period of last year is also encouraging. This reflects a robust domestic economy and income rises across the country, as well as a gradual recovery in Vietnam’s export markets, especially in ASEAN and China.

 

The decline in year-on-year inflation in recent months has been a pleasant surprise. Easing of food, housing and transportation prices, which make up almost 60 % of the CPI weighting, have directly contributed to the lower headline figures. The moderation in global commodity prices has been helpful. The global food prices, using the UN food price index as a proxy, have eased in recent months and this has correlated well with the slowdown in food price inflation in Vietnam.

 

The fuel price reductions on 27 May and 8 June have also helped to keep a lid on transportation costs. 

 

It has been revised inflation forecast for 2010 from 11.5 % to 9.5 %. Reduced pressure on the Vietnamese dong (VND) to depreciate also bodes well for managing imported inflation. However, Standard Charter remain watchful for signs of two sources of inflation. First is  domestic inflation – strong retail sales and industrial production could fuel inflationary pressure in the months ahead. Second is commodity prices. The current bout of stable commodity prices could disappear if risk appetite returns, driving the USD lower and commodity prices higher. Hence, it is acknowledged the current benign inflation environment but remain vigilant for the potential uptick in inflation in H2-2010. After all, Vietnam has the highest inflation volatility in East Asia. 

 

As a result of the in recent months, the central bank and the government have been working to lower interest rates. The State Bank of Vietnam (SBV) announced that major local banks agreed to reduce the VND lending rate to between 12 % and 12.5 % in July. They also agreed to cut the VND deposit rate to 10.2 % in the next three months. As noted previously, the base rate has lost its purpose as a policy reference rate and the SBV is expected to provide a more market-relevant benchmark rate in the months ahead to indicate policy intentions. Meanwhile, the authorities are still likely to influence lending and deposit direction.

 

The external payment position is a recurring problem of the Vietnamese economy. Vietnam s H1 trade deficit stands at US$ 6.5 billion compared with a deficit of US$ 2.1 billion in H1-2009. The dramatic difference was partly due to some large one-off exports of precious metals in 2009. The improvement in export growth and slowdown in import growth have helped to keep the country s deficit position stable. The H1 performance is largely in line with the full-year trade deficit forecast of US$13 billion. 

 

Inflows are also improving steadily. According to the Ministry of Planning and Investment, remittance flows amounted to US$3.6 billion in H1-2010, versus US$ 2.8 billion in H1-2009. Disbursed FDI is US$5.4 billion for H1-2010, 6 % higher than a year ago. The combination of stable trade deficit and improving inflow should bode well for currency stability.

 

The central bank clarified that the FX reserve should be 9 weeks-worth of imports and that they are aiming to raise this to 12 weeks by the end of the year. The improvement in the balance of payments dynamics should help to increase the country’s resilience to external payment stress. As highlighted in recent report, much of Vietnam’s external liabilities are with governments or international organisations such as the Asian Development Bank and the World Bank, debtors that are likely to be more willing to provide lending conditions that will not add stress to the balance of payment situation relative to private-sector lenders.