Vietnam completed
its leadership transition on April 9 2016, and we expect the new government to
maintain its strategic non-alignment foreign policy. In the latest maritime
dispute between China and Vietnam, the new administration adopted an unyielding
tone against Beijing, suggesting that it will not be subservient to its larger
neighbour.
However, we expect
Hanoi to seek to maintain a delicate balance as it attempts to appease
Vietnamese at home, while preserving crucial economic relations with China.
We forecast the
State Bank of Vietnam (SBV) to embark upon on a relatively shallow rate-cutting
cycle of 50 basis points over the course of the year in order to reduce lending
rates and provide support to the economy. The low inflationary environment (we
forecast consumer price inflation to average 2.1% in 2016) will also provide
sufficient room for the central bank to act. However, still-strong economic
growth momentum and concerns over external stability will likely moderate the
central bank's easing bias.
The strong
orientation of Vietnamese exports to the US and steady inflows of foreign direct
investment should sustain Vietnam's export growth over the coming quarters.
However, we expect import growth to remain similarly strong as the country
relies heavily on imported input materials for production. As such, we expect
Vietnam's trade deficit to widen further to 3.2% of GDP in 2016, from an
estimated 2.1% of GDP in 2015.
Major Forecast Changes
We believe that
Vietnam's industrial and services sectors will continue to benefit from a
resilient export sector, strong foreign investor interest and robust domestic
demand. However, extreme weather conditions and subdued oil prices will
continue to act as a drag on the economy, capping its short-term growth
potential. As such, we have downgraded Vietnam's real GDP growth forecast for
2016 to 6.3%, from 6.6% previously.
Although we
forecast Vietnam's budget deficit as a share of GDP to narrow over the coming
years, progress will be slow, as unrealistic fiscal projections, low oil
revenue, an increase in current expenditure and high debt repayment costs will
impede the government's efforts to consolidate its fiscal position over the
near term. Accordingly, we forecast Vietnam's budget deficit as a share of GDP
to come in at 6.0% in 2016, marking little change from the 6.1% recorded in
2015.
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