Vietnam Country Risk Report Q1 2019

Vietnam Country Risk Report Q1 2019

We maintain our forecast for Vietnam's real GDP to grow by 6 9% in 2018 and 6 5% in 2019, following an expansion of 7 0% y-o-y in the January-September period This will likely be mainly driven by continued strong growth in the export-oriented manufacturing sector, underpinned by liberal trade policies, positive demographics, and upskilling of its labour force The rise of the tourism sector – supported by government-led marketing campaigns – will provide a boost to the services sector

We expect the SBV to tighten its monetary policy stance via loan directives and macro prudential measures, opting to keep its benchmark refinancing rate steady at 6 25% Although inflation remains manageable, we believe that monetary policy remains too loose Vietnam's rapid economic growth has been padded by the sharp increase in leverage, and a subsequent unwinding of this debt binge would likely be more painful than the previous crisis in 2010-2012

We expect the Vietnamese dong to remain fairly stable against the dollar in the near term, and we are maintaining our forecast for the currency to average VND23,100/USD in 2018 The downside impact of widening interest rate differentials vis-à-vis the US and rising risk aversion will likely be partially offset by the robust export-oriented manufacturing sector and strong FDI inflows The SBV is also likely to actively intervene to maintain currency stability in the near term Over the longer term, we expect the currency to weaken against the USD gradually due to higher inflation and still-expensive REER

Vietnam has been aggressively expanding and strengthening its diplomatic network This has been partly motivated by security concerns as China has become increasingly assertive in recent years We expect these diplomatic efforts to bode well for its export-oriented manufacturing sector Forecast Changes

We are lowering our forecast for Vietnam's budget deficit as a share of GDP to come in at 4 4% in 2018 and 4 2% in 2019 (from 4 6% and 4 4% previously) This is due to below-target expenditure and strong revenue growth in the first nine months of 2018, as well as a smaller deficit projected in the 2019 Budget The pace of the government's privatisation drive remains sub-par, but has accelerated in the past few years This is likely to free up fiscal space for the government's development spending and is positive for long-term growth sustainability and macroeconomic stability

Key Risks

The potential for a renewed maritime dispute with China poses downside risks to Vietnam's otherwise stable short-term political outlook

Should the Trump administration introduce fresh tariffs on Vietnamese imports in the US, this would pose a salient risk to Vietnam's export sector, and conse-quently our economic growth forecast, given the sector's strong orientation to the US economy

Economic policy slippages (in which the government has a mediocre track record) could dent investor confidence, and result in a slowdown in FDI inflows and manufacturing growth Vietnam Country Risk Q1 2019