Vietnam Country Risk Report Q1 2020

Vietnam Country Risk Report Q1 2020

We at Fitch Solutions have revised up our real GDP growth forecast for Vietnam to 6.9% in 2019, from 6.5% previously. Real GDP growth accelerated to 7.3% y-o-y in Q319, from 6.6% y-o-y in Q219, driven primarily by stronger growth from the manufacturing sector. The influx of companies from China as a result of the US-China trade war appears to be putting increasing stress on infrastructure and labour in Vietnam, and we believe that these structural challenges may cap growth over the short term. While we expect manufacturing growth to top out over the near term, we believe that headline growth is likely to be supported by a strengthening of the growth in construction and service sectors.

The State Bank of Vietnam announced a surprise 25 basis point interest rate cut on September 13, which would take its refinancing and discount rates to 6.00% and 4.00%, from 6.25% and 4.25% previously, effective September 16. We expect the central bank to remain on hold over the coming months to observe the impact of its rate cut on the economy before making further adjustments to its monetary policy. While the rate cut would likely provide some support to growth, we do not expect it to be substantial given the infrastructure bottlenecks in the country restricting economic activity growth. We are revising our forecast for inflation to average 3.7% in 2020, from 3.3% previously, on the back of this rate cut and a rebound in food inflation as a result of the African swine fever, which now affects all provinces, and a rise in housing materials inflation.

We have revised our forecast for Vietnam's fiscal deficit (including principal repayments) to come in at 6.6% of GDP in 2019 and 2020, from 5.7% and 5.8% previously. Falling Vietnamese government bond yields in line with the ongoing global decline in yields would slow the growth in interest liabilities. However, we expect this to be more than offset by higher borrowing as the government seeks to accelerate the progress of key infrastructure projects in a bid to ease the congestion in major cities as a result of the influx of companies relocating their operations to Vietnam amid the US-China trade war.

We continue to expect the Vietnamese dong to remain broadly stable against the greenback over the near term, supported by robust FDI inflows, US dollar purchases by businesses, and a healthy foreign reserves position. Over the longer term, we maintain our view for the dong to remain on a gradual deprecia-tory path against the US dollar, due to its overvaluation and Vietnam's higher inflation in relation to the US. We maintain our forecasts for the unit to average VND23,300/USD in 2019, VND23,475/USD in 2020 and VND23,650/USD in 2021.

The US' rising trade deficit with Vietnam, exacerbated by the ongoing trade war between the US and several major global exporters, increases the risk of Viet-namese exports coming under punitive tariffs from the US. However, given Washington's view that an unchecked China poses a major security threat, we believe that the US' need to maintain strong diplomatic relations with Vietnam to balance growing Chinese influence in the region could play in Vietnam's favour with regard to the continuation of cordial trade relations with the US.

Key Risks

The potential for 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 US imports of Vietnamese goods, this would pose a salient risk to Vietnam's export sector, and consequently our economic growth forecast, given the sector's strong orientation to the US economy.

Economic policy slippages could dent investor confidence, and result in a slowdown in FDI inflows and manufacturing growth.