Vietnam Country Risk Report Q4 2018
We maintain our forecast for Vietnam's real GDP growth to pick up slightly to 6.9% in 2018, from 6.8% in 2017, after the economy expanded by 7.1% y-o-y in H118. The robust growth momentum will continue to be underpinned by government efforts to liberalise trade and investment, as well as to boost the private sector's footprint. However, risks are weighted to the downside.
We expect the State Bank of Vietnam (SBV) to maintain its benchmark refinancing rate at 6.25% over the remainder of 2018. Strong economic growth momen-tum has negated pressure on the central bank for further monetary easing, while modest core inflation and a buildup of foreign reserves mean that the SBV is now able to remain accommodative for longer despite rising global interest rates.
We expect the Vietnamese dong to decline further against the US dollar over the coming months, but the weakness is likely to be moderate given that Vietnam continues to be an economic outperformer among its regional peers, while the SBV is able and willing to intervene in the forex market. Over the longer-term, we expect the dong to gradually weaken given higher structural inflation.
Although Vietnam continues to score highly in our Short-Term Political Risk Index for its policy continuity and policymaking processes, we believe that risks to social stability are increasingly weighted to the downside. Despite the crackdown on corruption over the past few quarters, public perception of the government appears to be worsening, and this is being reflected in the heightened frequency and intensity of online and street protests.Major Forecast Changes
We forecast Vietnam's budget deficit as a share of GDP to narrow to 4.6% in 2018, from 5.6% in 2017, as capital expenditure is likely to see subdued growth in 2018. The 20.1% y-o-y contraction in capital outlay in Q118 should likely be offset by back loading of spending over the coming months, but the ongoing anti-corruption drive is likely to weigh on the implementation of public projects and cap expenditure growth.
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 foreign direct investment inflows and manufacturing growth.
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