The low inflationary environment in Vietnam (we forecast CPI to average just 2.1% in 2016) will provide ample room for the State Bank of Vietnam (SBV) to ease its monetary policy, but we expect apprehension regarding foreign exchange stability and strong economic growth momentum to temper the central bank's easing bias. As such, we forecast the monetary authority to cut its policy rate by a relatively shallow 50bps to 6.00% by end-2016.
Despite the ousting of pro-reform Nguyen Tan Dung, and the reappointment of conservative Nguyen Phu Trong to the General Secretary position during the CPV's 12th National Party Congress, we believe that the upcoming leadership is unlikely to make dramatic changes to existing policies that have propelled Vietnam's rapid economic growth over the past few years. More importantly, the injection of new blood into the party will likely sustain crucial market reforms over the coming years, which will allow Vietnam to stay on course with its strong growth trajectory.
The combination of a still strong export performance despite broad regional economic weakness, growing foreign investment interest, and robust domestic demand will continue to drive Vietnamese economic activity in 2016. As such, we maintain our forecast for Vietnam's real GDP growth to come in at 6.6% in 2016 (from 6.7% in 2015), which would make Vietnam one of the fastest growing economies in Asia. In particular, the country's manufacturing and real estate sectors will continue to benefit from greater foreign interest.
Major Forecast Changes
Vietnamese local currency government bond yields are likely to head higher over the coming months due to elevated levels of public debt, high fiscal deficit, and rising currency risks. Meanwhile, we have also revised our forecast for Vietnam's budget deficit as a share of GDP to come in at 5.3% (from 4.9% previously) in 2016, as we expect expenditure growth to outpace revenue in the coming year.
We expect the State Bank of Vietnam (SBV) to weaken its dong reference rate over the coming months as external headwinds increasingly weigh on the currency. Although strong economic growth prospects, capital controls, and a low inflationary environment will provide some support for the currency, we believe that it will be insufficient to stem capital outflows. As such, we forecast the Vietnamese dong to weaken to VND23,100/USD by end-2016, and VND24,000/USD by end-2017.
Key Risks To Outlook
The potential for renewed maritime dispute with China poses downside risks to our 2016 real GDP growth forecast of 6.6%.
Should the US economic recovery hit a standstill, 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.
|e/f = BMI estimate/forecast. Source: National Sources/BMI|
|Real GDP growth, % y-o-y||6.0||6.7||6.6||6.4|
|Nominal GDP, USDbn||185.8||193.1||201.3||217.4|
|Consumer price inflation, % y-o-y, eop||4.1||0.5||3.6||4.9|
|Exchange rate VND/USD, eop||21,388.00||22,485.00||23,300.00||24,000.00|
|Budget balance, % of GDP||-4.4||-5.0||-4.9||-4.7|
|Current account balance, % of GDP||4.9||1.1||0.1||-0.5|
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