The PCA's ruling on the Philippine arbitration case on July 12 will have wider implications for other claimant countries in the South China Sea, particularly Vietnam, as the conclusions that were drawn will help to set legal precedent for similar maritime disputes in the region. We believe that Vietnam will likely stand to benefit vis-a-vis China by using the ruling to clinch concessions from Beijing as a counterbalance to nationalist domestic sentiment.
We maintain our expectations for the SBV to lower its benchmark refinancing rate by a relatively shallow 50 bps to 6.00% by the end-2016 as a disappointing GDP growth figure in Q116, subdued inflationary pressures, and a relatively stable currency will provide impetus for the central bank to act. However, concerns over reigniting the housing bubble will likely temper the bank's easing bent.
We maintain our expectations for Vietnam's fiscal deficit to remain largely unchanged at 6.1%of GDP in 2016, due to high recurrent expenditure and debt repayment costs, as well as low oil-related revenue. Beyond 2016, we forecast a gradual improvement in the government's fiscal position owing to strong economic growth and reform efforts by the government. However, we note that contingent liabilities and slow reform momentum from the SOE and banking sectors could pose downside risks to fiscal consolidation efforts and public debt sustainability.
Major Forecast Changes
Due to a weaker-than-expected GDP growth performance in H116, we have downgraded Vietnam's growth forecast to 5.9%, from 6.3% previously. However, we expect growth to accelerate over the coming quarters spurred by a recovery in agricultural output, as well as robust growth in the industrial and services sectors.
We expect the Vietnamese dong to maintain its long-term depreciatory trajectory against the US dollar as inflation is likely to average higher than the US, and the income account deficit is likely to remain wide, acting as a persistent drag on the currency. However, we believe that dong weakness over the shorter-term is likely to be tempered by delays in Fed rate hikes and regional FX strength. Accordingly, we have upgraded our forecast for the dong to reach VND22,600 by end-2016, and VND23,200 by end-2017, versus our previous forecast of VND23,300/USD and VND24,000/USD, respectively.
The potential for renewed maritime dispute with China poses downside risks to Vietnam's otherwise stable short-term political outlook.
Should the US economic recovery falters, 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||5.9||6.4|
|Nominal GDP, USDbn||185.8||191.5||202.5||221.0|
|Consumer price inflation, % y-o-y, eop||1.8||0.6||3.6||4.9|
|Exchange rate VND/USD, eop||21,388.00||22,485.00||22,600.00||23,200.00|
|Budget balance, % of GDP||-4.4||-6.1||-6.1||-5.9|
|Current account balance, % of GDP||4.9||1.1||-0.2||-0.8|
Assess your risk exposure in Vietnam with our 100% independent forecasts assessing the pace and stability of this key market. Backed by trusted data from BMI Research's 52 million data point economic forecast model, this report will allow you to measure political, economic, business environment and operational risks in Vietnam with confidence.
Your subscription service includes:
- Delivery of the report in print and PDF
- Online access for 12 months
- The functionality to translate your online report into your choice of 10 languages - Arabic, Chinese, French, German, Italian, Japanese, Korean, Portuguese, Russian and Spanish
- The ability to export data and graphs from the online report directly into your workflow
- The support of a dedicated Account Manager to answer any questions you might have about your subscription
- Access to our team of leading analysts who will be happy to answer any questions you might have about the data and forecasts included in this report