Economy Still On Track To Hit 2014 Growth Forecast of 5.9%

BMI View: Latest GDP figures show that the Vietnamese economy grew by 5.0% y-o-y in Q114, and we believe that our 2014 real GDP growth forecast of 5.9% remains in sight. Indeed, we believe that increased macroeconomic stability, combined with pro-growth policies will help the economy accelerate from 2013 levels. Key downside risks to this view include a faster-than-anticipated slowdown in China as well as the stalling of the country's reform drive.

Latest data released by the General Statistics office of Vietnam (GSO) showed that real GDP accelerated by 5.0% year-on-year (y-o-y) in Q114, slightly faster than the 4.9% print registered in the Q113. Although it showed a deceleration from 6.0% recorded in Q413, we believe that the economy is still on track to hit our 2014 growth forecast of 5.9% in 2014. This would mark a slight acceleration from the 5.4% registered in 2013, and is above estimates by the Asian Development Bank, which forecasts real GDP to reach 5.6% in 2014. We believe that the economy will be driven by a strengthening of private consumption, continued foreign direct investment into key areas of the economy, a more robust external sector, and a rebound in manufacturing activity over the coming quarters. That said, trend growth for the Vietnamese economy will average a slower 6.2% over the next decade, compared to 6.5% recorded in the past 10 years.

Government Policy To Ensure Growth Remains Strong

Still-Strong Growth
Vietnam - Real GDP Growth, (% chg y-o-y)

Economy Still On Track To Hit 2014 Growth Forecast of 5.9%

BMI View: Latest GDP figures show that the Vietnamese economy grew by 5.0% y-o-y in Q114, and we believe that our 2014 real GDP growth forecast of 5.9% remains in sight. Indeed, we believe that increased macroeconomic stability, combined with pro-growth policies will help the economy accelerate from 2013 levels. Key downside risks to this view include a faster-than-anticipated slowdown in China as well as the stalling of the country's reform drive.

Latest data released by the General Statistics office of Vietnam (GSO) showed that real GDP accelerated by 5.0% year-on-year (y-o-y) in Q114, slightly faster than the 4.9% print registered in the Q113. Although it showed a deceleration from 6.0% recorded in Q413, we believe that the economy is still on track to hit our 2014 growth forecast of 5.9% in 2014. This would mark a slight acceleration from the 5.4% registered in 2013, and is above estimates by the Asian Development Bank, which forecasts real GDP to reach 5.6% in 2014. We believe that the economy will be driven by a strengthening of private consumption, continued foreign direct investment into key areas of the economy, a more robust external sector, and a rebound in manufacturing activity over the coming quarters. That said, trend growth for the Vietnamese economy will average a slower 6.2% over the next decade, compared to 6.5% recorded in the past 10 years.

Still-Strong Growth
Vietnam - Real GDP Growth, (% chg y-o-y)
Services Taking The Lead
Vietnam - Breakdown of GDP By Component (% chg y-o-y) & Share % (RHS)

Government Policy To Ensure Growth Remains Strong

We believe that government policies aimed at promoting balanced economic growth, improving the stability of the banking system, diversifying exports, attracting foreign investment and attracting investment in infrastructure bode well for the economic outlook. In terms of promoting balanced growth, we note that the State Bank of Vietnam (SBV) has continued to rein in inflation, which, at 4.8% y-o-y in the first quarter, remains near record lows and well below the central bank's target of around 7.0%. The slight deceleration in economic activity in Q114, combined with the weak inflation data over the period prompted the SBV to cut its refinancing rate from 7.0% to 6.5% in March. Although we do not expect further cuts this year (see: Downside Risks To Interest Rate Forecast, March 21), the central bank has adopted a dovish tone, and could step in again should it feel that the economy needs more stimulus. With regard to banking sector reform, the SBV continues to push forward with reforms aimed at improving the stability of the sector and increasing credit to the economy. Two key policies are the reduction in non-performing loans, which according to Moody's, stands at approximately 15%, as well as offloading bad debt off of bank's balance sheets and on to the newly created Vietnam Asset Management Company (VAMC). By the end of 2013 the VAMC had purchased approximately US$1.9bn worth of bad debt, and it aims to increase the pace of purchases over the coming months. Combined, these policies should help stimulate credit growth over the coming quarters, which will help underpin broader economic activity.

External Sector To Boost Growth
Vietnam - Trade Balance (US$mn) & Three-Month Moving Average

External Sector To Provide Tailwind

We expect the external sector (exports and foreign investment) to provide a tailwind to economic activity in the coming quarters. From a trade perspective, exports rose by 14.1% y-o-y in the first quarter, which helped bring the trade surplus to US1.0$bn for the first three months of the year and we expect this trend to remain in place. Indeed, the Vietnamese government has been making substantial efforts to promote trade and investment ties with other countries, and we believe it will help underpin exports over the coming months. A case in point was the fourth round of negotiations between Vietnam and South Korea for a bilateral free-trade agreement which took place in March, and officials are looking to conclude negotiations by the end of 2014. Moreover, Vietnam has been forging very strong trade and investment ties with Japan in order to attract funding and expertise to invest and develop the country's infrastructure and manufacturing sectors.

FOREIGN DIRECT INVESTMENT BY COUNTRY OF ORIGIN (TOP FIVE)
Jan-Mar 2014 Jan-Mar 2013
Origin Projects Value US$mn Origin Projects Value US$mn
South Korea 76 534 Singapore 20 2,247
Hong Kong 21 265 Japan 50 299
British Virgin 6 239 Taiwan 5 84
Singapore 15 231 Korea 51 70
Canada has 2 226 Thailand 5 55
Total 252 2,046 Total 191 2,927
GSO, BMI

While foreign direct investment fell by 30% y-o-y in the first quarter of 2014, it was not all bearish in our view. First, the number of projects increased by 32% y-o-y and second, the origin of the investments was much more diversified, which could suggests that it is more sustainable (see table). Third, we believe that foreign investment will continue to pick up as the business environment becomes increasingly attractive, particularly as more State Owned Enterprises (SOEs) are restructured and the limits on foreign ownership are raised. Moreover, Vietnam still boasts competitive wages compared to other manufacturing hubs such as China, Indonesia and Malaysia, which bodes well for cost competitiveness.

Risks To Outlook

Although we believe that the Vietnamese economy is on track to hit our 5.9% growth target, we see downside risks to this view. First, we still forecast an impending slowdown in China, which would weigh on regional growth in general. Second, public sector capital investment and spending was flat y-o-y in Q114 and capital investment of the state budget actually contracted by 2.3% y-o-y over the period. While we do not see this as a large risk, if public spending were to lag, it could act as a drag on headline growth. Lastly, we highlight that the pace of reforms will be crucial to sustaining economic growth in 2014 and beyond. Failure by the government to restructure SOE's and provide a framework for foreign investors to participate in the equitisation of these companies in a timely manner could weigh on investment and growth.

VIETNAM - ECONOMIC ACTIVITY
2009 2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f
Nominal GDP, VNDbn 3 1,809,149.0 2,157,828.5 2,779,880.2 3,245,419.2 3,584,261.0 4,012,847.7 4,494,844.6 5,033,219.9 5,616,365.8 6,269,265.3
Nominal GDP, USDbn 3 101.6 112.9 134.6 155.5 170.4 195.1 221.1 249.0 280.8 316.6
Real GDP growth, % y-o-y 3 5.4 6.4 6.2 5.2 5.4 5.9 6.4 6.6 6.4 6.4
GDP per capita, USD 3 1,152 1,267 1,497 1,712 1,859 2,108 2,368 2,643 2,957 3,309
Population, mn 4 88.2 89.0 89.9 90.8 91.7 e 92.5 93.4 94.2 95.0 95.7
Industrial production, % y-o-y, ave 1,5 6.7 14.1 10.9 7.0 5.9 7.7 8.4 8.6 8.6 8.5
Unemployment, % of labour force, eop 2,6 4.6 4.3 3.6 3.2 3.7 e 3.5 3.5 3.6 3.5 3.5
Notes: e BMI estimates. f BMI forecasts. 1 at 1994 prices; 2 Urban Area Only. Sources: 3 Asian Development Bank, General Statistics Office; 4 World Bank/UN/BMI; 5 General Statistics Office; 6 General Statistics Office/BMI.
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