Vietnam - Executive Briefing

October 2014
Global Economics
Tuuli McCully 1 (416) 863-2859
[email protected]
Neil Shankar 1 (416) 866-6781
[email protected]
Executive Briefing
VIETNAM
Capital Market Dynamics
Foreign Exchange ► Vietnam continues to maintain a crawling-peg system, linking the dong’s (VND) exchange
rate to the US dollar (USD) and allowing it to fluctuate +/-1% from the rate set by the central bank. In June, the
VND reached the existing ceiling; as a result, the central bank announced a 1% upward adjustment, setting the
interbank average rate at 21,246 per USD. The devaluation of the VND will help further facilitate the growing
export sector. Vietnam’s foreign exchange reserves will continue to rise at a strong pace due to favourable trade
dynamics, having increased by US$10 billion since the end of last year to US$35 billion. We expect the VND to
close the year at 21,350 per USD.
Sovereign Debt & Credit Ratings ► Vietnam’s sovereign credit rating outlook is encouraging, with Fitch Ratings
assigning a “positive” outlook to the country’s “B+” rating with an upgrade expected over the medium term.
Meanwhile, Standard and Poor’s rates the sovereign credit one notch higher in the “BB-” category with a “stable”
outlook. Moody’s rates Vietnam with a “B1” rating, the lowest among the three major agencies. According to Fitch,
Vietnam’s rating is underpinned by the historically low level of inflation, healthy economic growth supported by
rising demand for Vietnamese exports, and sizeable current account surplus. The primary concern is the slow
progress in implementing the government’s stabilization platform adopted in 2011, particularly regarding structural
reforms planned for state-owned enterprises and the banking sector.
Economic Outlook
Growth ► The Vietnamese economy will enjoy solid growth momentum by regional standards through 2015,
though the pace of expansion will fail to reach the 7% average recorded over the past two decades. The country’s
real GDP grew by 5.6% y/y in the first three quarters of the year and we expect output gains to average 5¾% y/y
in 2014-15. Despite the riots that broke out in May 2014, targeting Chinese workers and companies, activity will
continue to be underpinned by rapid gains in foreign investment. Furthermore, the export sector continues to
perform strongly — shipments were up by over 14% y/y (in USD terms) in the first three quarters of the year — as
Vietnam remains an attractive alternative to China for low cost manufacturing given that the nation’s relatively
young population offers a source of labour cost efficiencies. Meanwhile, banking sector challenges limit availability
of credit in the economy, which has an adverse impact on domestic demand growth.
Inflation & Monetary Context ► Inflationary pressures will likely intensify in 2015 from the prevailing low level.
Consumer prices increased by 3.6% y/y in September, the slowest pace since October 2009. We expect inflation
to accelerate towards 6% y/y by end-2015 on the back of recuperating domestic demand and the authorities’
continued attempts to support the export sector by devaluing the VND. The central bank’s monetary policy
focuses on promoting output growth and macroeconomic stability along with controlling inflation. The International
Monetary Fund (IMF) has encouraged Vietnam to redirect its monetary policy towards inflation targeting while
allowing greater exchange rate flexibility.
Fiscal & Current Account Balance ► Vietnam’s government finances are challenging with the fiscal deficit likely
averaging 6⅓% of GDP through 2015. Strong growth in public spending, continually outpacing economic
momentum, is reflected in the rising fiscal shortfall. According to IMF estimates, gross public debt will approach
60% of GDP by 2015. On the external side, strong demand for Vietnamese exports will support the current
account balance, with the surplus likely to average 6% of GDP through 2015.
Institutional Framework & Political Environment
Governance ► Vietnam’s political landscape will continue to be dominated by the ruling Communist Party of
Vietnam (CPV) over the foreseeable future, despite the split between the two distinct factions within the party.
Prime Minister Nguyen Tan Dung’s government prioritizes rapid economic growth and has campaigned on a
platform that involves the privatization of more than 400 state-owned enterprises that account for a large portion of
the economy. The conservative group within the CPV holds stability as a priority and is led by the president of the
CPV, Truong Tan Sang. Although the split within the CPV has triggered criticism of the government, control is still
maintained through internet censorship and harsh penalties for online news sharing.
Financial Sector ► Vietnam’s banking system suffers from poor asset quality despite the government’s
continuing attempts to cleanse the financial landscape. The non-performing loan ratio reported by the central bank
was 4.1% in July; however, external estimates are significantly higher. Bank lending grew by 6.7% y/y in
September, below the official target of 12-14%.
Executive Briefing is available on scotiabank.com and Bloomberg at SCOT
October 2014
Global Economics
Executive Briefing
INTERNATIONAL ECONOMICS GROUP
Pablo F.G. Bréard, Head
1 (416) 862-3876
[email protected]
Erika Cain
1 (416) 866-4205
[email protected]
Estela Molina
1 (416) 862-3199
[email protected]
Neil Shankar
1 (416) 866-6781
[email protected]
Scotiabank Economics
Scotia Plaza 40 King Street West, 63rd Floor
Toronto, Ontario Canada M5H 1H1
Tel: (416) 866-6253 Fax: (416) 866-2829
Email: [email protected]
Rory Johnston
1 (416) 862-3908
[email protected]
Tuuli McCully
1 (416) 863-2859
[email protected]
This report has been prepared by Scotia Economics as a resource for the clients of Scotiabank.
Opinions, estimates and projections contained herein are our own as of the date hereof and are
subject to change without notice. The information and opinions contained herein have been
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