Vietnam at a glance: All hangs on reforms 9.2016

HSBC

Thursday, 29 Sep 2016

Vietnam does have a thing or two to cheer about. The latest PMI survey shows that the manufacturing sector - the sector that attracts most FDI - continued to expand in August for the ninth straight month, even as some Asian countries and most Western economies have struggled to stay above the water line. Further, global headwinds notwithstanding, overseas demand for Vietnam's goods has been resilient. Similarly, Vietnam as an investment destination remains as attractive as ever. Not bad, all considered. 

And yet, there are a few clouds on the horizon. For example, Vietnam has a target of keeping inflation for 2016 under 5%. The September print was 3.3%. Yet there are upside risks, given that unfavourable weather and soil conditions may push up the cost of food. Moreover, the recovery in fuel prices will eventually find its way into the economy, stoking headline inflation. Regulated costs of key services like education and healthcare are also likely to edge up in the coming months. Robust credit growth further adds to upside pressures. The scope for further monetary easing therefore appears limited for the time being.
Speaking of interest rates, it's not just growing price pressures that are posing a problem, but also lingering bad debts will likely keep lenders from lowering lending rates even if the policy rate was lowered. So now the question is: if not monetary policy, then can fiscal policy take centre stage when needed? Not really. The budget deficit is already under strain from escalating public spending. After all, demand for public services is growing rapidly given the country's young population. At the same time, revenues have come under pressure due to lower oil prices and a slower pace of divestment.
Despite these evident challenges, Vietnam continues to outperform. Meanwhile, the government is pressing ahead with structural reforms, which, if pursued rigorously, should lift Vietnam's growth rate over time. For example, Vietnam has revamped its privatization procedures (or "equitization" in local parlance) to provide greater pricing transparency via a "book building method". In addition, officials keep pruning foreign ownership restrictions for listed companies.

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