HSBC lowered its anticipation on Viet Nam's GDP growth to 5.1 per cent this year from the previous 5.5 per cent in its monthly Viet Nam at a Glance report released yesterday.—Illustrative image/Photo anninhthudo

HCM CITY (Biz Hub)— HSBC lowered its anticipation on Viet Nam's GDP growth to 5.1 per cent this year from the previous 5.5 per cent in its monthly Viet Nam at a Glance report released yesterday.

The report said that May economic indicators painted a mixed picture of the economy.

While trade, retail sales, the HSBC manufacturing Purchasing Managers' Index (PMI), and CPI all point to anaemic growth of about 5 per cent for 2013 (relative to the historical average of 7 per cent), the registered FDI print shows that the country remains competitive and continues to attract healthy inflows.

As of May, total FDI registered capital had risen to US$5.1bn, up 23.5 per cent year-on-year.

Most of the capital has been channelled into the manufacturing sector, which has provided much-needed employment and investment in times of fiscal and monetary austerity and weak domestic demand.

The May HSBC manufacturing PMI retreated to below the neutral 50 points, dragged down by weak domestic demand.

Even the employment sub-index, which had been resilient, drifted below 50, pointing to a sobering growth outlook for the upcoming months.

The contraction of manufacturing output comes despite strong external demand indicators. The new export orders sub-index, for example, rose even higher, to 51.3 from 50.1.

Strong US consumer confidence and a gradual rebound of Japanese growth are lifting new export demand. But this boost is unlikely to offset domestic weakness.

Softness in year-to-date (May) exports continues, which expanded 15.1 per cent year-on-year.

While the year-to-date number is still in double digits, Vietnamese shipments have suffered from weak global commodity prices.

Exports of rice, coffee, coal, rubber and crude oil have all registered contractions.

Manufactured goods, on the other hand, have rebounded, bolstered by stronger demand and new investment in the textile and garment, footwear and electronics sectors.

While component imports are resilient, imports of final goods continue to contract, reflecting weak consumption.

Items such as milk and dairy products, automobiles, motorbikes, and petroleum recorded negative growth.

The 20.2 per cent year-to-date contraction of petroleum is also due to weak global prices and increased domestic refinery capability.

With subdued consumption and reduced reliance on foreign energy, Viet Nam's year- to- date deficit improved slightly to $1.9bn.

Strong remittance inflows and reduced import costs are likely to buoy Viet Nam's current account in 2013, providing a healthier macroeconomic environment.

Headline inflation continues to drop, thanks to weaker food prices and decelerating core prices to 6.35 per cent year-on-year from 6.6 per cent in April.

On a sequential basis, headline prices contracted by -0.1 per cent month-on-month versus 0 per cent in April.

Core inflation slowed to 11.0 per cent year-on-year from 12.1 per cent in April.

On a month-on-month basis, core inflation stayed flat in May, easing from 0.6 per cent in April.

The report expects core inflation to drop significantly in the coming months thanks to a favourable base effect and sluggish demand.

Rising domestic energy production capacity should also help stabilize the country's future energy supply.

Overall economic conditions are indeed weak but progress seems to be forthcoming, according to the report.

Growth is not expected to return to its previous rate until fundamental challenges to the economy are addressed.

The earliest any significant reforms should come are during the second half of the year, HSBC said. The Ministry of Planning and Investment recently proposed a 6 per cent growth target and 7 per cent inflation target for 2014.

Whether the government succeeds in achieving these ambitious targets depends on its ability to unfreeze a financial system plagued by bad debts, the report stated.

"No one doubts Viet Nam's potential to take off; it's a question of whether the government is incentivized to create institutions that support the country's great potential," it said. — VNS