HSBC forecasts headline inflation to pick up to 3 per cent year-on-year by the end of the first half and hit 5.1 per cent by year-end, breaching the central bank's target. — Photo vneconomy.vn

HCM CITY (Biz Hub) — The Government has set an economic growth target of 6.7 per cent for 2016, which HSBC, in its latest Vietnam at a Glance report, believes is feasible since export growth has rebounded to double digits reflecting new investment.

Meanwhile, domestic demand will remain firm thanks to robust private spending, which should be helped by continuing low interest rates.

It also expects macro policy management to possibly get trickier this year, as continued strong growth gradually stokes price pressures.

Actual FDI flow rose last year to a record US$14.5 billion, 17.4 per cent higher than in the previous year. It is expected to rise further in 2016, reflecting improvements in the investment climate (including the potential relaxation of foreign investment restrictions).

The new investments, coupled with continued market share gains in key products like electronics, footwear, and textiles and apparel, should boost Viet Nam's exports, even if global demand remains weak.

Viet Nam's rapid gain in smartphones is a case in point: the product barely registered in customs data before 2011, but last year tech exports jumped 34 per cent to $48 billion thanks to steady investments by multinationals businesses, which are attracted by the country's fast growth, low wages and large and eager work force.

Meanwhile, domestic demand should remain firm thanks to robust private spending, which is being helped by the low rates.

However, the report sees little, if any, scope for a more expansionary fiscal policy, given the government's tight finances.

Inflation and credit

With growth having firmly shifted gears to the 6-7 per cent range, inflation is expected to rebound emphatically in the second half of the year, though the uncertainty around this outlook is quite high, given the difficulty of forecasting the path of oil prices.

Another source of uncertainty is gauging to what degree productivity increases may be contributing to the lack of core inflation momentum. While it is certainly possible that new investments, especially in the manufacturing sector, may have helped raise both labour and total factor productivity, it is hard to confirm this, given the issues around the reliability of employment data.

HSBC forecasts headline inflation to pick up to 3 per cent year-on-year by the end of the first half and hit 5.1 per cent by year-end, breaching the central bank's target.

For its part, the central bank has sounded more relaxed about the price outlook. In a recent media interview, SBV governor Nguyen Van Binh said the central bank intends to keep policy rates steady at current levels if inflation is contained in the 3-5 per cent range.

He also said the central bank would target annual credit growth of 18 per cent y-o-y, though this could be raised to as high as 20 per cent.

Vietnamese dong

The widening trade deficit is increasing pressure on the dong and forex reserves.

The dong has been trading in the upper side of the SBV's band since early 2015. Heightened yuan weakness following the People's Bank of China's August 11 reforms has intensified the pressure on the dong.

However, competitiveness concerns are only part of the story. The weakness of the dong is also a reflection of a strong appetite for imported goods that has accompanied the revival in domestic demand.

In the last quarter of 2015 the SBV stuck to its promise to refrain from devaluing the dong further as it seeks to maintain stability in the run-up to the country's leadership transition in January.

But, given that the central bank's reserves are looking increasingly thin (import cover had fallen to 2.1months as of the third quarter last year), the SBV is likely to pare back intervention and allow the currency to depreciate further in the months ahead.

In fact, early this week it introduced a new mechanism that would allow for a daily, more market-based setting of the dollar-dong reference rate. — VNS