Viet Nam's economy takes a good shape

Tuesday, Oct 11, 2016 17:02

HCM CITY (Biz Hub) — Viet Nam's economy accelerated in the third quarter, expanding by 6.6 per cent year-on-year. This marks a sharp improvement from the 5.6 per cent growth rate registered last quarter, said a report on Asian economics conducted by the Hong Kong and Shanghai Banking Corporation (HSBC).

During the first half of the year, the economy lagged, in part due to widespread drought and declining agricultural output (which in turn further constrained rural consumption ). However, these supply-side disruptions have eased over the last few months, with production conditions normalising. Third quarter growth bounced back, although it will be a challenge to meet the government's full-year growth target of around 6.7 per cent.

Manufacturing and exports continue to be the twin bright spots of the economy. The September PMI report points to further improvements in the manufacturing sector. Both internal and external demand accelerated during the month, as did output and employment. In fact, employment rose at the fastest pace in over five years. This, and the fact that firms are continuing to build inventory, suggests that manufacturers remain optimistic.

The external sector also remains resilient. Exports rose by 9 per cent year-on-year  in September, once again outpacing regional peers. During the first nine months of the year, Viet Nam received about US$11billion in FDI, up 12.4 per cent from a year ago. With new factories commencing operations this year, experts expect FDI to drive gains in exports. Viet Nam remains highly competitive, especially in apparel and electronics assembly, and it should gain a greater global market share even as world trade remains lackluster.

Still, lingering bad debts, potential upside risks to inflation, and a slower-than-planned public divestment pose headwinds to the economy. The Government is gradually tackling reforms to put growth on a more sustainable path. However, for the time being, the scope for either monetary or fiscal easing is rather limited. Therefore, government experts are paring back forecasts slightly (to 6.2 per cent from 6.3 per cent for 2016, and to 6.5 per cent from 6.6 per cent for 2017), while continuing to expect that the economy will outperform in the near term. On that note, the government has pencilled in a 6.6 per cent growth rate for 2018.

Policy issues

Inflation has ticked up all year, accelerating to a rate of 3.3 per cent in September. Although it looks set to average below the 5 per cent target for 2016, many upside risks exist. For instance, unfavourable weather and soil conditions may push up the cost of food. Any recovery in fuel prices is likely to eventually find its way into the economy, stoking headline inflation. Also, regulated costs of key services like education and healthcare are likely to edge up in the coming months. Robust credit growth further adds to upside pressures. All things considered, the scope for further monetary easing, therefore, appears limited for the time being.

Similarly, the potential for fiscal easing is also quite small. According to the National Financial Supervisory Commission (NFSC), the budget deficit as of August 15 totalled nearly VND111.5 trillion, which is equivalent to about 44 per cent of the estimate for the entire year. However, budget deficit pressure will likely increase in the remaining months as infrastructure investment is expected to accelerate following a government resolution. On the other hand, revenue collection from crude oil and state-owned enterprises (SOEs) continues to fall behind, caused by lower fuel prices and stagnant divestments of the government's stakes in SOEs. Until August, the average selling price of crude oil was $41 per barrel – well below the budgeted price of $60 per barrel. According to the Ministry of Finance, VND10trillion--only a third of planned divestment revenues--was raised in the first eight months of the year.  — VNS

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