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Vietnam Country Risk Report Q3 2016

  • May 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views Vietnam completed its leadership transition on April 9 2016, and we expect the new government to maintain its strategic non-alignment foreign policy. In the latest maritime dispute between China and Vietnam, the new administration adopted an unyielding tone against Beijing, suggesting that it will not be subservient to its larger neighbour. However, we expect Hanoi to seek to maintain a delicate balance as it attempts to appease Vietnamese at home, while preserving crucial economic relations with China. We forecast the State Bank of Vietnam (SBV) to embark upon on a relatively shallow rate-cutting cycle of 50 basis points over the course of the year in order to reduce lending rates and provide support to the economy. The low inflationary environment (we forecast consumer price inflation to average 2.1% in 2016) will also provide sufficient room for the central bank to act.

However, still-strong economic growth momentum and concerns over external stability will likely moderate the central bank's easing bias. The strong orientation of Vietnamese exports to the US and steady inflows of foreign direct investment should sustain Vietnam's export growth over the coming quarters. However, we expect import growth to remain similarly strong as the country relies heavily on imported input materials for production. As such, we expect Vietnam's trade deficit to widen further to 3.2% of GDP in 2016, from an estimated 2.1% of GDP in 2015. Major Forecast Changes We believe that Vietnam's industrial and services sectors will continue to benefit from a resilient export sector, strong foreign investor interest and robust domestic demand. However, extreme weather conditions and subdued oil prices will continue to act as a drag on the economy, capping its short-term growth potential. As such, we have downgraded Vietnam's real GDP growth forecast for 2016 to 6.3%, from 6.6% previously. Although we forecast Vietnam's budget deficit as a share of GDP to narrow over the coming years, progress will be slow, as unrealistic fiscal projections, low oil revenue, an increase in current expenditure and high debt repayment costs will impede the government's efforts to consolidate its fiscal position over the near term. Accordingly, we forecast Vietnam's budget deficit as a share of GDP to come in at 6.0% in 2016, marking little change from the 6.1% recorded in 2015.

Table Of Contents

Vietnam Country Risk Report Q3 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Poor Weather Conditions To Weigh On Growth8
We believe that Vietnam's industrial and services sectors will continue to benefit from a resilient export sector, strong foreign investor
interest and robust domestic demand
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
Fiscal And Public Debt Outlook 10
Fiscal Deficit To Remain Wide in 201610
Although we forecast Vietnam's budget deficit as a share of GDP to narrow over the coming years, progress will be slow, as unrealistic
fiscal projections, low oil revenue, an increase in current expenditure and high debt repayment costs will impede the government's
efforts to consolidate its fiscal position over the near-term
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES12
External Trade And Investment Outlook 13
Trade Balance To Deteriorate Despite Strong Exports13
The strong orientation of Vietnamese exports to the US and steady inflows of foreign direct investment should sustain Vietnam's export
growth over the coming quarters However, we expect import growth to remain similarly strong as the country relies heavily on imported
input materials for production As such, we expect Vietnam's trade deficit to widen further to 32% of GDP in 2016, from an estimated
21% of GDP in 2015
Outlook On External Position 14
Monetary Policy 15
Shallow Rate Cuts On The Table15
We forecast the SBV to embark upon on a relatively shallow rate-cutting cycle of 50bps over the course of the year in order to reduce
lending rates and provide support to the economy The low inflationary environment (we forecast consumer price inflation to average
21% in 2016) will also provide sufficient room for the central bank to act However, still-strong economic growth momentum and
concerns over external stability will likely moderate the central bank's easing bias
TABLE: MAIN EXPORT AND IMPORT PARTNERS 15
TABLE: MAIN EXPORTS AND IMPORTS 15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE 15
Monetary Policy Framework 17
Chapter 2: 10-Year Forecast 19
The Vietnamese Economy To 2025 19
A New Focus On Quality Growth19
Vietnam's growth prospects over the next decade remain positive in our view, as reflected by our bullish forecasts for real GDP growth
to average 62% over 2016 -2025 We foresee a more stable economic environment, with inflation averaging a benign 45% and the
current account remaining in roughly in balance over the forecast period
TABLE: LONG-TERM MACROECONOMIC FORECASTS19
Chapter 3: Political Outlook 23
SWOT Analysis 23
BMI Political Risk Index 23
Domestic Politics 24
Hanoi To Maintain Foreign Policy Bearing24
Vietnam completed its leadership transition on April 9 2016, and we expect the new government to maintain its strategic non-alignment
foreign policy In the latest maritime dispute between China and Vietnam, the new administration adopted an unyielding tone against
Beijing, suggesting that it will not be subservient to its larger neighbour
TABLE: POLITICAL OVERVIEW 24
Long-Term Political Outlook 25
Long-Term Political Outlook - Key Political Challenges Over The Coming Decade25
Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will
face growing calls for democratisation, as was the case in other major South East Asian countries While our core scenario envisages
the CPV transforming itself into a technocratic administration, it faces major economic challenges which, if mismanaged, could lead to
widespread unrest
Chapter 4: Operational Risk 29
SWOT Analysis 29
Operational Risk Index 29
Operational Risk 30
TABLE: OPERATIONAL RISK30
Economic Openness 31
TABLE: TOP FIVE IMPORT PRODUCTS and IMPORT PARTNERS, 2009 - 2013, USDMN 31
TABLE: FREE TRADE AGREEMENTS32
TABLE: FREE TRADE ZONES AND INVESTMENT INCENTIVES33
Availability Of Labour 36
TABLE: ASIA - AVAILABILITY OF LABOUR RISK 36
TABLE: LABOUR FORCE EMPLOYMENT BY SECTOR ('000), 2007-2012 37
TABLE: TOP 10 SOURCE COUNTRIES FOR MIGRANT WORKERS, '00038
Chapter 5: BMI Global Macro Outlook 41
Global Macro Outlook 41
Tentative Stability, But New Risks Emerging41
TABLE: GLOBAL ASSUMPTIONS 41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 43
TABLE: MACROECONOMIC DATA and FORECASTS 45

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