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Vietnam Country Risk Report Q4 2016

  • August 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

The Permanent Court of Arbitration's ruling on the Philippinearbitration case on July 12 will have wider implications for otherclaimant countries in the South China Sea, particularly Vietnam, asthe conclusions that were drawn will help to set legal precedent forsimilar maritime disputes in the region. We believe that Vietnam willlikely stand to benefit vis-à-vis China by using the ruling to clinchconcessions from Beijing as a counterbalance to nationalist domesticsentiment.We maintain our expectations for the State Bank of Vietnam tolower its benchmark refinancing rate by a relatively shallow 50 basispoints to 6.00% by the end-2016 as a disappointing GDP growthfigure in Q116, subdued inflationary pressures and a relatively stablecurrency will provide impetus for the central bank to act. However,concerns over reigniting the housing bubble will likely temper thebank's easing bent.We maintain our expectations for Vietnam's fiscal deficit to remainlargely unchanged at 6.1% of GDP in 2016, due to high recurrentexpenditure and debt repayment costs, as well as low oil-relatedrevenue. Beyond 2016, we forecast a gradual improvement in thegovernment's fiscal position owing to strong economic growth andreform efforts by the government. However, we note that contingentliabilities and slow reform momentum from the SOE and bankingsectors could pose downside risks to fiscal consolidation efforts andpublic debt sustainability.

Major Forecast Changes
Due to a weaker-than-expected GDP growth performance in H116,we have downgraded Vietnam's growth forecast to 5.9%, from 6.3%previously. However, we expect growth to accelerate over the comingquarters, spurred by a recovery in agricultural output as well asrobust growth in the industrial and services sectors.We expect the Vietnamese dong to maintain its long-term depreciatorytrajectory against the US dollar as inflation is likely to average higherthan the US, and the income account deficit is likely to remain wide,acting as a persistent drag on the currency. However, we believethat dong weakness over the shorter term is likely to be temperedby delays in Fed rate hikes and regional foreign exchange strength.Accordingly, we have upgraded our forecast for the dong to reachVND22,600 by end-2016 and VND23,200 by end-2017, versusour previous forecast of VND23,300/USD and VND24,000/USD,respectively.

Table Of Contents

Vietnam Country Risk Report Q4 2016
Executive Summary.. 5
Core Views...5
Major Forecast Changes.5
Key Risks.5
Chapter 1: Economic Outlook.. 7
SWOT Analysis... 7
BMI Economic Risk Index.. 7
Economic Growth Outlook 8
Growth To Improve Over Coming Quarters..8
Due to a weaker-than-expected GDP growth performance in H116, we have downgraded Vietnam's growth forecast to 5.9%, from 6.3
%previously. However, we expect growth to accelerate over the coming quarters spurred by a recovery in agricultural output, as well as
robust growth in the industrial and services sectors.
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS..9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.9
TABLE: FIXED INVESTMENT FORECASTS..10
TABLE: NET EXPORTS FORECASTS10
Fiscal And Public Debt Outlook.. 11
Fiscal Position To Improve In 2017 And Beyond...11
We maintain our expectations for Vietnam's fiscal deficit to remain largely unchanged at 6.1%of GDP in 2016, due to high recurrent
expenditure and debt repayment costs, as well as low oil-related revenue. Beyond 2016, we forecast a gradual improvement in the
government's fiscal position owing to strong economic growth and reform efforts by the government. However, we note that contingent
liabilities and slow reform momentum from the SOE and banking sectors could pose downside risks to fiscal consolidation efforts and
public debt sustainability.
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES. 12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...13
External Trade And Investment Outlook 13
US Rate Hike Delays To Curb Dong Weakness..13
We expect the Vietnamese dong to maintain its long-term depreciatory trajectory against the US dollar as inflation is likely to average
higher than the US, and the income account deficit is likely to remain wide, acting as a persistent drag on the currency. However,
we believe that dong weakness over the shorter term is likely to be tempered by delays in Fed rate hikes and regional FX strength.
Accordingly, we have upgraded our forecast for the dong to reach VND22,600 by end-2016, and VND23,200 by end-2017, versus our
previous forecast of VND23,300/USD and VND24,000/USD, respectively.
TABLE: CURRENCY FORECAST... 14
Outlook On External Position.. 15
TABLE: MAIN EXPORT AND IMPORT PARTNERS...15
TABLE: CURRENT ACCOUNT BALANCE FORECASTS...15
TABLE: MAIN EXPORTS AND IMPORTS...16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.16
Monetary Policy 16
Slowing Economy Reinforces Expectations Of Easing.16
We maintain our expectations for the SBV to lower its benchmark refinancing rate by a relatively shallow 50bps to 6.00% by the end-
2016 as a disappointing GDP growth figure in Q116, subdued inflationary pressures and a relatively stable currency provide impetus for
the central bank to act. However, concerns over reigniting the housing bubble will likely temper the bank's easing bent.
Monetary Policy Framework 18
TABLE: MONETARY POLICY FORECASTS..18
Chapter 2: 10-Year Forecast... 19
The Vietnamese Economy To 2025 19
A New Focus On Quality Growth.19
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 6.1% over 2016-2025. We foresee a more stable economic environment, with inflation averaging a benign 4.5% and the
current account remaining in roughly in balance over the forecast period.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.19
Chapter 3: Political Outlook... 23
SWOT Analysis. 23
BMI Political Risk Index... 23
Domestic Politics. 24
South China Sea Ruling To Have Positive Spillover Effects.24
The PCA's ruling on the Philippine arbitration case on July 12 will have wider implications for other claimant countries in the South
China Sea, particularly Vietnam, as the conclusions that were drawn will help to set legal precedent for similar maritime disputes in the
region. We believe that Vietnam will likely stand to benefit vis-a-vis China by using the ruling to clinch concessions from Beijing as a
counterbalance to nationalist domestic sentiment.
TABLE: POLITICAL OVERVIEW. 24
TABLE: STAKES IN THE SOUTH CHINA SEA... 25
Long-Term Political Outlook... 26
Key Political Challenges Over The Coming Decade..26
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. On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian
nations with close relations with the US.
Chapter 4: Operational Risk... 29
SWOT Analysis. 29
Operational Risk Index 29
Operational Risk... 30
TABLE: OPERATIONAL RISK.30
Market Size And Utilities Analysis.. 31
TABLE: ASIA - MARKET SIZE AND UTILITIES RISK 32
Labour Costs 35
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE... 35
Chapter 5: BMI Global Macro Outlook... 39
Global Macro Outlook.. 39
Brexit To Hit Global Growth.39
TABLE: GLOBAL ASSUMPTIONS..39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %... 41
TABLE: MACROECONOMIC DATA and FORECASTS.. 43

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