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Vietnam Country Risk Report Q2 2016

  • February 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

The low inflationary environment in Vietnam (we forecast ConsumerPrice Inflation [CPI] to average just 2.1% in 2016) will provide ampleroom for the State Bank of Vietnam (SBV) to ease its monetary policy,but we expect apprehension regarding foreign exchange stability andstrong economic growth momentum to temper the central bank'seasing bias. As such, we forecast the monetary authority to cut itspolicy rate by a relatively shallow 50bps to 6.00% by end-2016.Despite the ousting of pro-reform Nguyen Tan Dung, and the reappointmentof conservative Nguyen Phu Trong to the General Secretaryposition during the CPV's 12th National Party Congress, we believethat the upcoming leadership is unlikely to make dramatic changes to existing policies that have propelled Vietnam's rapid economicgrowth over the past few years.

More importantly, the injection ofnew blood into the party will likely sustain crucial market reformsover the coming years, which will allow Vietnam to stay on coursewith its strong growth trajectory.The combination of a still strong export performance despite broadregional economic weakness, growing foreign investment interest,and robust domestic demand will continue to drive Vietnameseeconomic activity in 2016. As such, we maintain our forecast for Vietnam's real GDP growth to come in at 6.6% in 2016 (from 6.7%in 2015), which would make Vietnam one of the fastest growingeconomies in Asia. In particular, the country's manufacturing and realestate sectors will continue to benefit from greater foreign interest.

Major Forecast ChangesVietnamese local currency government bond yields are likely to headhigher over the coming months due to elevated levels of public debt,high fiscal deficit, and rising currency risks. Meanwhile, we have alsorevised our forecast for Vietnam's budget deficit as a share of GDPto come in at 5.3% (from 4.9% previously) in 2016, as we expectexpenditure growth to outpace revenue in the coming year.We expect the State Bank of Vietnam (SBV) to weaken its dongreference rate over the coming months as external headwindsincreasingly weigh on the currency. Although strong economicgrowth prospects, capital controls, and a low inflationary environmentwill provide some support for the currency, we believe that itwill be insufficient to stem capital outflows. As such, we forecast theVietnamese dong to weaken to VND22,892/USD by end-2016, andVND23,650/USD by end-2017.

Table Of Contents

Vietnam Country Risk Report Q2 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
Economy To Remain On A Strong Growth Path8
The combination of a still strong export performance despite broad regional economic weakness, growing foreign investment interest,
and robust domestic demand will continue to drive Vietnamese economic activity in 2016 As such, we maintain our forecast for
Vietnam's real GDP growth to come in at 66% in 2016 (from 67% in 2015), which would make Vietnam one of the fastest growing
economies in Asia In particular, the country's manufacturing and real estate sectors will continue to benefit from greater foreign interest
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
Bond Yields To Head Higher Amid Mounting Fiscal, Currency Risks10
Vietnamese local currency government bond yields are likely to head higher over the coming months due to elevated levels of public
debt, a high fiscal deficit, and rising currency risks Meanwhile, we have also revised our forecast for Vietnam's budget deficit as a share
of GDP to come in at 53% (from 49% previously) in 2016, as we expect expenditure growth to outpace revenue in the coming year
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES12
Currency Forecast 13
VND: More Depreciation On The Cards As External Headwinds Mount13
We expect the State Bank of Vietnam to weaken its dong reference rate over the coming months as external headwinds increasingly
weigh on the currency Although strong economic growth prospects, capital controls, and a low inflationary environment will provide
some support for the currency, we believe that it will be insufficient to stem capital outflows As such, we forecast the Vietnamese dong
to weaken to VND22,892/USD by end-2016, and VND23,650/USD by end-2017
TABLE: CURRENCY FORECAST13
Outlook On External Position 15
TABLE: MAIN EXPORT AND IMPORT PARTNERS15
TABLE: MAIN EXPORTS AND IMPORTS15
Monetary Policy 16
Central Bank Will Likely Refrain From Easing Too Aggressively16
The low inflationary environment in Vietnam (we forecast CPI to average just 21% in 2016) will provide ample room for the SBV to ease
its monetary policy, but we expect apprehension regarding foreign exchange stability and strong economic growth momentum to temper
the central bank's easing bias As such, we forecast the monetary authority to cut its policy rate by a relatively shallow 50bps to 600
%by end-2016
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 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
Upcoming Leadership To Stay The Course24
Despite the ousting of pro-reform Nguyen Tan Dung, and the reappointment of conservative Nguyen Phu Trong to the General
Secretary position during the CPV's 12th National Party Congress, we believe that the upcoming leadership is unlikely to make dramatic
changes to existing policies that have propelled Vietnam's rapid economic growth over the past few years More importantly, the
injection of new blood into the party will likely sustain crucial market reforms over the coming years, which will allow Vietnam to stay on
course with its strong growth trajectory
TABLE: POLITICAL OVERVIEW24
Long-Term Political Outlook 25
Key Political Challenges Over The Coming Decade25
Vietnam's biggest political question over the coming decade is whether one-party rule under the 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 RISK30
Trade Procedures And Governance 31
TABLE: IMPORT AND EXPORT DOCUMENT REQUIREMENTS31
TABLE: TRADE PROCEDURES BREAKDOWN 31
TABLE: ASIA - TRADE PROCEDURES AND GOVERNANCE RISK32
Vulnerability To Crime 33
Chapter 5: BMI Global Macro Outlook 37
Global Macro Outlook 37
Downside Risks Gather Momentum37
TABLE: GLOBAL ASSUMPTIONS37
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %38
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 38
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %39
TABLE: MACROECONOMIC DATA and FORECASTS 41

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