Vietnam macroeconomy to remain stable but less favorable in 2019

03:12' PM - Friday, 04/01/2019

In 2019, export and investment growths will be slightly lower year-on-year, causing a mild deceleration in Vietnam's GDP growth to 6.8%, Bao Viet Securities Company (BVSC) analysts have said in their latest strategic report.

However, it is highly probable that the government still reaches its targets in inflation control, interest rate and exchange rate stabilizations, stated the brokerage.

Insignificant global risks

According to BVSC, the macroeconomy, although less favorable, remains neutral and unlikely to cause any big shock to the stock market, unless the global economy faces unexpected risks such as the public debt crisis in Italy threatens the stability of Eurozone; a sharp decline in the jobless rate and surging wage force FED to raise interest rates faster and stronger than expected; trade war drags China's growth down faster than expected.

For the time being, the bilateral and multilateral free trade agreements, especially the EU-Vietnam Free Trade agreement, if approved by the EU’s Parliament, will enable Vietnam to maintain the current export growth to lease out the risks from economic slowdowns of the US, EU and China, the major trading partners with Vietnam.

Global financial conditions have tightened but it’s highly likely that the central banks of Japan and South Korea, two major investors to Vietnam, would maintain the low interest rates, enabling Vietnam to attract FDI and FII from these two countries.

The US-China trade war can have a massive psychological affect and result in investment disorientations but it will also be an opportunity for Vietnam to benefit from the rearrangement of the global supply chain.

With improved business environment, good infrastructure to connect with China and low labor cost, Vietnam is a good candidate to replace China in the "China +1" strategy of global investors.

Economy outlook in 2019

In 2018, Vietnam’s GDP grew 7.08% - the highest level since 2011. The key growth driver is the industrial-construction sector, but the agro-forestry-fishery sector is also a very active contributor with the strongest increase in 10 years.

From 2014, CPI has grown steadily at below 5% thanks to credit and M2 growths be maintained at 15-20%. In 2019, credit and M2 will continue to fluctuate at that range, and triggering insignificant inflation risks.

In 2019, prices of medicines and medical services are expected to rise 5-8%; electricity price should increase by about 7.5%; prices of educational service may rise by 6%. Price adjustment of state-controlled commodity groups will cause the overall CPI to increase by about 1% in 2019.

According to BVSC, inflation will be forecast based on three oil price scenarios at US$65, US$70 and US$90 per barrel. In the neutral scenario, BVSC expected inflation to fluctuate at around 3.5% in 2019.

This would result in an unchanged interest rates for 2019 compared to 2018.

However, in order to reduce the ratio of short-term funds used for medium- and long-term loans from 45% to 40%, some banks should increase their interest rates, but insignificantly (below 0.5%).

Vietnam has been in trade surplus since 2016, quite different from what happened in 2015 and 2007-2011, when the economy saw a strong VND depreciation. This surplus comes from both the current and capital accounts.

The overall balance will likely continue in surplus in 2019 thanks to export growth, FDI and stable remittance inflows. On that basis, there is insignificant risk that VND should devalue more than 5% next year. BVSC forecasts that VND will depreciate by less than 3% in 2019.

VND has been devalued against USD while CNY has both strengthened and weakened against USD and tended to devalue amid difficult time for the economy. CNY is forecast to keep devaluing against USD in 2019, but less than 5% and milder than in 2018. Therefore, VND will be under less devaluation pressure from CNY’s fluctuations in 2019. - Hanoitimes -

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