VINACHEM

Vietnam's slow economic recovery has prompted the central bank to continue cutting interest rates to spur consumption as inflation falls, according to an HSBC report issued on Thursday.

After expanding solidly since last September, Vietnam's score on the HSBC Purchasing Managers’ Index (PMI) eased markedly in August to 50.3 from 51.7 in July on slowing external orders and domestic demand.

“Despite the slowdown, we are not too concerned about Vietnam’s manufacturing sector, which will likely bounce back in the last quarter of this year,” said HSBC.

New investment is expected to fuel export demand from Vietnam’s most important market - the US. The outlook for the domestic sector, however, remains flat.

The Ministry of Finance also introduced incentives to support firms, it said. The corporate tax rate was cut to support businesses and attract manufacturing FDI--particularly for high-tech firms. In January, the rate was reduced to 22 percent from 25 percent; and by 2016, it will be cut to 20 percent.

Foreign-invested enterprises in sectors and regions favoured by the government receive even more advantageous rates.

The central bank already lowered the OMO (Open Market Operations) rate by 50 percentage points to 5 percent to support domestic demand. Should inflation decelerate further, the SBV may cut the policy rate further.

Vietnam's economy expanded 5.18 percent in the first half of 2014 from a year earlier, according to the General Statistics Office. The government is trying to bolster an economy that the World Bank estimates will expand 5.4 percent this year, missing the government target of 5.8 percent.