VINACHEM

HSBC's outlook for Vietnam in third quarter shows that the country has recovered from slower growth but still has to overcome many challenges.

In the third-quarter outlook, HSBC stated that agriculture and aquaculture still face difficulties caused by the El Nino extreme weather phenomenon.

Even the main sectors only saw slight increases but this shows the country has escaped the most difficult period. Services and manufacturing industries both have positive growth. Export companies will continue to face challenges as world demand is likely to decrease, however, domestic demand may strongly increase in late 2016.

Controlled growth will help improve the trade balance after the Ministry of Industry and Trade reported last year that Vietnam's total trade deficit stood at USD3.6bn.

In the mean time, Vietnam has continued to receive strong foreign direct investment which will bolster foreign exchange reserves. In the first six months, USD7.3bn of FDI was disbursed and FDI is predicted to continue to play an important role in the export industry and help Vietnam's shipping industry achieve strong result even if global demand slows down.

The country's inflation rate is still under control, ranging from 1.6% to 2%. According to HSBC, the headline inflation will reach 5% in middle of 2017. In order to counter this, the State Bank of Vietnam may increase interest rates to 5.5% in the third quarter.

Decreasing fuel prices mean state budget deficit will not recover anytime soon and may account for 6.6% of GDP this year. As a result, it will push the public debt to GDP ratio to 65%, the threshold international safety standard for public debt. HSBC suggested that government should increase revenues and restrain spending. Slow but sustainable economic growth is recommended.

HSBC maintains its Vietnam's growth prediction of 6.3% in 2016 and 6.6% for 2017, compared to the Vietnamese government's GDP growth target of 6.7% for this year.