Vietnam’s trade deficit is inevitable in Vietnam for 2015 and 2016 but the coming deterioration in the country’s trade balance is assessed as ‘good’, said ANZ Bank.

In a report released last Friday, ANZ said according to initial estimates in April, the 12-month deficit widened to US$2.9 billion and import growth at 19.4% year-on-year is now more than double the rate of export growth.

Growth in machinery imports has been outpacing total imports growth since mid-2014. Although machinery has been the top import for more than two decades, its share of total imports declined to only 13% in 2013 from a peak of 19% in 2009.

Machinery imports are associated with investment to expand production capacity. The recent surge of machinery imports is positive for Vietnam’s long-term growth potential.

The report said Vietnam would post a current account deficit of 0.5% of gross domestic product (GDP) in 2015 and of 1% of GDP in 2016. “… as this is a good deterioration in the current account deficit, we do not think foreign investors should become overly concerned with asset valuations in Vietnam,” it said.

ANZ said it is necessary to distinguish between a ‘good’ and ‘bad’ deterioration in the current account deficit. In an economy that does not have a comparative advantage in the production of capital goods, as the productive capacity of the Vietnamese economy expands, machinery and equipment for production is typically imported.

This type of deterioration in the trade balance is good as it adds to the productive capacity of the economy in the long run and enables Vietnam to continue to push out its production possibility frontier, the bank stressed.

The contribution to import growth by foreign-owned enterprises has been almost double that of domestic firms over the past year.

Foreign-owned enterprises now ship almost 60% of total imports, compared to 30% in 2009. Its share of total imports outstripped domestic enterprises in 2012, a time marked by underperformance of domestic consumption.

In April, the Purchasing Managers’ Index (PMI) rose to 53.5, posting the largest monthly increase since mid-2012. The increase in stocks of finished goods came with the increase in the backlog of work.

The sub-index for new export orders also rose for two straight months. These all suggest that output should rise to meet robust demand.

Lastly, disbursed foreign direct investment (FDI) since early this year is the highest since 2012, reaching US$4.2 billion as of April. Disbursed foreign investment is more indicative of the increase in production capacity.

However, ANZ also noted that the recent run of trade deficits align with a possible nascent recovery in domestic demand.

There is therefore likely to be an element of deterioration in the trade deficit due to the importation of consumer goods. This would be considered a ‘bad’ deterioration in the current account.