A waning electronics trade cycle and decelerating global demand pose material downside risks to Vietnam’s economic growth in 2019 and the next, HSBC said in its latest report. 

Vietnam’s last year 11-yeah high growth was primarily driven by manufacturing and services, which contributed five percentage points to the full-year growth of 7.1%, stated the report.

Vietnam’s manufacturing sector held up better than its regional peers despite a cyclical slowdown in electronics trade. Meanwhile, the services sector continues to outperform due to declining unemployment, rising wages, and an expansion of the tourism industry. 

Nevertheless, Vietnam’s high frequency indicators suggest an already-slowing economy, stated the report. Manufacturing PMI has expanded at a slower pace for three consecutive months, while average export growth in the first two months of 2019 (5.2%) has been markedly slower from the previous two years (2018: 24.8%, 2017: 18.3%). This is likely to weigh on growth for at least the first half of the year, before seeing a moderate recovery in the second half of 2019 as global growth stabilizes. 

HSBC forecast Vietnam’s economic growth to moderate to 6.6% in 2019 and to 6.4% in 2020. 

Meanwhile, foreign direct investments (FDI) have risen substantially at the outset of 2019, matching earlier anecdotal reports of rising investment interests due to rising trade tensions between the US and China. Total registered capital is up 153.2% and newly registered capital is up 75.7% year to date year-on-year as of February. 

Most notably, the largest chunk of FDI has originated from China, which suggests that Chinese manufacturers are also shifting manufacturing activities to Vietnam. Stronger FDI in light of rising trade tensions is one area that should support growth domestically despite slowing global demand. 

Positively, inflation pressures have moderated substantially since the third quarter of 2018 following a decline in global crude oil prices and efforts by the government to curb domestic price growth. This is likely to enable the State Bank of Vietnam (SBV) to keep its policy rate on hold for the rest of the year and focus more on sustaining growth. The report predicted inflation to average 3.1% in 2019 and 3.6% in 2020, despite some upside risks over the near term. 

According to the report, banks’ capital adequacy remains the most immediate domestic risk to the economy. Persistently high credit growth in recent years has translated to a ballooning of bank assets, which has not been matched by banks’ ability to raise capital. 

This problem is exacerbated in the country’s state-owned banks, where capital adequacy ratios (CARs) may fall below the 8% minimum threshold when Basel II standards are applied in 2020. 

​Vietnam’s credit growth in 2018 hit a 5-year low of 14%, while the government is aiming for a similar pace of credit growth this year. Thus it is expected that continued reforms, such as improving data quality/transparency and a further reduction in NPLs, would help attract greater equity investment to banks, improving their capital adequacy. 

Hanoitimes