HSBC Global Research has released a report on Vietnam’s economy titled ‘the return of twin deficits’.

After a brief rebound in October, the manufacturing PMI slipped back below the waterline in November, falling to 49.4. Weak external demand is to blame: new export orders are stuck at four-month lows.

Exports will likely stay sluggish through Q1 16, but HSBC remains optimistic that they will bounce back in 2016 as new FDI comes online. Over the longer horizon, Vietnam’s manufacturers should continue capturing global export market share, as on-going trade liberalisation efforts bear fruit.

Vietnam’s merchandise trade deficit has also widened this year. However, the main driver is increased imports, not falling exports. Recently, domestic demand has picked up strongly, reflecting the re-leveraging of the economy. Credit growth is on track to reach 17% this year.

Though not yet at alarming levels, credit growth has been running much more strongly in 2015, boosting domestic demand and pushing up growth to 6.5% YTD y-o-y, as of Q3 15, up from 5.6% during the same period last year.

HSBC expects rising domestic demand to stoke higher inflation pressures in 2016. Thanks to lower global commodity prices, average headline inflation looks likely to slow to a record-low 0.5% y-o-y in 2015 from 4.1% in 2014.

However, the November CPI report offers tentative signs that inflation is beginning to bottom out: after briefly slipping into deflation in the early fall, headline inflation ticked up to 0.3% y-o-y in November, driven by a smaller drag from energy prices and pick up in core inflation to 1.6% y-o-y from 1.4%. This isn’t exactly cause for alarm bells at this stage.

Nevertheless, with strong growth likely to continue in the quarters ahead, HSBC sees inflation rebounding to 3.1% y-o-y by end-H1 2016, partly on the back of base effects. HSBC then expects it to accelerate to 4.9% y-o-y by end-2016.

HSBC therefore sticks with call that the SBV will have to shift to a tightening mode next year, and expect the central bank to deliver the first 50bp hike in Q3 16, taking the OMO rate to 5.5%. If anything, the risk is that tightening will have to come sooner.

Since 2011, Vietnam has comfortably run a current account surplus, thanks to a sharp turnaround in the goods trade balance and steady remittances.

However, the erosion of the merchandise trade balance has led to a thinning of the current account surplus.

In Q1 15, the current account balance fell into a US$1 billion deficit, the first shortfall in nearly four years. To be fair, the drop was partly seasonal.

However, HSBC’s view is that the deficits are likely to become more commonplace in the coming quarters, based on our outlook for stronger domestic demand, and an attendant widening of the trade deficit.

In 2016, HSBC forecast the current account balance to slip into a deficit equivalent to 1.6% of GDP from an estimated 0.2% surplus in 2015 and a 5.1% surplus in 2014.

The likely return of current account deficits in 2016 means that the balance of payments may remain under pressure in 2016 and into 2017. Vietnam’s macro risks are limited for the time being; however, the SBV may choose to tighten monetary policy next year to maintain a sustainable growth path.  

VOV