Vietnam has just entered 2017, but already market analysts are trying to predict the trends of the next 12 months. Senior economist Le Xuan Nghia, director of the Business Development Institute, provides an insight about monetary and financial market movements in the new-year.

The economy starts on upswing

A worrisome trend has persisted in the past three years, with global GDP growth often outpacing trade growth. This signifies the trade sector’s diminished contributions to national economies.

Also, this has brought forth concerns over global trade instability. Most forecasts, however, suggested a complete change in the overall situation this year.

Accordingly, statistics showed that global trade inched up 3.9% in 2014. The rate softened to just 2.6 and 2.3%, respectively, in 2015 and 2016. This year the growth figure has been projected at 3.8%, based on the International Monetary Fund’s latest forecast.

Global GDP growth stood at 3.5% in 2014, slightly falling to 3.2% in 2015, and 3.1% in 2016. It is forecast to rise this year, up to 3.4%.

These figures indicate that the growth of both the global economy and trade have bottomed out and started to resume their upward trends. Without unexpected occurrences, we have reasons for more upbeat appraisals of the world economy resuming its pace this year, which would have a strong impact on Vietnam’s economy.

This forecast will remain unchanged even when real estate tycoon Donald Trump officially becomes the new US president, adding to the uncertainty surrounding the Trans-Pacific Partnership.

For Vietnam, we have a raft of other important trade agreements to avail of their potential, such as the Republic of Korea-Vietnam Free Trade Agreement (KVFTA), which allows 96% of Vietnamese goods to enter Korean markets tax-free or with lower import tax rates. Korean goods will follow a similar tax-cut roadmap when entering Vietnam.

The FTA between Vietnam and the Eurasian Economic Union also provides enormous potential that has yet to be fully tapped. The EU-Vietnam FTA is also very significant – as of now, the EU does not have any similar trade pact with an individual country.

Vietnam is the first country to have engaged in a trade deal with the EU and there will certainly be interesting contents there. The signing of this trade pact, however, has been delayed until this year due to Brexit-related issues.

As for the local economy, we have established two growth models-for short-and long-term growth-which have worked for several years now, and act as an input for the government policy-making process during the 2015-2025 period.

Our short-term model shows that the growth cycle peaked in the second quarter of 2015, while the bottom fell out on the second quarter of 2016. The growth trend resumed from the third and fourth quarters of last year.

In our short-term, two-year growth cycle, we forecast GDP growth will peak in this year’s second quarter before going downward.

This entire short-term cycle is part of a long-term cycle stretching from 2014 through 2023. Accordingly, during that longer period, Vietnam’s economy will trend upwards, though it may undergo different short-term cycles featuring both ups and downs in development.

Where to invest in 2017?

The following factors could significantly impact Vietnam’s stock market performance this year.

First, bank interest rates face the pressure of going up amid rising inflation. The 4.5% average inflation rate in 2017 set by the National Assembly was alleged to be quite high.

The average inflation rate calculation differs from the traditional method of consumer price index (CPI) calculation, which takes CPI in the following year to compare with December of the previous year.

The average CPI last year was 2.9%, or about 5% based on the traditional calculation method.

With an average CPI of 4.5% set for 2017, the CPI rate based on the traditional calculation method would surpass 5% this year. The interest rate is also influenced by other factors, such as interbank interest rates, which have recently shown signs of a rise.

Another factor is the government bond interest rate. After a period of shrinkage, it has slightly increased in recent months.

Next is the exchange rate. This rate projects to face certain pressure on account of appreciating US dollars when the US Federal Reserve adjusts the interest rate. We have proposed the government try to stabilise the exchange rate.

If it proves important to adjust the rate, it will be handled flexibly, but not through the home currency devaluation option as some experts have recommended.

The State Bank of Vietnam (SBV)’s current management approach is paying respect to market movement and managing the market in a flexible manner to avoid creating chaos in the monetary market.

We expect SBV will largely adopt a policy to ensure a stable rate. If there was a need to further push up the rate, the maximum increase would be 1% only.

With respect to market growth this year, we have recognized that the ups and downs in the real estate market are closely linked to economic growth. The growth cycle in the real estate market is often slower than economic growth.

By contrast, stock market movements often precede the real estate market and the economy. Even when commodities in the stock market increase, and foreign portfolio capital (indirect investment sources) sees a halt or fall, this trend still works with the stock market.

This year, Vietnam’s stock market may see slower growth, but I believe the market will become more stable compared with last year.

Another issue is how to tap China’s enormous capital sources. China was reported by the media to have founded four big financial institutions to feed infrastructure projects in Asia, with capital many times greater than the sum the World Bank and the Asian Development Bank had provided Asia in the past five years.

Investment in infrastructure will lead to growth in the real estate market, and this will certainly affect the stock market. The media has reported on China’s huge investment projects in Thailand and Malaysia.

Concerns over ineffective investment projects and national security risks have made Vietnam cautious in luring this source of capital. But we may lose out on opportunities with late decisions.

VIR