Growth in Vietnam remains robust but high capacity-use rates may limit further expansion, according to the World Bank’s “Global Economic Prospects: East Asia and Pacific - The Turning of the Tide?” report released on June 5. The country is forecast to grow by 6.8 per cent this year before moderating to 6.5 per cent in 2019 as capacity constraints become more binding.

In the meantime, economic conditions in developing East Asia and Pacific have for the most part remained favorable in 2018, including robust global trade, mostly contained borrowing costs, and sustained capital inflows. 

Growth across the region remains solid and exports have surged in both volume and value terms. Private consumption has been supported by strong consumer confidence and rising household wealth in an environment of moderate inflation. Investment spending in the region has also been strong.

Regional financial markets have generally remained buoyant, despite volatility in early and mid-2018 related to the prospects of faster monetary policy tightening in advanced economies and escalating trade tensions. 

Bond spreads in some countries have increased, following bouts of volatility in stock markets, but remain close to the low levels that prevailed in 2017. Domestic monetary conditions have tightened somewhat and tighter prudential policies have kept credit growth in check.

Domestic demand in China has been solid in 2018, reflecting robust consumption growth and recovering private fixed asset investment. 

The stock of corporate debt has continued to decline as a per cent of GDP in the first half of 2018 but remains high by international standards. China recorded its first current account deficit since 2001 in the first quarter of 2018, consistent with external rebalancing.

Among commodity exporting economies of the region, an investment-led cyclical recovery has continued in response to higher commodity prices, improved confidence, and low financing costs. 

Indonesia has continued to register strong growth this year, and growth continues to recover in Mongolia. Growth moderated in Malaysia but remains robust and broad-based.

In terms of outlook, growth in developing East Asia and Pacific is projected to ease from an upwardly revised 6.3 per cent in 2018 to 6.1 per cent in 2019. The modest slowdown in regional growth is largely due to the gradual structural slowdown in China. 

Excluding China, activity in the region is expected to slow from 5.4 per cent in 2018 to 5.3 per cent next year. 

The outlook is predicated on moderately higher commodity prices, strong but gradually moderating global demand, and incremental tightening of global financing conditions.

ANZ releases updated economic forecasts

With first quarter GDP growth at 7.4 per cent year-on-year, ANZ expects some pull-back in growth momentum towards a more sustainable rate of 6.8 per cent for 2018 as a whole, followed by 7.0 per cent in 2019. According to the ANZ Greater Mekong Outlook report released on June 1, first quarter growth was unseasonably strong, having tended to be at its lowest at the beginning of previous years and followed by an acceleration over the course of the remainder of the year.

In terms of production, the agricultural sector grew 4.1 per cent year-on-year; the fastest rate since the series was rebased in 2012. Industry also bucked historical trends by growing 10.1 per cent year-on-year.

Growth in industrial production has already eased. The introduction of new products in 2017 pushed up growth in consumer electronics, but now that production has normalized, favorable base effects have started to fade. In the absence of additional production capacity this year, ANZ expects real industry growth to moderate.

Growth in merchandise exports has also eased, reflecting trends in manufacturing production. Nevertheless, with an average increase of 15.8 per cent year-to-date year-on-year as of May, Vietnam’s exports remain robust. Imports, meanwhile, haven’t grown at the same pace, leading to a $3.4 billion trade surplus year-to-date. While export production is still supportive of growth, the net contribution of domestically-owned production has been limited. Indeed, the improvement in the trade balance is mostly attributable to the FDI sector.

Even so, the widening of the overall trade surplus has aided the central bank in rebuilding its forex reserves, with the government reporting reserves of $64 billion as of May, or roughly 3.5 months of imports.

Newly-registered FDI continues to pour in, though at $4.7 billion as of May is lower than the $5.6 billion in the same period last year.

After the US withdrew from the TPP, the remaining members have been negotiating the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). With Vietnam expected to uphold its commitment to pursue significant economic reforms, the prospects for more FDI are positive, ANZ believes.

Inflation has been on a gradual uptrend, reaching 3.9 per cent year-on-year in May. Food prices turned a corner at the beginning of the year, implying that all major CPI components are now contributing positively to headline inflation. Although transport costs have risen, they have not fully reflected the trajectory of global fuel prices. Meanwhile, health-related prices only rose 3.9 per cent year-to-date compared to 16.8 per cent year-to-date in the same period last year. If increases are delayed further, there will be heightened risk of higher price increases down the line. In the past, when health prices were capped over a prolonged period, the subsequent changes tended to be dramatic.

As such, ANZ expects inflation to stand at 3.6 per cent in 2018; still below the maximum threshold of 4 per cent set by the government early this year. The bank then expects inflation to remain on an upward path, reaching 4.2 per cent in 2019.

VN Economic Times