Vietnam growth looking unsustainable

Hanoi has been booming in recent years. Source: All Free Photos

Vietnam’s economy was one of the world’s fastest growing nations last year with a 6.7-per-cent rate of economic growth making it the swiftest-growing Asian nation after India (7.3 per cent) and China (6.8 per cent).

Hanoi is looking at 6.7-per-cent growth for this year but Prime Minister Nguyen Tan Dung said the economy could reach 7-per-cent growth. “Twenty-fifteen was a tough time for both the domestic and global economies,” the premier said. “But Vietnam’s GDP still managed to grow by 6.68 per cent, which lays a strong foundation for us to overshoot the target again in 2016.”

Vietnamese manufacturing has grown rapidly, becoming the largest exporter to the USA in 2014 among all the Asean members.

About 20 per cent of all Vietnamese goods are exported to the USA since Nike, Samsung Electronics and Intel established factories in Vietnam to take advantage of its cheap labour and famous work ethic.

Dung has pursued economically liberal policies, similar to those of Deng Xiaoping implemented in China during the 1980s. Under his premiership, Vietnam joined the World Trade Organisation in 2006, foreign-direct investment increased to a record level in tandem with the annual growth rates of 7 per cent and infrastructure has received a much-needed injection of stimulus funding in order to improve the attendant business climate.

Vietnam’s purchasing manufacturing managers’ index expanded for 24 straight months from September 2013 until last September, thanks in part to the continued falling value of the dong.

However, the end of the dong’s depreciation coincided with the curtailment of the manufacturing sector. In September, Vietnam’s manufacturing PMI fell to 49.5, making for its first decline in more than two years.

After bouncing to 50.1 in October amid the falling dong, the November reading fell to 49.4 as the dong strengthened.

HSBC argues that inflation could be bottoming out.

After reaching zero in September and October, largely as a result of the year-over-year drag from energy prices, Vietnam’s inflation reached 1.3 per cent year on year in February on the back of rising food prices. The firm is not anticipating the rising inflation will continue, although it does think there will be some supply-side pressures from droughts caused by El Niño in the next few months.

Factoring out the volatile food and energy sectors, the core rate is 1.9 per cent year on year, and will reach 3.3 per cent year on year by the end of second quarter and 5.2 per cent by the end of the year.

HSBC believes this will force the State Bank of Vietnam into a rate-hike cycle. The first hike will be 50 basis points and come in the third quarter of this year.

The multinational bank says the central bank in Hanoi will look to “rein in credit growth” to prevent overheating in the property sector.

These factors could put Hanoi’s hopes for 6.8-per-cent growth target out of reach.