Economics

Overview
The year 2008 was very challenging for Vietnam, having flirted with a balance of payment crisis and runaway inflation. However, 2009 brings with it new challenges and also opportunities. In the first edition for the year, we thought it best to lay
out our main macro calls for Vietnam.
But before we get into the details, we think it is fair to highlight that Vietnam has indeed come a long way. GDP per capita is slated to surpass USD1000 in 2009, a year ahead of the government’s target, compared with USD400 in 2000.
Our main macro calls:
(1) Growth to slow further Vietnam grew by 6.2% year-on-year in 2008 – the
worst performance since the 4.8% print in 1999. For 2009, we look for the economic momentum to slow further, with GDP growth printing at 5.4%, a view which we have held for sometime now. This compares with the government’s target of 6.5%. The trouble is that it’s not just exports that will slow, but domestic demand is expected to take a breather as well, largely on account of lower investment. A part of this is a spill over from the export weakness, but at the same time foreign direct investment, which makes up 20-25% of total investment, is likely to fall to around USD5bn in 2009 from a very robust USD11bn in 2008. The rationale for this unusual turnaround being that the financial crisis is going to make it that much more difficult for firms to fund investment and expansion whilst at the same time – in an environment of deteriorating growth outlook – firms are bound to be more cautious.
All however is not lost, as we believe that the lagged impact of the policy stimulus (see below) together with a gradually improving external demand environment1 will allow growth to bounce back in 2010, with our forecast being 6.6%. This gives us a V-shaped recovery, similar to what was seen following the Asian financial crisis.
(2) Inflation to collapse
On the inflation front, just as CPI went up dramatically in 2008, it is going to fall with as much vengeance in 2009 as high commodity prices drop out of the comparison. In addition, weaker growth should help contain underlying price pressures in the economy. As such, we think inflation is slated to hit a low of 5% by the middle of 2009 and then start heading up gradually, reaching its long-term average of 11% by the end of 2010. For 2009, as a whole, we expect inflation to average 9.5% compared with 23% in 2008.The decline in inflation will no doubt boost real disposable incomes in the country, thereby supporting consumer spending. However, it is fair to highlight that in an uncertain economic environment, the extra cash will probably go more towards saving rather than increased spending,
(3) Budget deficit to widen
The government, in an attempt to meet its 6.5% growth target for 2009, has announced new spending plans to the tune of USD6bn (6% of GDP), in infrastructure and export-oriented sectors, with the objective of generating more employment. Although the details have not yet been stated, media reports indicate that roughly USD1bn will be given to the Ministry of Planning and Investment to boost investment in the country. It remains to be seen whether the plans will materialise in full though. Based on the experience of other countries in the region, such as Indonesia, Malaysia etc, we are doubtful. Nevertheless, increased spending, even if it’s not of the magnitude the government has predicted, and lower revenue collections on the back of weaker growth, will see the budget deficit widen. Our forecast is for a shortfall of 7% of GDP, compared with 5% in 2008.The other point worth highlighting is that the fiscal boost, if it materialises, is large and, as stated by the IMF in the conclusion to its 2008 Article IV consultation, may result in an undesirable weakening of the external position in the absence of additional external financing.