Vietnam economy to emerge with strongest real GDP growth in ASEAN: analysis

Despite economic slowdown.

It has been noted that GDP growth of Vietnam is expected to slow to 6.3% in 2016 (lower than consensus expectations of 6.7%) from 6.7% in 2015.

According to a research note from Credit Suisse, this was driven by slower growth in in investment, exports, as well as car purchase.

Even with such slowdown, Vietnam will still be the economy with strongest real GDP growth in ASEAN under Credit Suisse's coverage, the report said.

Here's more from Credit Suisse:

GDP growth should moderate but remain the strongest in ASEAN. We expect real GDP growth to soften to 6.3% yoy in 2016, from 6.7% in 2015, led by moderation in car sales, export and investment growth.

General consumption should remain supported by still-low inflation and potential further rate cuts though car sales will likely weaken post the surge to front-run the changes in tax calculations at the beginning of this year. Investment by the state and domestic businesses will be constrained by funding issues, leaving FDI to do the heavy lifting. Expected slowdown in US and China would drag exports.

Constrained fiscal space. We see the budget deficit widening slightly to 5.5% of GDP from 5.4% last year. Likely weaker revenue from oil sector and customs, accounting for around a third of total state income, could cap government spending. Meanwhile, public debt is not too far away from the legal limit of 65% of GDP. With gradually declining access to concessional borrowing, we believe this fiscal constraint would limit the government's ability to boost capex, which accounts for around 40% of total investment. 

Further monetary easing likely, but banks' lending capacity capped. We expect inflation to pick up to 3% yoy by end-year 2016 from the low of 0.6% last year, still below the SBV target of 5%.

This will likely allow the central bank to cut the refinance rate by a further 50bps to 6% by the end of this year. Despite this, however, we see limited boost to credit growth as banks are capital constrained – total CAR of the six major listed banks will fall from 10.8% to 9.7% this year if lending expands 18%yoy, according to our equity team. 

Slower domestic growth could reduce pressure on the external balance. We see current account slipping into a mild deficit of USD 1.2bn (-0.6% GDP), from a surplus of USD 1.9bn in 2015. While Vietnam will continue to see a healthy basic balance, thanks to expected net FDI of over 8bn, we note that rising resident deposit and currency outflows, which reached more than USD 15bn last year.

This resulted in a decline in foreign reserves, which covers less than three months of imports. For these reasons, some moderation in import growth that reduces pressure on the external balance may be desirable.