2017 macro outlook

 

The National Assembly convened in October 2016 with an aim to achieve the following economic plans for 2017: 2017 GDP growth at 6.7%, CPI (average) of roughly 4% YoY, budget deficit at lower than 3.5% of GDP. Among these targets, GDP growth is attainable by given the obvious growth catalysts while other targets could be more difficult to achieve. The following catalysts are needed to stimulate growth:

 

Domestic consumption continues to grow strongly, thanks to stable interest rate environment and rising trend of the middle income class. This is the most basic internal force of growth, in the context of the world situation is more turbulent with the rise of trade protectionism.

 

Development investment (mainly infrastructure investment) could return to old growth momentum after one year of slow growth in 2016. The government’s development investment plans to increase by 36.7% YoY. In addition, ODA disbursement will recover after falling nearly 20% YoY in 2016, before Vietnam officially graduates from a low-income to middle-income country in Sep17 (after this deadline, development loans from global donors might be subject to higher interest rate).

 

Regarding FDI, although committed FDI decreased in 2016, most likely it will not compromise FDI disbursement in 2017, as many projects might be licensed and disbursed in the year, including large thermal power projects (Vung Ang 2, Nghi Son 2).

 

Two underperformed sectors in 2016 are likely to recover due to better weather (agriculture sector) and commodity prices are on the upward trend (mining sector).

 

 

Inflation taming is likely to be challenging for government in 2017. With new calculation method, CPI in the first months of 2017 will exceed the full year target level right away, and it is a major challenge for the government to ensure macroeconomic stability. On contrary, inflation at the beginning of 2016 was quite low, so there was room for monetary policy expansion then. Regarding monetary policy, in addition to pressure from rising inflation, banking sector’ undercapitalization also negatively impacted the possibility of high credit growth to support economic growth:

 

Credit growth at 17% - 18% in recent years has led credit-to-GDP ratio reached 10-year high, which implies higher risk for the banking system.

The pressure of bank recapitalization extended as their CAR fell from ~14.0% in FY14 to ~12.7% at end-Sep 16. SOCBs are the group with lower CAR in the system and if their goal is to achieve high credit growth, they will need to recapitalize soon.

 

Banks’ robust loan growth in 2016 was mostly fueled by retail loans, in which mortgage loans were estimated to account for 54% of retail loans. Both the government and the State Bank of Vietnam (SBV) are aware of the risks of mortgage loans for banks and the property sector is unlikely to grow rapidly from 2017, so credit growth comes from mortgage loans might be peaked and slowed down in the coming years.

 

For monetary policy, the exchange rate is also a major concern of market participants. As export growth softened in the wake of increasing protectionism, and import growth accelerated on the back of higher growth with capex expansion; the trade deficit is likely to resurface, coupled with expected lower remittances due to the US Fed rate hikes, while interest rates on deposits for USD in Vietnam remained at 0%. These factors can exert further pressure on Vietnam’s balance of payment. However, foreign indirect investment and SOE divestment could help to balance the pressures on the exchange rate. As a result, the SBV could be continue to take the initiative in managing the exchange rate. In regards to interest rates, accelerated inflation could push deposit rate higher, while the same might not be applicable for lending rate, as the government will try to maintain it at a stable level for the sake of higher growth.

 

For a lower budget deficit target, although there is great expectation for innovation in managing budget spending for 2017, the sharp reduction of the budget deficit to 3.5% of GDP will also be a challenge and the budget deficit continues to limit the ability to use fiscal policy to support economic growth.

 

In 2017, the revised Law on State Budget will take effect, which changes the budget deficit calculation (mainly removing debt repayments from the expenditure). For simplicity, the 2016 budget deficit is estimated at 5.64% of GDP in the old calculation (target 2016: 4.95% of GDP), converted to a new calculation of about 4.33% GDP. This means that even in a new way of calculating, a budget deficit of 3.5% of GDP is not just a change of calculation, but also a strong balance of payments effort. More strongly in the context of public debt has reached (and may have exceeded) the 65% of GDP.

 

On the spending side, the government targets to curb the current expenditure by 5% YoY.  As the current expenditure normally accounts for over 70% of total spending, this reduction will constitute for the expansion of development investment. On the revenue side, the structure of budget collection revealed diminished contribution from foreign trade activities (due to FTAs implementation), crude oil (revenue from crude oil only reached 69% of the year plan) and SOEs.

 

Looking at the whole, the emphasis on agricultural restructuring (climate change adaptation, high-tech agriculture, enhance the value chain, land accumulation), and the service sector (especially tourism) will create new impetus for economic growth. In the context of increased trade protectionism, focusing on internal development, focusing on domestic consumption, taking advantage of the opportunities of the young populations and the rise of the middle class is the major directions to sustain growth for Vietnam.

 

According to SSI Research & Investment Advisory, the main trends of Vietnam's stock market in 2017 include:

More SOE divestment: Equitization and divestment of SOEs will continue to create investment opportunities to change the face of the Vietnamese stock market. We expect that at least 50% of the Top 30 market cap will be replaced by newcomers in 2017. Consumer, industrials and energy sectors will grow the most in terms of market cap, therefore, the VN30 will become more representational of the overall market. In Decision 58/2016 on SOE classification for 2016-2020 issued by the Prime Minister, many SOEs do not need state-owned dominance, this will create more investment opportunities in the coming years.

 

More banking reforms: Banking reform is expected to improve in 2017. However, a down year might be followed by an up tempo year. In 2017, although we still see a lot of risks facing the sector, any progress in M&A or FOL extension will strengthen investors’ confidence

 

Impact from external factors: Besides the impacts from the US Fed rate hike, increasing protectionism and a softening RMB, we believe that Vietnam will continue to be an attractive frontier market destination, given the progress in FOL extension and market cap expansion. We expect that in May-June Review, the weight of Vietnam might increase significantly in the MSCI Frontier Index (MSCI Frontier will upgrade Pakistan to emerging market status and might exclude Nigeria and consider upgrading Argentina to emerging market as well).

 

Commodities outlook:  In our opinion, commodities (Oil, natural gas and coal) uptrend is beneficial for fiscal balance and the energy & material sectors. On the other hand, high input price is negative for the consumer and industrial sectors as margin could contract.