2018 macro outlook

 

Projected growth in 2018 reflects even stronger fundamentals than previous economic cycle, characterized by robust foreign inflows, low interest rates, a stable VND, strong demand growth, and an ongoing improvement in productivity derived from restructuring the economy. Vietnam’s macro performance improvements are due to no small effort from reform in the SOE sector.


Growth projection evident across all sectors of the economy
We expect 2018 GDP growth to be 6.7% YoY (considered the upper range of the government target of 6.5-6.7% YoY), retaining impressive growth from last year in relation to regional peers. Please note that growth should be high in 1H 2018 due to a low base effect; this anomaly is expected to normalize in the second half.  


Private investment will likely maintain its strong momentum exhibited so far, thanks to better demand recovery and a stable interest rate. Vietnam FDI continued to display an encouraging barometer of future growth, continuing the strong momentum from 2017.


For public investment, our chips are stacked towards the current cycle giving way towards a new beginning in 2018, as USD inflows become more abundant.


In addition beyond the torrential pace of the manufacturing sector, tourism has emerged to be the second star of growth. We are very bullish on Vietnamese tourism prospects and execution in the next 2-3 years for the following reasons:
(i) a burgeoning middle class in Vietnam increasingly with penchant to spend far more on travel, and
(ii) Vietnam experiencing solid recurring double-digit growth figures for tourists to Vietnam from 2016 to the present.


The positive aura of sustained tourist arrival growth forecasts is based on:
(1) the recent implementation of simplified “e-visa” policy procedures, as well as an extension upon visa exemptions for tourists from the UK, France, Spain, Germany, and Italy until June 2018 to further boost tourism; and
(2) increasing tourism interest from neighboring countries such as China, South Korea, and Japan.


SOE IPO and divestment at its peak (in terms of deal size)
Although the amount of total firms up for divestment and/or IPO for the 2018-2020 period might not be as large as in previous years, the aggregate deal size for these offerings during this period is expected to be far more significant. The proceeds from 2018-2020 IPOs and divestment of SOE firms are estimated to be 2.75 times higher than the proceeds from the whole period 2011-2017 (i.e USD 26.3 bn vs USD 9.5 bn). Vietnam may very well end up being the only country in the world that embarks on a new wave of SOE reform in 2018, placing a lot of large and profitable SOEs on public offer.


The reform of SOEs will be further supported with the issuance of Resolution 09/NQ-CP by the government on Febuary 5th, 2018, on the establishment of the State Capital Management Committee. It is expected that 30 enterprises and economic groups will be transferred to the Committee, including 9 out of 10 economic groups (except for Military Telecom Corporation (Viettel) – which is a defense enterprise) and 21 corporations which are currently under the management of the ministries. Under the plan devised by the Ministry of Planning and Investment, the Committee will manage and supervise state capital and assets at enterprises; at the same time implement the restructuring, divestment, arrangement, renovation and improving the efficiency of SOEs, etc.

 

 

Strong USD inflow is expected
Given the plethora of IPOs and divestment opportunities, including flagship market leader firms by sector offering a high proportion of divestment, we hold the belief that this wave of IPOs will be greatly welcomed by investors. In our estimates, total IPO value during 2018-2020 could reach $9.7 bn, while the total value of divestment could reach $16.6 bn USD. To be successful, a clear ownership structure with active participation of the private sector will help the SOEs to improve their profitability, which is a good reason for investors to make buy decisions. We might even see portfolio investment to come back to the heyday of the 2005-2007 period. We believe that the State Bank of Vietnam is now more experienced in handling new capital inflows in a prudent approach to avoid any macro disturbance.


Capital inflows will tamp down interest rates, while fueling credit growth
As the government is keen on lowering the lending rate further from its current benchmark rates, a strong foreign inflow would be more than enough to lower short-term interest rates and keep medium and long-term interest rates stable at this low level.  Such a low interest rate environment is likely to be quite conducive to further credit growth. Indeed, we see credit playing a major role in creating 2018 growth; not only being supplemented by way of a more dovish monetary policy stance, but also in allowing banks to transition their loan structuring by expanding their retail loan books, which in turn pushes domestic consumption to grow even more.  As individual credit cycle is still in early stage, we see that the overall risk profile might be more manageable and diversified in the next one or two years.  

 

 

IPOs and divestments expected to free up resources for fiscal expansion
Given the wave of IPOs and divestments which started in 2017, the government’s fiscal balance is expected to be on ease in the next 3 years, freeing its hands for more flexibility in fiscal policy and project implementation. The proceeds from the Saigon Beer Alcohol Beverage Corporation (SAB – HOSE) deal that came in during the last days of 2017 is an example of a significant burden lifted from the fiscal budget, as it is equal to 44% of the total expected proceeds from SOE divestment as detailed in the 2016-2020 plan for medium term public investment. This frees up resources for the government to act in regards to public investment, which has been comparatively lacking vs. expectations in the last 2 years.  


Banking system clean-up process on a realistic path, helping capital-raising activities to accelerate
The banking reform roadmap for 2016-2020 stipulates 2017-2018 to be the deadline for the sector’s legal framework, kick off of Basel II across 10 commercial banks, SOE divestment from banks, and VAMC chartered capital rising to $5 trillion ($ 220 mn). For 2019-2020, Basel II compliance is to be implemented across 12-15 banks (standardized approach compliance), with all bank CAR ratios over Basel II prescribed levels. By then the VAMC will have a chartered capital of VND 10 trillion, and will need to complete the full resolution of its purchased bad debt. Banking system NPLs (including bad debt sold to the VAMC and restructured debt) need to be lower than 3%. (Please note that the IMF estimated that this NPL was 8.4% at the end of 2016).


For 2018 specifically, we see 10 banks who have to comply with the Basel II deadline will start preparing for raising capital, including: Bank for Investment and Development of Vietnam JSC. (BID – HOSE), Vietnam Joint Stock Commercial Bank for Industry and Trade (CTG – HOSE), JSC Bank for Foreign Trade of Vietnam (VCB – HOSE), Vietnam Technological and Commercial Joint- stock Bank (TCB – OTC), Asia Commercial Joint Stock Bank (ACB – HNX), Vietnam Prosperity Joint-Stock Commercial Bank (VPB – HOSE), Military Commercial Joint Stock Bank (MBB – HOSE), Maritime Bank, Sai Gon Thuong Tin Commercial Joint Stock Bank (STB – HOSE), and Vietnam International Commercial Joint Stock Bank (VIB – OTC). Our estimate for 14 State-owned Commercial Banks and Joint Stock Commercial Banks to raise further capital in 2018 is set at $3.8 bn USD.   


We believe that Resolution 42 and the revised Banking Law will be the key tools to effect real change in order to clean up bank balance sheets in 2018-2020, which in turn will be useful for those banks who need to raise more capital.