2019 OUTLOOK: A BUD IN THE MUD 

 

Vietnam’s high growth trajectory might well extend into 2019, thanks to new production capacity and stable FDI. The National Assembly approved the plan for 2019 goals, with GDP growth at 6.6-6.8% YoY, CPI at about 4% on average, and budget deficit at 3.6% GDP. The government target will be at the higher end of the National Assembly plan, as it wants to push ahead growth and reform to mark the completion of the 5-year plan (2016 - 2020). 

 

In the meantime, Vietnam has become a highly preferred alternative location where manufacturing conglomerates can diversify their production bases against the backdrop of the trade war of attrition currently ongoing between the US and China. Vietnam is seen as an attractive alternative for a production base, especially given the openness of the economy and its proximity to China. Therefore, the manufacturing sector could maintain its current momentum, thanks to new production capacity and stable FDI inflow. Construction of infrastructure projects could also bring in support, starting in 2H 2019.  There is potential room for growth in this segment if the public investment engine could fire back up after a long lull as Vietnam wraps up its 5-year cycle 2016-2020. Current ongoing reforms in Vietnam are not just limited to SOEs sector or the banking system, but also are aimed towards more access to global markets through a number of new free trade agreements, such as the CPTPP or EU-Vietnam FTA, which should bring in additional waves of foreign investment. 

 

For inflation, we believe that pressure is relatively tranquil and along schedule. This relatively lower pressure on inflation in turn paves the way for an acceleration in subsidies removal upon electricity (8.36%), domestic coal, healthcare, education, plus the imposition of the new environmental tax. Food & foodstuff prices are already at a high base in 2018, which might translate to a buffer to keep inflation in check.

 

Anyway, the rebound on the commodities price, the El Nino impact on agriculture products, and less bang for the buck with VND would be key risks to our assumptions. The National Assembly recently reminded the government that in the 2016-2020 plan, the inflation target for 2020 is “lower than 3%”. The stance from the National Assembly essentially sets the tone from the top, one of inflation control, and a stance that will likely continue to remain a national priority for years to come.

 

With less pressure on inflation in the short-term, monetary policy could see a slight dovish-tinged tightening which means policy-makers could switch to easing if needed to support growth, which might be feasible with a tamer inflation print.  While credit growth limit for 2019 is only 14%, signalling tightening stance, but flexibility is still there if weaker growth being witnessed.  Meanwhile, fiscal policy might continue to be accommodative to allow fuel for public investment to focus on infrastructure projects.

 

For interest rates, a precedent of a tightening monetary policy would lead to higher lending rates by about 30 to 50 bps in 2019. Inflation risk is not significant, but there is a dynamic of a rising cost of funds (to comply with Basel II and other requirements from the central bank). While we believe the current trend of shifting more towards retail lending (which have higher yields) will continue at most banks, we also expect the lending rate for retail borrowers to increase at a larger scale. This is especially the case for long-term loans such as mortgages, loan instruments of which often carry favorable fixed rates in the first 1-2 years before converting into floating and commercial rates in the following years.  On the upside risk, improved recapitalization for the banking system could be a positive catalyst for the manifestation of more stable interest rates. 
 
As the likelihood of USD rate hike by FED in 2019 subdues, we believe that forex fundamentals for Vietnam are still alive and well, with inflows from stable FDI disbursement, FII (on SOE divestment and IPOs, banking system recapitalization, and M&A in private sector), remittance, trade surplus, and other vectors that in aggregate helps to keep the balance of payment in surplus. So, the pressure on exchange rates might be less pronounced than it was in 2018. The X-factor is the trade war intensification, which can have a material impact on the CNY, and on VND indirectly.
 
On the trade front, Vietnam would be still able to post another trade surplus for 3 years in a row, based on:
 
Growth in manufactured exports (not just from mobile phone, but also from other electronics)
 
Improved value-added exports (not just limited to processing, but also with more developed supporting industries, and more build-up of integrated value chains)
 
Import substitution (steel, petroleum products) 
 
Benefits from potential trade war/new FTAs (CPTPP, EVFTA, etc.)
 
On the other hand, protectionism, weaker global demand (not just for slower growth in general, but weaker demand for some important sector to Vietnam such as smartphone) could pose a big risk to the growth potential. 
 
 
On SOE reform, we expect state-owned enterprise (SOE) IPOs and divestments to accelerate in 2019-2020, a welcome change after a lull starting back in 2Q 2018. 2018 is a disappointing year for privatization. Regarding IPOs, the government ideally plans to equitize 127 SOEs during 2017-2020 (44 in 2018, 64 in 2019), but currently implementation of these equitizations is in actuality quite less than that (with only 24 by 2017 and 3 in 2018). Regarding divestment, the government planned 135 SOE divestments in 2017 (actual: 13) and 181 SOEs in 2018 (18 completed as of November). On listing, by mid-2017 there was then 747 unlisted SOEs. After a lot of efforts, there are still 667 unlisted SOEs as of Nov 2018. 

On the positive side, the process for transferring SOEs to Commission for the Management of State Capital at Enterprises (CMSC) progressed at a more rapid clip recently.  Basically, CMSC will directly represent state ownership of 19 economic groups and state corporations. It’s expected that the management of a single entity, i.e. CMSC, would bring about more favour to the reform process of these SOEs, despite difficulties ahead. 

In short, we believe that Vietnam economy faces a mixed bag of issues in 2019, with more headwinds from global economy slowdown, rising protectionism and a tightening monetary policy. On the other hand, tamed inflation and stronger fiscal position could leave ample room for policy makers in case growth is not on the right track, even though GDP target is only 6.6 – 6.8%, lower than 7.08% achieved in 2018.