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Vietnam's ambitious growth target might be out of reach

Mar 4, 2016, 07:54 IST

A farmer visits her rice paddy field in Hanoi, Vietnam.Reuters/Nguyen Huy Kham

Vietnam's economy was one of the fastest growing in the world in 2015.

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Its 6.7% growth rate made it the fastest-growing economy in Asia behind only those of India (7.3%) and China (6.8%).

The government has set a 6.7% growth target in 2016, but Prime Minister Nguyen Tan Dung thinks the economy can grow at 7%. "2015 was a tough time for both the domestic and global economies," Dung said.

"But Vietnam's GDP still managed to grow by 6.68%, which lays a strong foundation for us to overshoot the target again in 2016."

Vietnamese manufacturing has been on fire. In fact, in 2014, Vietnam became the largest exporter to the US among the 10 ASEAN countries.

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About 20% of all goods produced in Vietnam were sent to America as companies like Nike, Samsung Electronics and Intel moved manufacturing operations to the country to take advantage of its cheap labor.

Vietnam's purchasing managers' index for manufacturing expanded for 24 straight months from September 2013 until September 2015, thanks in large part to the continued depreciation of its currency, the dong.

Andy Kiersz / Business Insider, Data from Bloomberg

However, as the dong's depreciation came to an abrupt halt, so too did the strength of Vietnam's manufacturing sector. In September, Vietnam's Manufacturing PMI fell to 49.5, making for its first contraction in over two years.

After bouncing to 50.1 in October amid dong weakness, the November reading dipped to 49.4 as the dong got stronger.

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In a note released by HSBC on Thursday, the firm says momentum in Vietnam's manufacturing sector appears to be slowing.

HSBC

Additionally, HSBC says inflation appears to be bottoming out.

After hitting zero in September and October, largely as a result of the year-over-year drag from energy prices, Vietnam's inflation rate reached 1.3% YoY in February thanks to an acceleration in food prices. The firm doesn't anticipate the ramp up in inflation will be sustained, although it does think there will be some supply-side pressures from droughts caused by El Niño.

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Factoring out the more volatile food an energy, the core rate now sits at 1.9% YoY, and will reach 3.3% YoY by the end of Q2 and 5.2% by year-end.

According to HSBC, this will force the State Bank of Vietnam into a rate-hike cycle. The first hike will be 50 basis points and come in the third quarter of 2016, the banks says.

Aside from hiking rates, HSBC says the central bank will look to "rein in credit growth" to prevent overheating in the real estate sector.

All of these factors could put both prime minister Nguyen's 7% growth target and the government's official 6.8% growth target out of reach.

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