Barclays remains bullish on Vietnam’s economy
15:37' 30/05/2007 (GMT+7)
VietNamNet Bridge – Barclays Capital, the investment banking arm of Barclays Bank, last week issued a relatively positive outlook on the Vietnamese economy, despite inflationary pressure and a potential current account deficit.
The outlook, which calls Vietnam "an improving credit story", forecasts the economy to continue growing by around 8% per annum over the next two to three years, very much in line with forecasts from the Asian Development Bank and International Monetary Fund.
"We continue to believe that the combination of high growth and improvement in Vietnam's balance of payments profile should lead to Moody's upgrading its B3 sovereign rating by one notch by the end of the year", the bank said in its research paper dated on 22 May. Moody's last March placed a positive outlook on Vietnam's sovereign rating, up from stable.
Barclays Capital said that growth, however, may be kept in check this year, in part due to poor weather conditions which already had a detrimental impact on the agriculture sector in the first half of the year, and as a result, on rural incomes and consumption.
However, overall growth would likely accelerate moving forward and GDP will rise by 7.8% for the whole year, thanks to the ongoing strength of exports and investment from the rapid build-up of FDI, as well as the ongoing strength of government spending on infrastructure and other capital projects.
"Whilst tighter credit conditions are projected to keep domestic credit growth increasing at around 20% in both 2007 and 2008 - against 40% in 2005 - such a rate of growth should still be viewed as stimulative in regards to the build-up of investment", said Barclays.
Researchers, though, highlighted inflation as a possible cause for concern, resulting partly from unfavourable weather conditions that will force agriculture prices higher, and the economy running "at above potential".
The inflow of foreign funds and ongoing balance of payment surplus will also add extra price pressures, said Barclays.
The bank also pointed out that Vietnamese central bank has been "willing to tolerate a higher inflation rate" as long as it remains below the real GDP growth rate, for the greater importance of improving infrastructure and promoting economic growth.
Barclays, however, warns that inflation rate may surpass the real GDP growth rate by early 2008, if the central bank does not further tighten the monetary policy in the second half of 2007.
Foreseeing a marked increase in trade deficit particularly due to imports of machinery, Barclays Capital remains "relatively sanguine".
"The widening of the [current account] deficit should be offset by a sharp rise in the capital account surplus, with both inflows of portfolio funds and foreign direct investment set to enjoy a marked rise," the report said, adding that in the first quarter foreign investors were net buyers of $530mil in equities compared with $470mil in the whole of 2006.
Given that the Vietnamese Government has announced plans to issue $1bil of foreign currency denominated bonds in 2007, the bank expects portfolio flows into equities and planned issuance of dong and dollar bonds to total $2bil in 2007.
" [We] believe that a [current account] deficit in the order of 3.5% of GDP is sustainable given Vietnam's external debt profile and balance of payment ratios," read the report.
Despite the deficit, foreign exchange reserves stood at $13.4bil at the end of 2006 and are forecast to rise to $18.4bil by the end of 2007 and $22.8bil by the end of 2008, or 4.3 and 4.5 months of import coverage, respectively.
"Such a ratio compares favourably with similarly rated sovereign credits," the bank said. But analysts also warned that a "sustained period of [stock] market volatility would lead to a reversal in the balance of payments dynamics and cause a sharp decline in forex reserves."
(Source: Viet Nam News)
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