Vietnam’s economy is on a tear led by “snowballing” FDI inflows, growing trade integration and sustained highs in consumer confidence. GDP grew by 6.8% this year on the back of a 14.4% expansion in industrial production, an 8.4% rise in consumption and a 21.1% surge in exports. Inflation remains subdued despite estimated credit growth of 19% while the Dong has been one of the most stable currencies in the region, facilitated by a trade surplus of US$2.7 billion and an estimated current account balance of US$1 billion at 2017 year end.
We expect close to 7% GDP growth to be sustained into 2018 on the back of continued loose monetary policy and a pick-up in public spending. An estimated 44.4% increase in registered FDI this year should fuel export growth over the next 2-3 years, provided that global demand stays robust. We expect around 6.6-6.8% GDP growth next year based on a forecasted 12.0% expansion in industrial production, a forecasted 8.2% rise in consumption and a revival in public spending (forecasted +40%). The new Nghi Son refinery project should come onstream, satisfying up to 40% of domestic refined products demand, adding further oomph to manufacturing momentum and bolstering the trade balance. Our forecast is predicated upon an assumed “soft reversal” of quantitative easing and a gradual tightening of monetary policy by the Fed.
Rapid credit growth and growing infrastructure bottlenecks could have an inflationary impact towards the end of 2018 and into 2019. With credit growing at nearly three times the pace at which GDP is growing, there is a risk of inflation picking up to levels that might get the SBV a little edgy, particularly into 2019. While we recognize the rapid pace of infrastructure development, growing congestion on urban roads and some major airports, combined with the lagged impact of oil price rises, could portend a rise in supply chain and transportation costs and have a broad inflationary impact across the economy. This does not really pose a risk to our sanguine 2018 outlook on the economy but it is something to keep an eye on over the medium-term.
Here is link to the full report.
Vietnam benefits from its close proximity to China, low labour costs, large young population, trade friendly administration and a desire to progress from being a frontier market to a more conventional investment destination.
The removal of limits on foreign ownership of shares represented a major catalyst for change in 2015 and the stock market has been improving since early 2016. As an increasingly important manufacturing centre Vietnam is leveraged to global growth. China’s expansion came in ahead of target today and as a major destination of Vietnamese goods that news was greeted with another fresh high on the stock market. The pace of the advance is now accelerating and a reaction of more than 75 points would likely signal a peak of more than short-term significance.
The Vietnam Holdings Fund trades at discount to NAV of 11% and has been trending higher in a reasonably consistent manner since 2011. It is currently somewhat overextended relative to the trend mean but a sustained move below it would be required to question medium-term upside potential.|
This graphic highlights the fact that while Vietnam’s growth is impressive it is being outpaced right now by India and a handful of African countries. India is a slowly evolving manufacturing powerhouse and the textile and garment industries have a long history of seeking out the absolute lowest cost manufacturing venues. As an aside I noticed that the underwear I bought recently were manufactured in India and Kenya whereas the older briefs in my drawer were manufactured in Thailand, Vietnam, Philippines and Egypt. This is just one small example of how manufacturing can migrate in a very short period of time and that outsized growth is easier when coming off a low base.