Despite a weaker-than-expected GDP growth in the first quarter at 4.48%, Vietnam still boasts one of the brightest growth prospects in Asia, according to HSBC.

Upswing in the tech cycle, consistent FDI inflows, and multiple Free Trade Agreements (FTAs) are seen as factors to keep up the country’s growth momentum, noted the bank in its latest report.

As uncertainties have led HSBC to revise down Vietnam’s GDP growth forecast in 2021 to 6.6%, but the bank expected a strong rebound to 8.5% next year, up two percentage points from its previous assessment of 6.5%.

For 2021, the report suggested Vietnam’s inflation would average around 3% in 2021, well below the State Bank of Vietnam’s (SBV) 4% ceiling. With inflation being less of a concern, the central bank has more flexibility to keep its monetary policy unchanged in 2021, it added.

Given Vietnam’s limited fiscal space, monetary policy did most of the heavy-lifting to support the economic recovery in 2020. The SBV cut its annual refinancing interest rate from 6% to 4%.

Taking into consideration positive GDP growth and benign inflation pressure, HSBC expected the SBV to keep its policy rate on hold until the second quarter of 2022, before possibly delivering a 25bp rate hike in the subsequent quarter. This would bring the refinancing rate to 4.25% by end-2022.

According to HSBC, while Vietnam’s fiscal space is constrained by its elevated public debt, some targeted and short-term assistance is still needed for struggling sectors and individuals to broaden out the recovery.

Production at Nippon Paint Vietnam in Quang Minh industrial park, Hanoi. Photo: Pham Hung

Indeed, the Ministry of Finance has proposed another extension of taxes and land rental payments with a total package worth VND115 trillion (1.7% of GDP). This includes a 5-month extension of the value-added tax (VAT) and a 3-month deferral of corporate income tax (CIT).

After a brief pause in 2020, the bank expected Vietnam to resume its fiscal consolidation efforts in 2021, while the fiscal deficit is predicted to shrink from 5.2% of GDP in 2020 to 4.7% in 2021, bringing down its public debt back to below 60% of GDP.

Future risks

Although Vietnam remains on a fast track to economic recovery, there are notable risks still looming, including a prolonged vaccination roll-out, which may delay the country’s tourism recovery.

At the domestic front, the weak labor market remains a headwind for reviving private consumption. While unemployment rates have dropped since the third quarter of 2020, a large part of Vietnam’s labor market remains in the informal sector, which may not be captured in formal employment statistics.

“Thus, supporting vulnerable businesses and workers remains a key task,” stated HSBC.

Meanwhile, Fitch Solutions in its new report argued that downside risks to Vietnam’s growth in 2021 “are now higher owing to the continued pressures being faced globally from the pandemic”.

Headwinds to both Vietnam’s services will remain as the outlook for a rapid resumption of international leisure travel remains bleak.

In addition, the strong momentum in manufacturing will also begin to face challenges arising from high shipping costs and competition for shipping capacity to the west between rest of Asia-West routes and China-West routes, asserted Fitch Solutions.

Source: http://hanoitimes.vn/vietnams-growth-prospect-remains-brightest-in-asia-316853.html