Vietnam: Vietnam Business Forecast

Core Views

Vietnam's real GDP growth will moderate in 2011 as the full impact of monetary tightening begins to feed through the economy. Public spending cuts further suggest that economy activity will remain depressed in H211. However, private consumption should remain resilient on the back of increased government subsidies for the poor and robust labour market conditions.

Selling pressures on the Vietnamese dong should continue to wane on the back of an improved outlook on inflation, a narrowing trade deficit and continued efforts by the State Bank of Vietnam to curb US dollar speculation and de-dollarise the economy.

The State Bank of Vietnam's monetary tightening cycle will come to an end in H211 as inflationary pressures begin to moderate on the back of softening food prices.

Major Forecast Changes

We have revised our end-2011 policy rate forecast from 13.00% to 14.00% to reflect the central bank's 100-basis-point rate hike in April. We expect interest rates to remain on hold through the end of the year.

Key Risks To Outlook

Downside Growth Risks From Rising Commodity Prices: Should commodity prices continue to trend higher through 2011, we could see the central bank adopting a more hawkish stance on monetary policy. Further rate hikes would put considerable downside pressure on economic growth.

Devaluation Risks From Persistent Trade Deficit: Despite multiple devaluations since late 2009, Vietnam's trade deficit has failed to see a sustained improvement. The latest devaluation in February will take several months before the full extent of its impact on the trade balance can be gauged. Should we fail to see compelling evidence of an improvement in the trade balance, we would not be surprised to see the dong coming under further selling pressures.