Vietnam’s GDP forecast to expand in Q2 at same pace as in Q1

Vietnam’s GDP of the second quarter will likely grow at the same pace as the first quarter at 6.79% year-on-year, according to Viet Dragon Securities Company (VDSC). 

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Overall, VDSC maintained an optimistic view on the of Vietnam’s economy growth rate that is forecast to reach 6.8% year-on-year, thanks to contribution of the domestic manufacturing sector. 

GDP growth in the January – March period remained lower than the rate recorded in the first quarter of 2018, but still higher than the GDP growth rate of the same period of other previous years. 

Specifically, growth in agriculture, industry and services sectors reached 2.68%, 8.63% and 6.5% year-on-year, respectively.

VDSC pointed to three main points that could impact Vietnam’s economic performance in the coming quarter, including the sign of slowing down of the agricultural sector, export growth significantly lower than import growth, and liquidity of the interbank market not too abundant. 

Sign of slowing down in agricultural sector

The recovery of the agricultural sector has played an important role to Vietnam’s outstanding economic growth in the past two years. However, the question is whether this sector can keep up its speed as it is facing difficulties in both production and consumption. 

In the Mekong Delta region, although the cultivated area of the winter-spring crop increased by 1.8% year-on-year, the productivity decreased to 6.74 ton per hectare, down 2.7% year-on-year. 

Meanwhile, the export volume of rice in the first three months fell sharply, by 26% year-on-year, because there was not as many large export orders this year as in the previous year. Recently, the State Bank of Vietnam (SBV) has requested state-owned commercial banks to ensure loans for businesses to buy rice from farmers. Besides, the government increases rice purchase to stock reserves.

For the livestock sector, pig farming and consumption are negatively affected by the Africa swine fever. Although the output of pork for sale this year is still higher than the same period last year because low base in 1st quarter 2018 (due to sharp falling price of pork ), farmers still find it hard to sell their hogs as consumers’ concern on the fever. The price of pork has fallen deeply around the country, and the shortage of supply may occur in the upcoming quarters. 

Export turnover of major agricultural products such as coffee, cashew nuts, and fruits has decreased in both quantity and price. China, a major importer of Vietnam's agri-business outputs, is tightening import standards with informal cross-border trade. This is quite unfavorable for Vietnam's goods in the current period.

Export growth is significantly lower than import growth 

Until March 15, Vietnam's export and import growth reached 8.9% year-on-year and 4.7% year-on-year, respectively, according to the General Department of Vietnam Custom. 

Nominal GDP growth reached 9% year-on-year. As a country with a high degree of openness, export growth is significantly lower than import’s and nominal GDP’s implies two potential negative impacts on the trade balance and the real GDP growth. 

Firstly, although Vietnam still recorded a surplus of US$0.5 billion in the first three months of 2019, this figure was much lower than US$ 2.7 billion of last year period. Textile and wood products are the export products with biggest surplus of Vietnam this year compared to 2018. 

USD-denominated revenue from agricultural export decreased due to difficulties as mentioned above while exports of phones and components fell sharply. Export of phones and parts thereof to China dropped sharply, 69.1%, while this is the highest export turnover, accounting for 20.7%. 

If this situation does not improve, Vietnam's trade balance may switch to deficit from surplus.

However, a sharp decline in export growth may not immediately affect the economic growth in 2019. The development of a series of projects in manufacturing sector is become the main driver for the growth. 

Specifically, the Nghi Son refinery project and the second furnace of Formosa began to contribute to the economic growth from June 2018, so they will contribute technically to GDP growth of the second quarter. 

Liquidity in the interbank market is not too abundant 

Export-Import growth and nominal GDP growth.

Since mid-March, the overnight rate has picked up dramatically after falling from the beginning of the year. Demand for borrowing on the interbank market is also quite high, maintaining over VND50 trillion (US$2.15 billion) per day, the highest level in recent years. 

In general, over the past six months, this interest rate has continuously fluctuated above the threshold of 3% and has not shown signs of decline. 

According to data from GSO, the spread between money supply growth rate and credit growth rate is only 0.64%. Meanwhile, the Vietnam State Treasury planned to issue VND73.5 trillion (US$3.16 billion) and VND260 trillion (US$11.21 billion) of government bonds in the January – March period and 2019 respectively, much larger than last year's issuance volume. 

Overnight rate will still move around 3-4% in the second quarter of 2019. However, VDSC expected this movement is still under the control of the SBV. The authorities will stick with the cautious policy to control money supply in order to keep inflation under control as the prices of electricity and oil have increased. 

Besides, the above 3% of overnight rate for VND will create a safe spread for VND and USD overnight rate, which is currently about 2.45%. A positive spread helps the SBV to adjust the exchange rate. 

From the beginning of the year, pressure of exchange rate has declined as the exchange rate in free market and interbank market has cooled down. On the contrary, the SBV still adjusted the central exchange rate to create room, avoiding any dramatic rise in exchange rates in free market as in the past.


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