Global growth outlook weaker than previously expected. In April 2019, the IMF cut its global GDP growth forecast (for the third time in six months) to 3.3% in 2019 due to a number of factors affecting major economies, including increasing trade tensions, tariff hikes, tighter financial conditions and weakening business confidence. This is the slowest rate of growth since the global financial crisis in 2008/09.
Recovery in electronics production helped improve IIP growth in May. The Index of Industrial Production (IIP) of electronics, PCs and optical products recovered to grow 7.6% YoY in May after declining for two consecutive months. Overall IIP grew 4.6% MoM and 10% YoY in May vs 9.3% YoY growth in April. In 5M 2019, overall IIP rose 9.4% YoY, which is slightly lower the 10.3% YoY recorded in 5M 2018, but still higher than those recorded in 5M 2016 (7.4%) and 5M 2017 (6.6%).
Impact of foreign direct investment (FDI) on Vietnam’s economy. Since the launch of Vietnam’s Foreign Investment Law in 1988, FDI has played a vital role in Vietnam’s development and become an integral part of the economy, with the foreign invested sector contributing nearly 20% of GDP in 2017 vs only 6.3% in 1995. The sector is also the key driver of Vietnam’s exports, accounting for ~70% of total exports.
The dong depreciated after holding unchanged for months .On the first working day of 2019, the State Bank of Vietnam (SBV) showed its intention to build up its foreign reserves, which declined in H2 2018, by lifting its buying price vs the USD from VND22,700 to VND23,200. Thereafter, the USD/VND exchange rate in the inter-bank market moved around the SBV’s purchase level of VND23,200 until the third week of April, before ramping up to VND23,415 as of May 31, 2019 (the VND has depreciated 1.02%
Infrastructure is a crucial element of an economy’s competitiveness, and in turn correlates highly with incomes (GDP per capita). Investment in infrastructure is therefore a key issue for developing countries. In Vietnam, infrastructure projects (primarily in transportation and utilities) have traditionally been established, owned and managed by the Government. Generally, projects have been financed through taxes or by borrowing from commercial banks and international financial institutions.
Refined petroleum production helped to maintain strong IIP. The Index of Industrial Production (IIP) grew 9.2% YoY in 4M 2019. Thanks to the strong IIP of coke and refined petroleum (+77.5%), the manufacturing & processing sector maintained a high growth rate of 10.9%, despite weak IIP of electronics, PCs and optical products (+1.9% in 4M 2019 vs +23.6% in 4M 2018).
Vietnam’s economy expanded 6.8% in Q1 despite a high base last year and internal/external obstacles. The solid footing built in 2018 helped the economy expand 6.8% YoY in Q1 2019. Though Q1 2019’s economic growth is lower than the 7.4% YoY impressive expansion in Q1 2018, it is still higher than the growth recorded in Q1 from 2009 to 2017. Production slowed but remained strong. The Index of Industrial Production (IIP) rose 9.2% YoY in Q1 2019, lower than the 12.7% YoY growth recorded Q1 2018
Weaker IIP recorded in 2M 2019. The Index of Industrial Production (IIP) increased 9.2% YoY in 2M 2019 vs 13.7% YoY growth recorded in 2M 2018. The lower growth rate was mainly attributed to a decline in IIP of the mining sector (-4.7% vs 2.8%) and slower growth of the manufacturing sector (11.5% vs 16.0%), in which electronics and PCs posted an IIP of only 5.2% vs 38.3% recorded in the same period last year.
Production recorded moderate growth in January. The Index of Industrial Production (IIP) slid by 3.2% MoM and grew 7.9% YoY vs 22.1% YoY growth recorded in January 2018 after accelerating in December to meet Tet holiday demand. Production activity could be distorted by the long Tet holiday in February. However, given rising new orders, according to the Nikkei report, we expect production to recover in the second half of this month.
Further industrialization and urbanization underpin our outlook for continuing rapid GDP growth of close to 7% in 2019 and 2020, despite our expectation of slowing global growth and potential softening in demand for exports. We believe momentum from pre-existing FDI commitments and increased focus on the ‘plus one’ in multinational corporations’ ‘China plus one’ overseas investment strategy will sustain inbound FDI. Relatively elevated debt levels, an evolving banking system