2013 : Vietnam at a glance - HSBC

Economics
Macro - Vietnam
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Global Research
Vietnam at a glance
Starting with a stronger foundation
The economy slowed as expected to
5.0% in 2012 from 5.9% the previous
year, but the sacrifice was not in vain
From a macro perspective, 2013 will
likely be a better year than 2012 amid
slowly improving domestic and
external demand and the initial results
from Vietnam’s recent reform efforts
Watch out for further concrete reforms,
especially those that reduce bad debt
in the financial system and improve the
business environment to make Vietnam
more competitive
2 January 2013
Trinh D Nguyen
Economist
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6975 trinhdnguyen@hsbc.com.hk
View HSBC Global Research at: http://www.research.hsbc.com
Issuer of report: The Hongkong and Shanghai Banking
Corporation Limited
Disclaimer & Disclosures
This report must be read with the
disclosures and the analyst certifications
in the Disclosure appendix, and with the
Disclaimer, which forms part of it
More needs to be done
For a country with great potential such as Vietnam, the 5%
growth of 2012 is nothing to cheer about, as this is not fast
enough to allow the country to leap to a new level of
development. But this number should be interpreted in the
context of Vietnam’s past, current and future challenges.
Since transforming the country into a more market-oriented
economy from a centrally planned one in the late 1980s and
early 1990s, Vietnam has grown on average 7%. Thanks to
reforms such as strengthened property rights, market
liberalization and opening to foreign investment, Vietnam
boosted productivity significantly in the 1990s. But this
burst of total factor productivity gradually slowed in the
2000s as state investment rose significantly. And much of
this state investment was not in efficiently run state-owned
enterprises, which required more capital to subsidise their
operations. As such, the strong growth rates in the past
decade were not sustainable, as the costs were
macroeconomic instability and lower productivity.
Therefore, the government’s actions in 2011 and 2012 to
prioritise sustained – over rapid – growth were considered
positive for Vietnam’s long-term outlook.
But further reforms are needed and the sooner they come,
the better. The bad debt overhang still needs to be resolved.
The business environment and supportive infrastructure
should be improved. Vietnam, while attractive for its
burgeoning market and cheap wages, is either stagnating or
worsening in major competitiveness rankings. Although the
contraction of registered FDI inflows is partly due to
sluggish global growth, it also reflects Vietnam’s gradual
loss of competitiveness.

Economics
Macro - Vietnam
2 January 2013
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Chart 1. Growth slowed in 2012; the industry sector saw the
biggest decline (% y-o-y)
9
7
5
3
1
-1
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
Agriculture
Industry
Manufacturing
Services
Source: CEIC, HSBC
Despite a challenging year, some bright stars of the
economy shone in 2012. Exports expanded almost
20% despite weak external demand. There was a
trade surplus. The December HSBC PMI
employment sub-index rose. Investment from Japan
increased, reflecting the still attractive workforce and
location. But whether these will stay strong depends
on how soon reforms come. We remain watchful of
the concrete actions the government takes.
Chart 2. But on a quarter-on-quarter seasonally adjusted
basis, the economy is stabilizing and on track for a recovery,
albeit a modest one (% q-o-q sa)
5
3
1
-1
-3
-5
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12
Source: CEIC, HSBC
Agriculture Industry Services
A better but still bumpy year
With cautious optimism, we expect 2013 to be a
better year than 2012. Across the globe, monetary
officials are doing what they can to shore up
domestic demand. Japan, an important market for
Vietnamese exporters, will likely see upside risks
to GDP growth thanks to Prime Minister Abe’s
accommodative stance as well as the BOJ’s
aggressive easing. Data from the US also suggests
that the housing recovery is real, which means
that consumer confidence will likely be supported
(though watch the lingering fiscal cliff concerns).
Coupled with this, the FOMC is doing what it can
to help the US economy. China is on track for an
economic recovery and bumps in the road will
Chart 3. The manufacturing sector is recovering, thanks to
slowing inflation, stabilization of domestic demand and a
China recovery
5
3
1
-1
-3
-5
Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12
Source: CEIC, Markit, HSBC
HSBC PMI Index (% 3m/3m)
Official GDP Manufacturing (% QoQ sa)
Chart 4. Sluggish growth in the developed world, especially
the EU, caused demand for goods such as textiles and
footwear to slow; but new foreign investment in electronics
helped boosted exports to double digits (% y-o-y)
60
40
20
0
-20
-40
Source: CEIC, HSBC
2007 2008 2009 2010 2011 2012
Electronics Textile & Garments
Crude Oil
Total
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Economics
Macro - Vietnam
2 January 2013
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Chart 5. Since June 2010, export growth has exceeded
import growth on a quarterly basis (% y-o-y), allowing the
trade deficit to narrow…
40
30
20
10
0
-10
-20
-30
-40
Dec-08 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12
Source: CEIC, HSBC
Exports
Imports
Chart 6. …thanks to a refocus on manufacturing;
manufacturing FDI inflows in 2012 (% of total registered FDI)
60
50
40
30
20
10
0
Electricity, Gas, Air
Con Supply
Source: CEIC, HSBC
Human Health
Construction
Transportation
Information,
Communication
Wholesale, Retail
Trade, Motor Repair
Real Estate Activities
Manufacturing
likely be smoothed out with fiscal policy. The EU,
the biggest market for Vietnam, may have
bottomed out in Q4 2012.
This means that from an expenditure perspective,
external demand for Vietnamese goods is
expected to improve. Exports, while still strong at
18.3% growth, slowed from 34.2% in 2011. Most
of the slowdown was in textiles, garments and
footwear, which dropped significantly due to
weaker demand in the EU. But thanks to new
foreign investment in electronics, which raised
electronic exports, the total export level remained
robust. The growth rate of electronics will likely
slow, although should still remain strong, as the
one-time burst of new investment wears off. The
acceleration of non-electronic exports should
offset the negative effect of both slowing
electronics and likely decline in crude exports due
to increased capability in oil refinery that raises
domestic demand for crude oil (and limits import
needs of refined products).
From a sector outlook, manufacturing is poised to
benefit from firmer demand from abroad as well as
contained inflation, which gives scope for
manufacturers to employ price discounting
strategies. The sector had a tough year in 2012, as
domestic demand was subdued and external
demand weakened. But moving forward, we
expect the global landscape to improve. Even
domestically, after two years of tightening their
purses, consumers are gradually easing. Chart 3
shows that the HSBC PMI manufacturing index
tracks well with the official GDP breakdown of
manufacturing growth, although the HSBC PMI
Table 1. HSBC Vietnam Manufacturing PMI and its sub-indices
Dec-12 Nov-12 Oct-12 Long-Term Average
PMI Index 49.3 50.5 48.7 49.3
Output 50.1 51.6 49.3 49.6
New Orders 49.0 51.1 47.2 49.4
New Export Orders 47.1 48.5 45.4 49.9
Backlogs of Work 43.6 45.2 46.5 48.4
Stocks of Finished Goods 47.4 46.9 50.2 49.6
Employment 51.3 51.4 50.8 50.3
Output Prices 45.5 46.6 47.5 51.1
Input Prices 49.6 51.0 56.3 57.2
Suppliers' Delivery Times 52.6 52.6 52.6 52.6
Stocks of Purchases 44.2 45.8 45.6 47.7
Quantity of Purchases 50.0 51.0 47.9 48.7
Source: Markit, HSBC; Note: Less than 50 and falling Less than 50 and rising or same Greater than or equal to 50 and falling Greater or equal to 50 and rising or same
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Economics
Macro - Vietnam
2 January 2013
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Chart 7. Activity is stable but still very bumpy due to...
Chart 8. ...still weak global conditions and sluggish domestic
demand (PMI-based index)
60
60
55
55
50
50
45
45
40
Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12
PMI Index
Output
Source: Markit, HSBC
40
Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12
New Orders
New Export Orders
Source: Markit, HSBC
shows a sharper contraction in 3Q. Since 3Q,
activities have been bolstered by improved
domestic credit conditions as well as a gradual
recovery of China. But with the global recovery
process still fragile as well as the unresolved fiscal
compromise in the US, 1Q could be a bumpy ride.
The December HSBC PMI sub-indices show that
manufacturing activity stabilised at close to 50 but
has yet to take off, being held back by cautious
consumption abroad and domestically. New export
orders show a continued deterioration of external
demand, which will likely persist into early 1Q.
Note both the stabilisation of output as well as the
expansion of employment despite persistent weak
export demand. This reflects a gradual
improvement of credit conditions domestically as
well as slowing inflation (Chart 9), which gives
room for manufacturers to discount output prices
to boost demand. But a continued contraction of
inventory suggests that de-stocking measures are
ongoing and managers are waiting for stronger
signs of growth to ramp up production. While
preparing for an expansion with increased
employment, they are proceeding cautiously.
The service sector, on the other hand, continues to
be robust (Charts 1 and 2), albeit expanding by a
slower pace of 6.4% in 2012 versus 8.2% in 2011.
This resilience is derived from Vietnam’s strong
demographics and rising income, which
necessitate a range of services from financials,
transport, health, education and electronics repair.
At the same juncture, the real estate sector is
Chart 9. Output prices continue to drop thanks to slowing
inflation (PMI-based index)
60
55
50
45
40
Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12
Source: Markit, HSBC
Output Prices
Input Prices
Chart 10. Employment continues to expand due to
expectations of a recovery but manufacturers are still
cautious and continuing to destock (PMI-based index)
55
54
53
52
51
50
49
48
47
46
45
Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12
Source: Markit, HSBC
Stocks of Finished Goods
Employment
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Economics
Macro - Vietnam
2 January 2013
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Chart 11 Slowing GDP growth has hurt revenue collection,
although lower public spending helps the budget balance to
narrow
% y-o-y VND bn
45
100000
35
25
15
5
-5
2006 2007 2008 2009 2010 2011 2012
Source: CEIC, HSBC
Current spending
Budget balance (RHS)
Revenue: Tax
80000
60000
40000
20000
0
-20000
-40000
Chart 12. Inflation is expected to be relatively contained in
2013 with a modest pickup due to improved demand and an
unfavourable base effect
27
22
17
12
7
2
Nov-07 Oct-08 Sep-09 Aug-10 Jul-11 Jun-12 May-13
Source: CEIC, HSBC
Headline CPI (% y-o-y)
HSBC
Forecasts
Core CPI (% y-o-y)
particularly affected by the slowdown
domestically as bad debts have not been cleared.
As such, the sector is relatively frozen as the
process for recovering insolvency is cumbersome
and banks prefer to roll over bad debts. This
means is that unless the issue of bad debt is
resolved, a recalibration of prices, in which the
supply of real estate would reflect demand, is
unlikely to happen. The State Bank of Vietnam
(SBV) hopes to address this by setting aside
VND20-40trn to lend to home buyers in 2013 to
boost the property market. Should it be successful
at boosting demand for real estate, the issue of
existing bad debts would be largely untouched,
which means systemic risks would remain if not
become larger. Given that banks are more
cautious and are quality credit-driven, any new
lending would be contingent upon the availability
of credit-worthy borrowers. As such, we do not
anticipate a huge upsurge of credit growth in
2013. The SBV estimates that credit growth will
accelerate to 12% in 2013 from 6.4% in 2012,
which is close to our forecast of 13%. Taking
inflation into account, real credit should only give
a marginal boost to growth.
The fiscal prints for the year reflect weak
domestic demand; the budget deficit declined to
VND16trn from VND54.4trn in 2011 largely due
to a decline in revenues and expenditures.
Revenues from land and housing dropped 24.7%
in 2012 while revenue from VAT imports
Chart 13. The global slump and Vietnam’s slowing growth
affected inflow FDI, although Japanese inflows remain
strong (% y-o-y)
1900
1400
900
400
-100
Source: CEIC, HSBC
2010 2011 2012
Japan South Korea Hong Kong Singapore
Chart 14. Japan is the largest FDI investor in Vietnam
totalling USD4bn (% of total; top five FDI countries)
80
60
40
20
0
2008 2009 2010 2011 2012
China Singapore Hong Kong South Korea Japan
Source: CEIC, HSBC
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Economics
Macro - Vietnam
2 January 2013
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Chart 15. The slowdown of investment from top countries
(except Japan) reflect deteriorating competitiveness; a
higher number indicates a worse ranking
2012
2011
2010
0 20 40 60 80 100 120
Doing business (WB) Infrastructure (WEF) Global competitive (WEF)
Source: The World Bank, World Economic Forum, HSBC
Chart 16. Still has a lot of advantages, including strong
population growth which could expand to 100m people in the
mid 2020s (% working population growth rate)
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
Source: UN, HSBC
JP TW KR CH TH VN ID
1990s 2000s 2010s 2020s
contracted 3.2%. With the economy slowing
down across the board, revenue collection from
corporate income tax slowed to 16% from 24.5%
in 2012; and VAT tax collection slowed to 10.4%
from 26.1% in 2011. This translates into total
revenue collected reducing to 10.8% from 24.3%
in 2011. To carry out its fiscal consolidation
policy, the government reined in public spending,
which slowed to 18.9% from 35.5% in 2011.
Capital expenditure saw a modest contraction.
This is to lower the budget deficit as well as a cutdown
on wasteful public spending. We expect this
trend to continue next year with import growth
still constrained by relatively weak domestic
demand, albeit with some improvement in
revenue collection as imports are expected to
stage a modest recovery. With revenue collection
slowing and expenditure reduced to lower the
budget balance, a fiscal stimulus to spur growth is
unlikely in 2013, with the government having
neither the funds nor the appetite to do so.
As a whole, although growth slowed, five major
developments were considered positive in 2012
that will eventually build a foundation for more
sustainable growth: 1) the trade balance is in
surplus thanks to weaker import growth and
strong exports; 2) inflation slowed to 6.8% in
December 2012 from 17.8% in January 2012; 3)
the budget deficit is narrowing, lowering
Vietnam’s debt burden; 4) FX reserves have risen
significantly; and 5) FDI inflows surged from
Japan, which is considered positive for Vietnam’s
industrialization process.
Chart 13 shows that registered FDI inflows into
Vietnam from Japan surged. The amount of
Japanese FDI inflows into a country can also be a
proxy on whether that country would ultimately
raise its level of productivity and move up the
value chain. Generally speaking, Japanese FDI
has been more “trade oriented” than US FDI,
meaning Japanese firms in Asia tend to build
overseas production zones as an extension of their
domestic base. This results in Japanese firms
having a role of being an initiator and coach in the
industrialization of less-developed countries. In
Vietnam, the top-five FDI countries are from
Asia, which reflects an ongoing trend of
multinational firms relocating out of China to
reduce costs. Countries, such as Vietnam and
Indonesia, are poised to gain from this
restructuring as labour costs are relatively lower
and the population is dynamic enough to support
robust domestic demand (Chart 16).
However, Vietnam could do more to attract
foreign investment to support its development. As
shown, with the fiscal space constrained, more
foreign investment is needed to pick up the slack
of domestic investment. Additionally, the
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Economics
Macro - Vietnam
2 January 2013
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Table 2. HSBC main Vietnam forecasts
Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013f Q2 2013f Q3 2013f Q4 2013f 2011 2012 2013f
GDP (% y-o-y) 4.1 4.7 5.4 5.5 7.5 5.5 4.5 4.7 5.9 5.0 5.5
CPI, average (% y-o-y) 17.2 11.0 5.9 6.8 7.2 9.6 11.1 9.9 18.6 9.3 9.5
Trade balance (% GDP) 0.9 -1.1 0.9 0.3 -4.6 -0.5 1.3 0.8 -9.8* 0.2* -2.2*
OMO rate, end quarter (%) 13.0 10.0 8.0 7.0 7.0 7.0 7.0 8.0 14.0 7.0 8.0
VND/USD, end quarter 20900 20905 20860 20900 21000 21000 21500 21500 21034 20900 21500
Source: CEIC, HSBC; Note * denotes USDbn
infrastructure needs are immense, ranging from
shortages of electricity to public transportation
systems, which would benefit from world-class
technology that foreign firms bring. But to do this,
Vietnam would need to improve its business
environment, most notably reducing red tape and
creating clearer laws on how to resolve
insolvency. Without doing so, firms are entering
Vietnam only to take advantage of the wage costs
rather than to take advantage of the dynamic
domestic market. This shows in the contraction of
registered FDI (with the exception of Japan) as
they have other attractive markets such as
Indonesia and Thailand to enter.
As such, for Vietnam to realize its ambitions,
reforms need to be carried out to not only
eliminate the bad debt but also improve the
efficiency of the economy.
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Economics
Macro - Vietnam
2 January 2013
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Disclosure appendix
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The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
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personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Trinh Nguyen
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