Vietnam at a glance-Things are starting to look up - HSBC

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Global Research
Macro
Vietnam Economics
Vietnam at a glance
Things are starting to look up
Growth accelerated to 5.4% y-o-y in 3Q12 from 4.7% thanks to
strong services, but will likely stay below trend at 5.0% for 2012
Weak domestic demand gave the government an opportunity
to increase prices in September, causing inflation to spike
While the rapid pick-up is a one-off, an anticipated recovery
in 4Q12 could stoke inflationary pressure, although inflation
is still likely to stay in single digits by year-end 2012
Time to reflect and prepare
The Vietnamese are having a mellow autumn – not to lament, but to be introspective about
how to bounce back stronger. They have endured the after-effects of high inflation and
subdued growth, both internally and externally, this year. While some of the slowdown is due
to a weak global environment, much of it is domestic-driven. Years of overinvestment by
inefficient state-owned enterprises and public investment have left the country overburdened
with debt; an issue that has reverberated loudly after many businesses, private as well as
public, have suffered from high borrowing costs and low demand, as well as consumers
having faced higher living costs and decreased incomes. How to unload bad debt and
improve the standard of living in an era of subdued global growth must be addressed.
1 October 2012
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
While the government has not stated a clear strategy about how it will create a leaner economic
machine, some signs of progress are in place. The State Bank of Vietnam (SBV) has submitted
a plan to the government to establish a debt trading company in an effort to tackle bad debts
and improve the allocation of capital in the economy. The latest data release also shows that
the output is stabilising: the September HSBC PMI is close to 50, exports have rebounded, the
trade balance year-to-date is positive, inflation remains in single digits, the VND is broadly
stable, and the economy accelerated slightly in 3Q12.
Vietnam has been successful at cooling an overheated economy to achieve macroeconomic
stability. Growth remains below trend and will likely expand only at 5.0% in 2012. The
deceleration of the economy should be taken as an opportunity to correct structural weaknesses
such as a still-cumbersome business environment, inefficient SOEs and public investment,
establishing a coordinated decision making body to eliminate policy fragmentation, creating a
clearer industralisation policy to develop processing capacity, as well as capture Vietnam’s
inherent competitiveness. With the government showing a willingness to sacrifice growth for a
more manageable macroeconomic environment, we hope falling leaves are a sign of a stronger
revival in the spring rather than one of decay.

Macro
Vietnam Economics
1 October 2012
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Table 1. HSBC Vietnam Manufacturing PMI and its sub-indices
Sep-12 Aug-12 Jul-12 Long-Term Average
PMI Index 49.2 47.9 43.6 49.3
Output 49.5
New Orders 49.5
New Export Orders 50.4
Backlogs of Work 48.9
Stocks of Finished Goods 49.8
Employment 50.1
Output Prices 51.8
Input Prices 57.9
Suppliers' Delivery Times 52.6
Stocks of Purchases 48.1
Quantity of Purchases 48.5
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
Still weak, but stabilising
Close to 50 output
After a sharp dip in manufacturing activity in July, business has broadly stabilised in September. Both the
PMI and the output print are close to the 50 threshold, which marks a levelling of activity. The 3Q12
GDP result reflects this: growth remains subdued and below trend, but is not declining. On a sequential
basis, the GDP print shows quarter-on-quarter stabilisation in 3Q12 for the manufacturing sector, with a
slight deceleration. Several factors are preventing a significant pick-up in manufacturing activity: weak
external demand and lacklustre domestic consumption. The new export orders sub-index remained below
50 from July to September. In fact, the most recent print shows a worsening of demand abroad. However,
in contrast, the output print is improving to close to 50, indicating a slower pace of deceleration and some
signs of recovery. Chart 1 shows a V-shaped recovery of the PMI on a trend basis (% 3m/3m). This
means that while both the global and domestic situation is still fragile, the worst is likely over. Unless the
global situation worsens significantly in the coming months, the stabilisation of economic activity should
allow a strengthening of manufacturing activity.
Chart 2 shows continued headwinds facing Vietnamese exporters: on a trend basis, export demand is low.
However, it is unlikely to dip significantly in the coming months. The employment sub-index, while it is
Chart 1. On a trend basis (% 3m/3m sa), manufacturing
activity appears to be turning a corner (HSBC PMI)
Chart 2. Export orders continue to be subdued, while new
orders are stabilising (% 3m/3m sa, HSBC PMI)
3
3
-2
-2
-7
-12
Aug-11 Nov -11 Feb-12 May -12 Aug-12
PMI Index Output
Source: Markit, HSBC
-7
-12
Aug-11 Nov -11 Feb-12 May -12 Aug-12
New Orders
New Ex port Orders
Source: Markit, HSBC
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Chart 3. While still slightly below 50, the V-shape pattern
suggests a stabilisation of economic conditions (HSBC PMI)
Chart 4. After the sharp dip in July, the quantity and stocks
of purchases are levelling off (HSBC PMI)
58
53
48
43
38
M ar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12
Em ploy ment Quantity of Purchases
58
53
48
43
38
Mar-11 Jun-11 Sep-11 Dec-11 M ar-12 Jun-12 Sep-12
Stocks of Purchases Quantity of Purchases
Source: Markit, HSBC
Source: Markit, HSBC
not improving significantly, is not deteriorating much either. Both employment and quantity of purchases
are levelling at the near-50 mark, not yet a strong enough sign to celebrate, but enough to breathe a sign
of relief. Manufacturers have wound down their stock of purchases in the past to prepare for a worsening
environment, but have since normalised their inventories. All sub-indices suggest that Vietnam’s
manufacturing has passed the trough. While a significant recovery is still too premature to declare, signs
are showing that 4Q12 could be relatively better.
In addition to external headwinds, one thing to note is the significant pick-up of input prices. While this is
due to the recent increases of oil and electricity prices, the sharp uptick in prices poses a significant
burden on producers, who have not been able to pass on the costs to consumers due to fierce competition
and subdued demand. Chart 6 shows the rise on a trend basis for the three main measures of inflation:
headline, core and food inflation. Headline inflation rose to 6.5% y-o-y in September from 5.0% in
August; on a sequential basis, it rose by 2.1% m-o-m sa from 1.2% in August. Core inflation rose to
11.2% y-o-y from 8.8% in August; on a month-on-month basis, it rose 3.1% m-o-m sa from 1.6% in
August. Food inflation, on the other hand, slowed to 1.8% y-o-y from 2.0% in August; on a month-onmonth
basis, it rose 0.8% m-o-m sa from 0.5%. While the rapid increase of both headline and core
inflation is worth being vigilant about, we believe both investors and the public should not lose sleep over
Chart 5. Input prices are increasing rapidly, putting an
additional burden on manufacturers (HSBC PMI)
Chart 6. Inflationary pressures are on the rise
60
55
50
45
40
M ar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12
Output Prices Input Prices
65
55
45
35
25
15
5
-5
%3m /3m saar
Nov -07 Oct-08 Sep-09 Aug-10 Jul-11 Jun-12
Headline Core Food
Source: Markit, HSBC
Source: CEIC, HSBC
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Chart 7. One-off increases in electricity, health-care services, and tuition fees caused September headline inflation to rise (% m-o-m sa)
17
12
7
2
-3
-8
-13
Aug-08 Apr-09 Dec-09 Aug-10 Apr-11 Dec-11 Aug-12
Household Equipments and Appliances
Health and Personal Care
Post & Telecommunications
Education
Culture, Sport and Entertainment
Source: CEIC, HSBC
this as it was caused by administrative measures to let essential goods prices such as gasoline, electricity,
health-care services, and tuition fees rise. Health care services and tuition fees are one-off increases and
were implemented to take advantage of benign food inflation, as last year’s high inflation did not allow
the government to raise health care and education fees. This is considered positive, in our view, as it
allows the government to reduce the budget deficit and normalise prices. Although the rise of inflation is
not a significant cause for concern due to still low domestic demand, given that we anticipate a recovery
in 4Q12, inflation could continue to rise, albeit at a much slower pace than the 2% m-o-m rise in
September. As such, as indicated by our OMO policy rate forecast, we believe the room for further cuts
has closed and rates will likely stay at 8% for the rest of the year. Headline inflation will probably also
remain at a single-digit level towards year-end 2012.
What’s most encouraging about the most recent data release is the resilient nature of Vietnamese exports. Yearon-year
exports jumped to 30.4% y-o-y in September (a government estimate based on the first 15 days of
customs data) from 6.3% in August; on a sequential basis, it rose 15% m-o-m sa from a contraction of 2.3% in
the previous month. The rise is primarily due to the strong performance of apparel, footwear, rice, electronics,
coffee and crude, although some of this is due to high commodity prices. Aqua products, on the other hand,
Chart 8. Exports are gradually improving thanks to higher
commodity prices and a rebound of garment shipments
60
40
20
0
-20
-40
2008 2009 2010 2011 2012
Source: CEIC, HSBC
Ex ports (% 3m/ 3m sa)
Imports (% 3m/3m sa)
Chart 9. Retail sales are decelerating, but still very robust
75
65
55
45
35
25
15
Apr-08 Feb-09 Dec-09 Oct-10 Aug-11 Jun-12
Retail Sales (% y --o-y )
Retail Sales (%3m/3m sa RHS)
Source: CEIC, HSBC
23
18
13
8
3
-2
-7
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Chart 10. On a sequential basis, growth, while still weak, is
stabilising (% q-o-q sa)
10
5
0
-5
8
6
4
2
0
-2
-4
-6
Chart 11. While agriculture and industry sectors are stagnating,
the service sector is picking up the slack (%)
12
10
8
6
4
2
0
Mar-08 Dec-08 Sep-09 Jun-10 M ar-11 Dec-11 Sep-12
Industry Serv ices Agriculture (R HS)
2007 2008 2009 2009 2010 2011 2011 2012
Agriculture (y -o-y ) Indus try (y -o-y )
Serv ic es (y -o-y )
Source: CEIC, HSBC
Source: CEIC, HSBC
continued to contract. Imports also rose 5.3% y-o-y from 3.1% in August. On a sequential basis, they rose
4.2% m-o-m sa from a 2.6% contraction. Most of this is due to the recovery of sewing material imports.
Machinery and petroleum, as well as fertiliser imports continued to be subdued. Electronics imports also
slowed; however, the expansion pace is still high at 47.5% y-o-y (versus 70.5% in the previous month). The
perk-up of sewing goods suggests that Vietnam’s main export earner is expected to recover in the coming
months, as it already did in September.
As such, the growth print of 5.4% y-o-y, which makes year-to-date growth still less than 5%, is not a surprise.
Chart 10 shows that on a q-o-q seasonally adjusted basis growth decelerated since the second quarter, but still
remained in positive territory. On a year-on-year basis, only the service sector showed a pick-up in activity, as
both the agriculture and industry sectors suffered from weak domestic demand and sluggish global growth.
Looking ahead, we expect a stronger performance in the fourth quarter, backed by accelerated credit growth, as
well as the resilient nature of Vietnamese exports, although electronics will likely decelerate.
The Vietnamese people have already written off this year as one of low growth to pay off their debt or position
themselves for when domestic demand and global growth returns. The government, too, has accepted that the
economy will grow below trend for several years to unburden itself of its debt. The main priority is to stabilise
the macro environment to restore trust from the public, as well as investors. At the same, an agenda to clean up
bad debt must be established and a clearer strategy for the next step of industrialisation must be created. No one
is expecting an instant solution as these policies will likely take years to be rolled out. However, reforms must
take place for Vietnam to realise its potential.
In addition to having a trade surplus year-to-date (USD34m versus a deficit of USD7.6bn in 2011 for the same
period), single-digit inflation, a stable VND, rising foreign reserves, and a more transparent central bank, some
signs of progress on long-standing challenges such as banking sector reform have been achieved. The SBV has
approached the bad debt issue in three stages: strengthening liquidity, resolving bad debts and restructuring
operations. For the first stage, liquidity has been ample. For the third stage, the SBV plans to issue some
regulations on classifying assets, using risk prevention funds and creating criteria for accounting standards and
financial reporting. The SBV has stated that 2013 would be the peak time of the restructuring programme,
which is expected to be finished by 2015. We will remain watchful of whether these promises will be
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Vietnam Economics
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delivered. However, if the future is anything like the past, the government has shown that it is willing to make
necessary adjustments when the time comes. When that will happen is still a question mark.
Vietnam Main Macro Forecasts
Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012f Q3 2012f Q4 2012f 2011 2012f
GDP (% y-o-y) 5.7 6.1 6.1 4.1 4.7 5.4 5.8 5.9 5.0
CPI, average (% y-o-y) 17.1 22.0 21.3 17.2 11.0 5.8 6.5 18.6 9.2
Trade balance (% GDP) -9.9 -3.7 -5.8 0.9 -1.1 1.7 3.7 -9.8* 2.3*
OMO rate, end quarter (%) 15.0 14.0 14.0 13.0 10.0 8.0 8.0 14.0 8.0
VND/USD, end quarter 20600 20830 21034 20900 20905 21500 21500 21034 21500
Source: HSBC forecasts; * Denotes actual values in USDbn
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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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