Improving BOP bolsters promising economic outlook

Transcription

1 Vietnam Macro - Analysis of BOP May March 211 Hien Nguyen Macro Analyst hien.nguyenhai@vcsc.com.vn ext. 132 Improving BOP bolsters promising economic outlook Balance of Payments (BOP) is one of the key facets that reveal the health of an economy. As a developing country, Vietnam encountered a structural BOP problem in the period with the current account deficit and financial account surplus significantly expanding. A problematic BOP, together with a GDP growth slowdown, very high inflation and strong credit growth, reflected macroeconomic instability during this period. However, strong export growth, which was mainly fueled by a surge in the export of smartphones and spare parts after Samsung joined Vietnam s manufacturing sector, helped Vietnam maintain a current account surplus over the last six years and resolved the BOP problem. Concurrently, Vietnam s economy attained healthier GDP growth with inflation under control, a stable exchange rate, more efficient utilization of investment capital and less vulnerability to external risks. Therefore, we still have an optimistic outlook toward the Vietnamese economy, with moderate but more sustainable GDP growth, given the country s persistent current account surplus. How has Vietnam s BOP transformed in the last 17 years? Vietnam s BOP retained an overall balance surplus for most of the last 17 years, but the drivers were different before and after 21. The current account balance shift from deficit in to surplus since 211 emphasized the increasingly important role of trade in Vietnam s BOP. How is Vietnam s BOP different from those of other countries in the region? Thailand s deeper exposure to global risks makes this country s BOP more sensitive to fluctuations of portfolio investment flows than its neighbors. As Vietnam s top export products are electronics and garments, its current account is less vulnerable to changes in global commodity prices than that of Indonesia, whose exports heavily depend on oil. The nature of Vietnam s BOP is more similar to that of the Philippines, which requires a lot of imported capital goods to support a fast-growing economy. But Vietnam could still maintain a current account surplus in the last six years thanks to the vigorous export of electronics. How are Vietnam s BOP and GDP correlated? It is common knowledge that a long-running current account deficit would harm a country s solvency. Vietnam s deeper global trade integration through its entry into the WTO since 27 resulted in excessive investment capital, which caused strong imports and a widening current account deficit from 27 to 211. Unfortunately, the investment surplus could not be translated into higher economic growth during this period because of the global recession. As a result, Vietnam incurred macroeconomic instability with very high inflation, strong VND depreciation and problematic BOP in this period. However, Vietnam was able to solve its structural BOP problem by boosting exports and shifting its current account deficit into surplus since 211. An improving BOP is a key indicator for a more stable economy. How will Vietnam s BOP look in 217? An expected trade deficit will deteriorate Vietnam s BOP in 217, but a weakening current account balance should not pose a risk for the economy as macro indicators remain stable. A goods trade deficit and decreasing overseas remittances may lessen the current account balance while a steady FDI uptrend and a likely higher FII net inflow will support a favorable financial account. See important disclosure at the end of this document VCSC<GO> May 31, 217 1

2 The tranformation of Vietnam s BOP Goods trade balance was the main trigger for Vietnam s BOP surplus. Vietnam s BOP has been in surplus for most of the last 17 years, but the underlying reasons for the surplus were different before 21 than during The balances of the current account and financial account indicated that trade or investment activities were the key drivers for the BOP surplus. The current account was in deficit from 22 to 21 before turning to surplus since 211 when Vietnam s economy became more dependent on the export-oriented manufacturing sector. The financial account balance has remained in surplus since 21 except for a small deficit of USD283 million in 213 as Vietnam has traditionally been heavily fueled by investment capital, particularly FDI. Therefore, the shift in the current account balance in this period reflected the increasingly critical role of trade in the country s balance of payments. Figure 1: Vietnam s BOP, , 1 1, 1 1,, -, -1, - -1, Current account balance Financial account Overall balance Overall balance ( of GDP) Source: ADB, SBV An abundant trade surplus helped Vietnam regain a BOP surplus in 216. Vietnam enjoyed a large BOP surplus of USD8.4 billion in 216 after incurring a USD6 billion deficit the previous year. The big gap in BOP between these two years was mainly attributed to the trade balance, which was a USD3.6 billion deficit in 21 before becoming a surplus of USD2. billion last year, according to the Customs Office. Furthermore, a significant difference in the financial account balance, which was USD1.6 billion in 21 and USD1 billion in 216, also contributed to the BOP disparity in the last two years. Unlike the current account surplus in 211 to 214 which was driven by strong export growth, the surplus of nearly USD9 billion in 216 was primarily caused by import growth of just.2 YoY compared to double-digit increases in the three prior years. Sluggish global and domestic production and consumption demand resulted in this growth slowdown. Apart from continued ample FDI inflows that benefited from a series of bilateral trade agreements (BTAs) and free trade agreements (FTAs), a much smaller deficit of other investments, including money and deposits, loans, trade credits and other account receivable/payable in 216 than in 21 also helped to narrow the financial account deficit last year. Although money deposits, which traditionally occupied a large part of this category, continued to outflow from Vietnam in 216, the country s decent economic performance with stable exchange and interest rates helped to mitigate the withdrawal. After incurring a small deficit of USD6 million in 21, which could be attributed to the significant VND depreciation following the strong CNY devaluation in August 21, portfolio investment returned to a slight surplus of USD228 million in 216. See important disclosure at the end of this document VCSC<GO> May 31, 217 2

3 Figure 2: Vietnam s BOP in 21 and 216 by quarter Source: ADB, SBV How is Vietnam s BOP different from regional peers Unit: USD million Q1 216 Q2 216 Q3 216 Q4 216 Current account 884 8,998 3,12 2,242 3,499 1 Goods balance (f.o.b) 7,374 13,99 3,833 3,174 4,927 2,6 Services balance (f.o.b) (4,3) (,226) (93) (1,29) (1,46) (1,41) Primary income balance (9,92) (7,72) (1,741) (1,623) (2,4) (2,348) Secondary income balance 7,73 7,986 1,94 1,981 2,77 1,988 Capital account Financial account 1,87 1,1 2,18 2,944 1,366 3,2 Direct investment 1,7 8,7 2, ,71 3,162 Portfolio investment (6) 228 (66) (46) Financial derivatives Other investment (9,48) (1,42) (364) (1) (1,72) 819 Net errors and omissions (8,3) (1,623) (1,818) (1,97) (1,887) (4,943) OVERALL BALANCE (6,32) 8,39 3,464 3,211 2,978 (1,263) Reserves and related items 6,32 (8,39) (3,464) (3,211) (2,978) 1,263 International investment position While the BOP of Vietnam, Indonesia and Philippines was more susceptible to trade, that of Thailand was more subject to investment. Figure 3: Overall balance as of GDP Figure 4: Current account balance as of GDP Vietnam Thailand Indonesia Philippines Vietnam Thailand Indonesia Philippines Source: ADB, SBV, BOT, BI, BSP As a small and developing market, Vietnam BOP did not seem to be affected by portfolio investment flows as strongly as that of Thailand. Among these four ASEAN countries, Thailand generally had the highest ratio of overall balance to GDP, particularly before 21, thanks to its strong trade balance during this period as exports enjoyed double-digit growth rates. After incurring current account deficits in 212 and 213, which were caused by a significant decrease in the trade surplus, Thailand regained an abundant current account surplus in the last two years. Thailand was the 1 th largest US import market in 216 and China, the US and Japan were its leading export partners. We believe that a strengthening trade surplus will continue to be a pillar for Thailand to maintain a BOP surplus in 217, especially amid the expected recovery of the world s economic giants. In terms of the financial account, Thailand s BOP appeared to be more easily affected by investment flows, peculiarly FII, compared to the other three mentioned countries. We observed a significant outflow of portfolio investment from the country over the last See important disclosure at the end of this document VCSC<GO> May 31, 217 3

4 four years as Thailand suffered an economic recession. As a more developed market, Thailand is more exposed to global risks than Vietnam, the Philippines and Indonesia, and hence experiences more fluctuations of portfolio investment flows. Figure : Thailand s financial account and GDP growth 3, 2, 2, 1, 1,, -, -1, -1, -2, -2, Financial account GDP growth Source: ADB The sustainable nature of Vietnam s top export products made its current account less vulnerable to changes in global commodity prices. Indonesia s narrower BOP balance since 212 could be explained by its current account deficit over the last five years. Indonesia s current account balance sharply fell from USD1.7 billion in 211 to -USD24.4 billion in 212 and was a deficit of USD16.3 billion in 216. Since Indonesia is a country whose exports heavily depend on fuels, its trade balance was negatively influenced by the performance of oil exports. The growth slowdown of China, Japan and the US, Indonesia s biggest export partners, led to weaker demand for oil imports from 212. Moreover, the drastic decrease in crude oil prices from mid-214 was also a major contributor to Indonesia s smaller goods balance. Being dependent on oil as a top export product is a weakness of Indonesia due to unpredictable fuel prices. Therefore, compared to regional peers, Indonesia s BOP is more vulnerable to global petroleum prices. Vietnam s leading export products are electronics and garments & footwear, which we expect not to have severe changes in prices and demand in the future. A global economic recovery with stronger consumption demand will likely foster Vietnam s exports of these categories in the next few years. As oil accounted for only 1.3 of Vietnam s total exports in 216, the fluctuations of oil prices and demand should only have a minimal impact on Vietnam s trade balance. Figure 6: Indonesia s current account balance and oil & gas exports, 4, 3, 2, 1, - (1,) (2,) (3,) (4,) Oil and gas export Current account balance Source: ADB, BI, Ministry of Trade Indonesia See important disclosure at the end of this document VCSC<GO> May 31, 217 4

5 Figure 7: Top export products of Vietnam, Thailand, Indonesia and the Philippines in Source: WTE Vietnam Thailand Indonesia Philippines Machinery including Mineral fuels including oil: Electrical machinery, computers: US$37.2 billion US$27.9 billion (19.3 of equipment: US$2.2 billion (17.4 of total exports) total exports) (44.8 of total exports) Electrical machinery, equipment: US$76.9 billion (36. of total exports) 2 Footwear: $17.9 billion (8.) Machinery including computers: $13 billion (6.2) Electrical machinery, equipment: $29.7 billion (13.9) Vehicles : $27.2 billion (12.7) Clothing, accessories (not knit Gems, precious metals: or crochet): $12.9 billion (6.1) $14.2 billion (6.6) Knit or crochet clothing, accessories: $11.7 billion (.6) Furniture, bedding, lighting, signs, prefab buildings: $8 billion (3.8) Coffee, tea, spices: $4. billion (2.1) 8 Fish: $4.4 billion (2.1) 9 Leather/animal gut articles: $3.8 billion (1.8) Rubber, rubber articles: $12.2 billion (.7) Plastics, plastic articles: $11.4 billion (.3) Mineral fuels including oil: $6.3 billion (2.9) Meat/seafood preparations: $.9 billion (2.8) Optical, technical, medical apparatus: $.3 billion (2.) Animal/vegetable fats, oils, waxes: $18.2 billion (12.6) Electrical machinery, equipment: $8.1 billion (.6) Gems, precious metals: $6.4 billion (4.4) Vehicles: $.9 billion (4.1) Rubber, rubber articles: $.7 billion (3.9) Machinery including computers: $. billion (3.8) Footwear: $4.6 billion (3.2) Clothing, accessories (not knit or crochet): $3.9 billion (2.7) 1 Fruits, nuts: $3.2 billion (1.) Cereals: $4.6 billion (2.1) Wood: $3.9 billion (2.7) Machinery including computers: $7.8 billion (13.8) Wood: $2.9 billion (.1) Optical, technical, medical apparatus: $2. billion (4.4) Vehicles: $1.4 billion (2.) Ores, slag, ash: $1.3 billion (2.2) Animal/vegetable fats, oils, waxes: $1.2 billion (2.1) Fruits, nuts: $1.1 billion (2) Ships, boats: $1 billion (1.8) Gems, precious metals: $77.4 million (1.3) Strong import demand for capital goods, amid fast-growing economies, threatens to undermine the current accounts of Vietnam and the Philippines. The Philippines is the ASEAN country closest in economic size to Vietnam, recording nominal GDP of USD291.3 billion in 216 vs Vietnam s USD2.3 billion last year. Like Vietnam, this country was able to keep its BOP in surplus for most of the last 17 years. The Philippines current account has retained a surplus since 23 while Vietnam s was still in deficit until 21. It was strong FDI inflows that converted Vietnam into an export-oriented economy and helped Vietnam s goods balance turn to surplus since 212. However, the Philippines has incurred a goods trade deficit over the last 17 years while services and primary income balances have preserved a surplus since 2, contrary to the other three countries, which have always suffered services and primary income deficits. The Philippines services and primary income surplus reflected that the country is an attractive services outsourcing destination for more developed countries, possibly thanks to its low labor costs and the strong English proficiency of its workers. Meanwhile, Vietnam still heavily relies on foreign competency to boost the domestic service sector, including finance, tourism, transportation and information technology. In 216, the Philippines overall balance was small deficit of USD116.1 million, falling from a surplus of USD2.6 billion in 21. A significant decrease of 91.7 YoY in the country s current account surplus was the main reason for this shift in the Philippines BOP position last year. As one of the fastest-growing economies in the region, the Philippines had strong demand for the import of machinery and equipment to fuel its domestic manufacturing and infrastructure system, which only stands above that of Myanmar, Cambodia and Laos in the ASEAN region. The Philippines attained strong GDP growth of 6.8 in 216, higher than Vietnam s 6.2. The World Bank also maintained its forecast for the Philippines 217 economic growth of 6.9 due to strong domestic demand and the government s pledge to boost infrastructure spending, while still keeping Vietnam s 217 GDP growth at 6.3. To support a fast-growing economy, the Philippines accelerated the import of capital goods, increasing the country s total import turnover by 2.3 YoY in 216, much higher than in previous years (21: +3.3 YoY, 214: +4.4 YoY, 213: See important disclosure at the end of this document VCSC<GO> May 31, 217

6 +.18 YoY). We believe that this trend will likely continue in the next two years and thereby should widen the Philippines BOP deficit in the near term. Figure 8: GDP growth YoY Figure 9: Logistics performance index 216: Quality of trade and transport-related infrastructure (1=Low to =High) Singapore Malaysia Thailand Vietnam Indonesia Philippines Cambodia Myanmar Laos Philippines Vietnam Source: ADB Source: WB Strong export growth of electronic products helped Vietnam s current account retain a surplus in recent years. The top import products of Vietnam and the Philippines in 216 were quite similar. Like the Philippines, Vietnam is also very dependent on imported materials and equipment to support the domestic manufacturing sector and infrastructure. However, Vietnam s current account balance has been in surplus over the last six years due to strong export growth of electronic products, especially smartphones and spare parts. Samsung has made the country its major production hub, accounting for 3 of Samsung s total global production. And Samsung s electronic products occupied 2 of Vietnam s total exports in 216. Therefore, the much higher export growth of electronic products in Vietnam than the Philippines helped Vietnam obtain a current account surplus for the last six years. The import of machinery and equipment seemed to strongly influence Vietnam s current account balance in recent years. In 21, Vietnam s imports in this category jumped 23 YoY, decreasing the current account surplus by 9.2 YoY. But last year, when the import growth of machineries and equipment slowed down to 2.9 YoY, Vietnam s current account surplus surged to nearly USD9 billion. In 4M 217, Vietnam incurred a large trade deficit of USD2.7 billion with the import of machinery and equipment jumping 38.9 YoY. If this trend continues through the end of the year, this will be a critical factor for a narrower BOP position for Vietnam in 217. Figure 1: Top import products in 216 Figure 11: Export growth of electronic products Vietnam Electrical machinery, equipment: US$4.6 billion (23 of total imports) Machinery including computers: $21 billion (1.6) Plastics, plastic articles: $9.6 billion (4.9) Philippines Electrical machinery, equipment: US$2.7 billion (24.1 of total imports) Machinery including computers: $11.7 billion (13.6) Mineral fuels including oil: $8.4 billion (9.7) 4 Iron, steel: $8.8 billion (4.4) Vehicles: $7.6 billion (8.9) Mineral fuels including oil: $7.6 billion (3.9) Plastics, plastic articles: $3.1 billion (3.6) Vietnam Philippines Source: WTE Source: Vietnam Customs Office, PSA See important disclosure at the end of this document VCSC<GO> May 31, 217 6

7 How is the growth of Vietnam s BOP and GDP correlated A long-running current account deficit would harm a country s solvency. It is widely believed that rapidly accelerating economic growth would shift the current account balance into deficit as a country needs to boost input imports to meet its strong production and consumption demand, thereby disequilibrating the balance of payments. This is a common issue in developing countries. If the current account deficit occurs over a long period of time, a long-term balance of payments will be problematic, with a fast-widening current account deficit and a rising financial account surplus. This would reflect a low level of national savings compared to a high rate of investment. Low-capital developing countries usually have more investment opportunities than they can undertake. A deficit should promote export growth and spur stronger economic expansion. However, if export growth cannot exceed that of imports, the current account would be in deficit. If a country runs a current account deficit, its liabilities to the rest of the world would increase through rising investment capital which needs to be paid back. The country is expected to be able to eventually generate a sufficient current account surplus to repay what it has borrowed, which would trigger money outflows from the country and further deteriorate its BOP. If the current account deficit continues for the long term, the country would struggle to meet its foreign liabilities, given its low domestic savings. Figure 12: India s GDP growth and BOP Figure 13: India s trade growth and direct investment , 3, 3, 2, 2, 1, 1,, -2 GDP growth Current account balance ( of GDP) Overall balance ( of GDP) Direct investment Export growth Import growth Source: ADB Source: ADB To illustrate this issue, we use India as an example. In our opinion, India is a developing country which has problems with its BOP as India has incurred a current account deficit since 24 with the deficit broadening quickly during the period. As a fast-growing economy thirsty for investment capital to boost growth, investment into India has significantly risen over the last decade and resulted in a strong financial account surplus, which has helped the country maintain a BOP surplus for most of the last 17 years. India achieved very high economic growth of 8-1 from 23 to 21 (except for a slowdown of 3.9 in 28 due to the global recession), which could be attributed to a strong investment increase during that period. However, India s export growth has generally been lower than import growth, leading to a persistent current account deficit. See important disclosure at the end of this document VCSC<GO> May 31, 217 7

8 Vietnam s improving BOP through strong exports has reflected the country s more sustainable and healthier economic growth. Global economic integration followed by financial and trade liberalization plays a critical role in reinforcing the economic growth of developing countries, but exacerbates their BOP with higher current account deficits. As a fast-growing nation, Vietnam also encountered this structural BOP problem in the period as the current account deficit and the financial account surplus sharply rose. Vietnam s economy could not take in excessive investment capital to boost export growth proportionate to the surge in imports. After Vietnam joined the WTO in late 26, the country attracted massive capital inflows; registered FDI in 28 increased six-fold from that of 26. Consequently, the financial account surplus as a percentage of GDP jumped to 23.3 in 27 and 12.4 in 28 from 4.7 in 26. The rapid growth of investment capital resulted in stronger import growth that significantly outpaced export growth in 27. In 27, imports surged by 4 YoY, nearly doubling the same figure in 26, while export growth slowed slightly from previous years. This indicated that despite the strong increase in input, Vietnam was not able to absorb a large amount of investment capital and produce comparable export growth, leading to a broadening current account deficit in this period. Figure 14: Vietnam s FDI 8, 7, 6,, 4, 3, 2, 1, - Figure 1: Vietnam s export-import growth Disbursed FDI Registered FDI Export growth Import growth Source: FIA Source: Customs Office Vietnam did not succeed in translating a large current account deficit into higher economic growth in 27 to 211. Vietnam s current account deficit as a percentage of GDP surged to 9.2 in 27 and 1.9 in 28 from a small deficit of.2 of GDP in 26. The tremendous FDI inflows were unable to offset the trade deficit, thus worsening the BOP. Moreover, the larger current account deficits in 27 to 21 did not stimulate an economic expansion because Vietnam s GDP growth slowed during this period compared to the five previous years, when GDP increased by over 7 YoY. The global financial crisis in 28 was the main hindrance that prevented Vietnam from achieving higher GDP growth despite rising inflows of capital. Sluggish global demand made exports and imports fall 8.9 YoY and 13.3 YoY, respectively, and decelerate GDP growth to.4 in 29. Trade integration accompanied by strong foreign investment seemed unsuccessful in significantly boosting Vietnam s economy during the period. The broader current account deficit and lower GDP growth obviously reflected Vietnam s macroeconomic instability in this period. See important disclosure at the end of this document VCSC<GO> May 31, 217 8

9 Figure 16: Vietnam s GDP growth and BOP Overall balance ( of GDP) (LHS) Financial account balance ( of GDP) (LHS) Current account balance ( of GDP) (LHS) GDP growth (RHS) Source: ADB In , investment capital surplus resulted in Vietnam s macro instability, which was reflected through very high inflation and credit growth. With immense capital inflows, Vietnam experienced macroeconomic turbulence during Net positive capital inflows put huge pressure on domestic demand, which subsequently increased relative prices. Vietnam s average annual inflation soared to 13.4 in this period compared to 6.1 in five years prior with CPI peaking at 23.1 in 28. At the same time, credit growth also hit a very high level of over 3. Unfortunately, the excessive capital could not be translated into stronger economic growth. Instead of pouring into the sectors which promise to generate economic output, money was mainly spent on speculative assets, particularly real estate and securities, with exaggerated expectations of future growth and price appreciation. As a result, asset price bubbles emerged while the country was facing increasing instability. Figure 17: Vietnam s inflation Figure 18: Vietnam s growth of money supply, credit, and deposit rate M2 supply growth (LHS) Credit growth (LHS) Deposit interest rate (12 months) (RHS) Source: GSO Source: SBV, ADB See important disclosure at the end of this document VCSC<GO> May 31, 217 9

10 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan- Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-1 Jan-16 Jan-17 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan- Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-1 Jan-16 Jan-17 Although a VND strong depreciation in contributed to increasing exports, this was not a driver for sustainable export growth. The excessive capital brought about VND surplus in the market, hence devaluing the VND. By the end of 211, the dong had depreciated by 31.3 from the end of 27 and to become the weakest currency among regional countries. Noticeably, domestic drivers were more influential on the VND than external factors during this period. Normally, when China, Vietnam s head-to-head trade competitor, devalues its currency, the SBV allows the dong to depreciate to improve Vietnam s export competitiveness. However, the CNY strongly appreciated in , contrary to the VND s movement. It is undisputable that exchange rate plays a very important role in international trade. The export-led growth model, which is very common in developing countries, has been pursued by Vietnam to accelerate export growth and improve economic expansion. It is widely believed that a falling VND would help increase Vietnam s export competitiveness. Although the sharp VND depreciation helped increase Vietnam s annual export growth in (except for 29 when exports declined by 8.9 YoY), this was not a sustainable catalyst for a healthy export increase because of the hidden vulnerability. In other words, stronger export growth in this period did not reflect improving economic health but rather economic weaknesses instead. On the other hand, a weakening VND makes imports more expensive and therefore reduces import demand. With more competitive exports and more expensive imports, we saw higher exports and lower imports, which narrowed the current account deficit during After reaching a peak of 1.9 of GDP in 28, Vietnam s current account deficit gradually declined in the next three years and turned into a small surplus of.2 of GDP in 211. Figure 19: VND vs other regional currencies Figure 2: CNY/VND movement USD/CNY USD/THB USD/MYR USD/VND DXY USD/IDR -2 Source: Bloomberg Source: Bloomberg A persistent current account surplus since 211 has played a critical role in solving Vietnam s structural BOP problem. Despite a decline in the financial account surplus, Vietnam s BOP stayed positive for most of the period as the current account balance turned to surplus in 211 and has remained so over the last six years. Figure 21 shows that there was a large gap between exports and imports in while they have been closer in value since 212. Furthermore, the Pearson coefficient also indicates that Vietnam s exports and imports had a weaker correlation in than in the 2-26 and periods and that the strongest relationship between exports and imports occurred in This proves that Vietnam has become more efficient in utilizing imported inputs to generate stronger export growth, which has been the main driver for the current account surplus in recent years. South Korea has emerged as Vietnam s top foreign investor with Samsung the major player. Samsung s entry into See important disclosure at the end of this document VCSC<GO> May 31, 217 1

11 the Vietnamese market has helped smartphones and spare parts overtake garments and footwear to become Vietnam s leading export product since 213. With this export strength, Vietnam is expanding its export focus from the processing industry to the high-tech industry. Figure 21: Vietnam s correlation between exports and imports Figure 22: Vietnam s top export products USD bn 2, 18, Pearson correlation coefficient between exports and imports: , 14, 12, 2 26: : : , 8, 6, 4, 2, Export Import Others Crude oil Aqua & Agricultural products Garments & Footwear Smart phones, Electronics & PCs Growth of smartphone and spare part export Source: Customs Office, VCSC Source: Customs Office (Note: Pearson correlation coefficient has a value between -1 and +1: +1 total positive linear correlation, no linear correlation, -1 total negative linear correlation) Figure 23: Registered FDI from South Korea Figure 24: Exports from Samsung Vietnam F Registered FDI from South Korea Proportion of registered FDI from South Korea () Samsung Export (USD bn) Contribution to Vietnam's export Source: FIA Source: GSO, Customs Office See important disclosure at the end of this document VCSC<GO> May 31,

12 Vietnam s persistent current account surplus since 211 has also shown that the macroeconomy has become more stable over the last five years. After surging by 236 YoY in 28, Vietnam s registered FDI maintained a steady downtrend in the following three years before regaining positive growth since 212. Disbursed and registered FDI reached annual average growth rates of 7.7 and 7.4 in , compared to 27.2 and 41.9 in the five years prior, respectively. Average credit growth also slowed down to 16 per year in , much lower than the 34 per year in the period. As a result, inflation decelerated to a moderate level and the VND also became much more stable. Therefore, the annual average GDP growth of.9 in , down from 6.2 in , does not illustrate a negative signal, but rather a healthier economy and the country s stronger solvency given rising international reserves and a more favorable BOP. Figure 2: Vietnam s international reserves 4, 4, 3, 3, 2, 2, 1, 1,, Foreign reserves Foreign reserves ( of GDP) Source: ADB Figure 26: Vietnam s foreign reserves weeks of imports Foreign reserves (weeks of imports) Source: ADB, VCSC Vietnam s BOP outlook Vietnam s deteriorating BOP in 217, due to an expected trade deficit, will not trigger instability amid the current macro stability. Vietnam s current account balance will likely deteriorate because of the predicted deficit in the goods trade balance. In 4M 217, exports and imports grew by 16.8 YoY and 24 YoY, respectively. Stronger global and domestic demand drove machinery and equipment imports to surge 39.3 YoY, greatly contributing to a trade deficit of USD1.9 billion in the first four months of this year. Given the expectation of a continuing upward trend in imports, we predict Vietnam will incur a goods trade deficit of USD2. billion in 217, which will weigh on the country s current account balance. Well-controlled inflation and a slight VND depreciation should support Vietnam s current account balance. Vietnam s CPI in 4M 217 increased by.9 compared to the end of last year. On-going healthcare fee increases were the main driver of inflation so far this year, and hence cost-push inflation has had a muted impact on headline inflation. Therefore, the modest level of See important disclosure at the end of this document VCSC<GO> May 31,

13 YTD inflation has not negatively affected Vietnam s export prices. As of May 1, the VND had appreciated.3 YTD. But this appreciation did not make Vietnam lose export competitiveness in 4M 217 because the USD depreciated against most emerging market currencies, including the CNY, which appreciated by.74 YTD as of mid-may. Given the consensus expectation of two more Fed rate hikes before year-end which has been priced into the market, the VND may not depreciate as significantly as we expected (3). The current consensus of a 1-2 VND depreciation in 217 should only have a limited impact on Vietnam s export competitiveness. The expected weakening of the BOP can also be attributed to the possible decrease in overseas remittances. According to SBV, overseas remittance enjoyed a steady uptrend for 23 years from USD14 million in 1993 to USD1 billion in 212, USD11 billion in 213, USD12 billion in 214, and USD13.2 billion in 21 before declining by 31.8 to USD9 billion in 216. As overseas remittance from the US account for 6 of the total amount, changes in the US economy and policies played an important role in triggering the decrease, including the Fed rate hike in mid- December 216 and the significant VND depreciation in the fourth quarter last year. The Fed rate hike in mid-march and two more rate increases through the rest of this year will continue to put pressures on overseas remittance into Vietnam in 217. While the current account balance will likely degrade, the financial account will remain ample thanks to solid FDI solid growth. In 4M 217, Vietnam s disbursed and registered FDI continued upward, rising 3.2 YoY and 4. YoY, respectively. Samsung s business expansion with USD2. billion additional registered capital in the Samsung Display project in Bac Ninh, the strong investment flow into the electricity sector with expected mega projects such as Nghi Son 2, Vung Ang 2 and Quynh Lap 2 (registered capital of USD2. billion each), supportive FTAs and macroeconomic stability promise a gainful year for FDI. The likely higher inflow of portfolio investment will ensure a favorable financial account balance this year. In 4M 217, foreign investors net purchased a total of USD26.2 million in Vietnam s equity market compared to a net outflow of USD86.9 million in the same period last year. Stable foreign exchange and interest rates have been the main supportive factors for the strong net foreign inflow since the beginning of this year. Both Moody s and Fitch recently upgraded Vietnam s ratings outlook from stable to positive, further supporting Vietnam s stock market. Vietnam s stricter control over public debt may tighten foreign loans, signaling a heathier BOP while lowering the financial account balance. Given Vietnam s quickly increasing public debt which reached 64.7 of GDP in 216, the Government s medium-term public debt management program and the 217 debt repayment plan temporarily stop guarantees for new SOE loans and set limits on some other credit types for the Government and enterprises. The Government plans to borrow USD4.4 billion of ODA in 217, similar to the targeted amount in 216. However, more expensive ODA from July 217, as Vietnam became a middle-income country in 21, will pose challenges for Vietnam to attract ODA. See important disclosure at the end of this document VCSC<GO> May 31,

14 Disclaimer Analyst Certification of Independence I, Hien Nguyen, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking. 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This report is not directed at you if VCSC Broker or Decker&Co, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Decker&Co, LLC and VCSC is permitted to provide research material concerning investment to you under relevant legislation and regulations. See important disclosure at the end of this document VCSC<GO> May 31,

15 Contacts Corporate Head Office Hanoi Branch Bitexco Financial Tower, 2 Hai Trieu Street 19 Tran Hung Dao District 1, HCMC Hoan Kiem District, Hanoi Transaction Office Transaction Office 1 Nguyen Hue Street Nguyen Cong Tru Street District 1, HCMC District 1, HCMC Research Research Team Barry Weisblatt, Head of Research, ext barry.weisblatt@vcsc.com.vn research@vcsc.com.vn Digvijay Singh, Senior Manager, ext 14 Logistics and Transportation Banks, Securities, Insurance Anirban Lahiri, Senior Manager, ext 13 - Nghia Dien, Analyst, ext Nga Nguyen, Analyst, ext Son Tong, Analyst, ext Phu Pham, Analyst, ext 124 Macro - Hien Nguyen, Analyst, ext Luong Hoang, Analyst, ext 364 Oil & Gas, Power and Fertilizer Duong Dinh, Manager, ext 14 Consumer and Pharma - Tram Ngo, Analyst, ext 13 Phap Dang, Senior Manager, ext Thanh Nguyen, Analyst, ext Dao Nguyen, Senior Analyst, ext 18 - Nghia Le, Analyst, ext 181 Retail Client Research Duc Vu, Manager, ext 363 Real Estate, Construction and Materials - Ninh Chu, Analyst, ext 196 Hong Luu, Manager, ext 12 - Thanh Tran, Analyst, ext Anh Nguyen, Analyst, ext Vy Nguyen, Analyst, ext 147 Institutional Sales and Brokerage & Foreign Individuals Head of Institutional Sales Vietnamese Sales Michel Tosto, M. Sc. Dung Nguyen ext ext 136 michel.tosto@vcsc.com.vn dung.nguyen@vcsc.com.vn Retail & Corporate Brokerage Ho Chi Minh City Hanoi Quynh Chau Quang Nguyen ext ext 312 quynh.chau@vcsc.com.vn quang.nguyen@vcsc.com.vn See important disclosure at the end of this document VCSC<GO> May 31, 217 1