Vietnam’s economy is on the right track despite a number of problems in need of observation, economists of Standard Chartered Bank said in the 2013 economic report.
This is one of the few reports expressing optimism on the local macroeconomic picture in the near future. The bank’s experts ascribed the change in their viewpoint to a number of elements; firstly, they expect the State Bank of Vietnam (SBV) to keep interest rates stable during next year and keep its cautious attitude towards the risk of inflation rebounding to higher levels than expected.
“We think SBV will be more prudent in 2013 to achieve the target of curbing inflation at less than 8% and accumulate foreign reserves again if there are no big risks of reserve decrease found,” according to the report.
“The bank keeps a neutral viewpoint regarding government bonds. Bonds’ coupon hit the floor level in the third quarter of 2012 in the context of interest rate cuts and declining inter-bank liquidity,” the report said. “We expect SBV to retain the base rate, thus keeping bonds’ rates stable,” it noted.
Demand from foreign investors will be the main element for the driving force of supply and demand.
“The government bond market might bring high yields for foreign investors as coupons of local bonds are higher than those of other new emerging markets. We predict the rate of bonds with a two-year term at an annual 11% next year. The prospect of the stability of foreign exchange rates in 2013 along with increasing yields might warm up the bond demand in the market,” the report stated. (See related story on Page 2)
Secondly, the fact that credit growth has slowed recently might be the first signal of enterprises reducing debt leverage, which will help improve the health of the financial industry if maintained.
Thirdly, the experts expect the Vietnam dong/U.S. dollar exchange rate to stay stable at VND21,000 in 2013. The stability of trade balance and the low consumer price index are really positive signals for Vietnam dong.
Likewise, the slowing economic growth will enhance the strength of the local currency. In addition, the economists said the central bank will continue to be cautious about maintaining the base rate at 10% next year as risks of core inflation are still high. The weak points of Vietnam dong is bad debts and lack of trust of local policies.
The report also shows concerns about the stability of the macroeconomic conditions owing to rising bad debts. “The central bank estimates bad debt ratio at 8-10% while the market offers higher rates, at 15-20%. Both the Government and the central bank have sent signals indicating that they will solve the problem. The Prime Minister in March 2012 approved a banking restructuring plan by 2015. The central bank also committed to lower bad debt ratio to 3% by end-2015. The signals are positive, but no specific information on the plan is available,” the report said.
One more important thing is the reform of State-owned enterprises as a way to deal with bad debts as the majority of bad debts of the country are related to State-run companies. The Government plans to establish an agency to manage State-owned entities with an aim to reduce the number of large State-owned firms under the Prime Minister to 10 instead of the current 21.
If the job is carried out as planned, the credit level of the Prime Minister in the market will run high and vice versa.
Standard Chartered estimates the country’s GDP growth will recover at a modest 5.5% in 2013 after dropping to the lowest level since 2000.
The bank predicts GDP to steadily increase to 6.2% in 2014 and 6.5% in 2015. Meanwhile it expects the inflation to gradually go down over the years, at 7%, 6% and 5.8% in 2013, 2014 and 2015 respectively.
Investment and exports are expected to contribute the most to the recovery. However, inflationary risks still remain public concerns.
Source: http://english.thesaigontimes.vn