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Fitch Solutions expects Vietnam’s economy to recover later this year

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HCMC – As Vietnam appears to have contained Covid-19 domestically, Fitch Solutions expects its economy to recover in the second half of this year and, as such, has revised up its 2020 real gross domestic product (GDP) growth forecast to 3% from the previous 2.8%.

The UK-based analytics firm said on Monday that Vietnam’s real GDP growth slowed to 0.4% year-on-year in the second quarter of 2020 from 3.7% in the first quarter.

The growth was dragged down by a sharp slowdown in manufacturing growth and a contraction in the services industry, bringing the first-half year-on-year growth to 1.8%.

“We expect the recovery to be mostly driven by a resumption in manufacturing activity and some recovery in retail, hospitality and transport and warehousing services, given that movement restrictions have been eased since May,” according to Fitch Solutions.

The State Bank of Vietnam (SBV) cut its benchmark interest rates on May 12, taking the refinancing rate to 4.5% from 5%, the discount rate to 3% from 3.5% and the overnight inter-bank lending rate to 5.5% from 6%.

Given the weak economic outlook, Fitch Solutions expects further easing measures from the SBV as the country is still targeting real GDP growth of above 5%, which in the firm’s view, “appears overly ambitious amid the current global growth backdrop”.

Therefore, the firm maintained its view that the key problem now lies with a lack of loan demand amid economic uncertainty and that further interest rate cuts will not provide much of a boost to the economy at this stage.

The firm revised its forecast for Vietnam’s fiscal deficit, excluding debt repayment, to come in at 6.4% of GDP in 2020, from the previous 6%.

“The Government’s Covid-19 relief measures, which focus heavily on tax reduction and waivers versus spending, bring us to the view that a revenue contraction will be the main driver of this outcome,” said Fitch Solutions.

The firm has also revised its forecast for the Vietnamese dong currency to average stronger at VND23,250 per U.S. dollar in 2020 and VND23,400 in 2021, versus VND23,475 and VND23,650 previously.

Despite weak foreign direct investment inflow due to the Covid-19 pandemic and temptation to maintain a relative weakness of the dong to support export competitiveness, Fitch Solutions expects the Vietnamese central bank to intervene to maintain stability to avoid potential punitive measures from the United States.

“We maintain our view for the dong to gradually depreciate against the U.S. dollar over the long term due to its overvaluation and Vietnam’s higher inflation vis-à-vis the United States,” said the firm.

It also pointed out several key risks to the Vietnamese economy. It noted that the potential for a renewed maritime dispute with China poses downside risks to Vietnam’s otherwise stable short-term political outlook.

Should the Trump administration introduce fresh tariffs on U.S. imports of Vietnamese goods, this would pose a salient risk to Vietnam’s export sector and, consequently, the firm’s economic growth forecast, given the sector’s strong orientation to the world’s largest economy.

The firm admitted that economic policy slippages could dent investor confidence and result in a slowdown in foreign direct investment inflows and manufacturing growth.

By Gia Phong

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