Country Report Vietnam April 2009

Outlook for 2009-10

• The ruling Communist Party of Vietnam will keep a tight grip on power in 2009-10, rejecting calls from some quarters (and especially from groups of overseas Vietnamese) for political pluralism.
• The government faces a severe test of its ability to manage the economy, and there is a risk that demonstrations (if only small ones) could occur as economic growth slows sharply and unemployment rises.
• The government will push ahead with economic stimulus programmes, while the State Bank of Vietnam (the central bank) will maintain an accommodative monetary policy stance in order to support the economy.
• The Economist Intelligence Unit forecasts that real GDP will grow by just 1.6% in 2009, reflecting the poor outlook for growth in exports, private consumption and investment.
• Inflation is forecast to slow to an average of 4.8% in 2009, and it will stay relatively low in 2010 as external supply-side pressures remain weak.
• We forecast that the value of the dong against the US dollar will fall by around 8% (in nominal terms) in 2009, to D17,930:US$1, and will decline further (although at a slower pace) in 2010.
• The current-account deficit will narrow in 2009-10 as a result of a reduction in the trade deficit.

Monthly review

• The government has remained focused on limiting the potential for social distress stemming from the economic downturn.
• One of the main components of the government's stimulus programme, an interest rate subsidy on new dong-denominated short-term bank loans to provide companies with working capital, has proved popular with firms.
• In response to growing downward pressure on the dong relative to the US dollar, the SBV has widened the daily trading band for the local currency.
• Official figures for the first quarter of 2009 show clearly that the economy has weakened. Real GDP growth slowed to 3.1% year on year, comparing poorly with the expansion of 7.4% registered in the first quarter of 2008.
• In line with falling global commodity prices and sluggish domestic demand, inflation has continued to fall. Year-on-year inflation slowed to 11.3% in March, from 14.8% in February.
• The value of imports fell sharply in the first quarter of 2009, by 45% year on year, raising concerns over future growth. Export revenue (excluding gold and crude oil) dropped by 7% in the period.

Source: Country Report