Research Report: Trump’s victory raises concerns on VND, trade

December 2016

Disclaimer: The opinions expressed herein are that of VietCapital and not of VietnamAdvisors. This is NOT a solicitation to buy or sell securities.

Domestic consumption: Although real growth slowed in 11M 2016 YoY due to higher inflation, it was still higher than the same period of the four years prior to 2015. As 2017’s Lunar New Year comes in mid-January 2017, December should see strong growth of retail sales, leading to an improvement in the annual rate.

Industrial production: Accumulated IIP for 11M 2016 rose by 7.3% YoY vs. a 9.9% in 11M 2015. We expect the IIP growth rate to accelerate further in December – ahead of the Tet holiday. In addition, strong new orders should positively affect the IIP growth rate in the coming month.

Government expenditure: State revenue in 11M 2016 reached 89.8% of the full-year target with improved YoY growth compared to previous months (11M 2016: +6.3% YoY). The state budget deficit (excluding principal repayment) is targeted at 3.8% of GDP in 2016 and 3.5% of GDP in 2017. The government’s divestment plan of SOEs should help relieve pressure on the state budget collection next year.

Trade: The trade deficit of USD400 million in November reduced the YTD trade surplus to USD2.85 billion. We expect another monthly trade deficit in December and keep our year-end forecast of a USD2.5 billion trade surplus.
Foreign direct investment: Disbursed FDI continued its solid uptrend by adding USD1.6 billion in November, while additional registered FDI hit a three-year low. In 11M 2016, capital disbursement rose 8.3% YoY, vs. a decline of 10.4% YoY in total registered and additional FDI. We expect registered FDI will rebound in the coming month, though long-term prospects are still uncertain due to global risks

Inflation: November CPI rose 0.48% MoM, 4.52% YoY, and 4.5% YTD, mainly driven by price surges of transportation and healthcare. We project 2016 inflation at 5% mainly due to stronger domestic demand at the end of the year.
FX rate: In November, the dong’s interbank rate depreciated 1.5% due to both external and internal factors, of which the US. Election result was the main driver. We maintain our forecast that the USD/VND will continue to rise but the dong will not depreciate by more than 2% for 2016.

Credit and deposit growth: SBV officials have recently revealed that credit growth has quickened to 14.57% as of the November 28. Even though this rate is well below this year’s target of 18%, we still expect credit growth will accelerate strongly in the last month of the year to approach the annual target.

Government bond yields: 5Y bond yields slightly increased from 5.11% at the end of October to 5.37% on November 30. Tighter bank liquidity did not put upward pressure on the 5Y bond yield as strongly as we expected. Thus, our forecast for the 5Y bond yield at 6.0% at the end of 2016 become less likely, but we do expect to see tightening above 5.5%.

Economic Activity

Domestic Consumption

Real growth slowed. In 11M 2016, nominal retail sales of consumer goods and services rose 9.5% YoY to VND3,201 trillion (USD142.3 billion). Although the nominal growth rate of total retail sales of consumer goods and services was higher than 11M 2015, rising inflation this year led to a real growth rate of 7.6%, vs. 8.3% in 11M 2015. However, this year’s real growth rate is higher than the rates in the same period of the four years prior to 2015.
Retail sales of goods contributed 76% of the total and increased 9.4% YoY, of which sales of food, textiles, household appliances and vehicles grew 12.6%, 9.9%, 9.1% and 3.8% YoY, respectively. Sales of accommodation and catering services accounted for 11.7% of the total and up 10.4% against the same period last year. Sales of tourism and sales of other services also advanced 11.4% YoY and 9.2% YoY, respectively.

OUTLOOK: Global events could affect domestic consumer confidence, but Lunar New Year, which comes early, could save this year’s growth. There have been several factors which weighed on domestic consumption this year including: lower-than-expected GPD growth and significant adjustments in tuition fees, healthcare service prices and gasoline prices. In addition, the US election result has stirred up global markets, including Vietnam. The USD/VND exchange rate has surged significantly in the past two weeks as it is highly likely that the Fed will raise its policy rate this December and cause capital to flow back to the US. Thus, consumers’ budgets could be slimmed and consumer confidence could be negatively affected. However, as 2017’s Lunar New Year comes in mid-January 2017, retail sales of goods and services are expected to increase strongly in the next two months. Therefore, December should see a strong growth of retail sales, leading to an improvement in the annual rate.

Vietnam’s car sales outperformed regional markets. For 9M 2016, Thailand and Indonesia have seen sluggish growth in car sales, while Malaysia’s car sales dropped 13.8% YoY. In contrast, Vietnam’s total sales of cars and trucks surged 30% YoY in 10M 2016. Vietnam’s sales of cars and trucks in October posted the highest monthly level since the beginning of this year. 28,283 units of cars and trucks were sold in October, up 6.5% MoM and 26.4% YoY. Some of the increase can be attributed to the growth of Uber and other ride sharing companies.

Imported CBUs plummeted significantly mainly due to the new special consumption tax, which came in effect since July 1, 2016. After few months of declines, November’s imported CBUs rebounded 7.6% in value and 7.0% in units compared to last month. However, in 11M 2016, imported CBUs still dropped nearly 20% in value YoY.

Industrial Production

In November, the index of industrial production (IIP) grew 7.2% MoM, which is lower than the same period last year, but is an improvement from 6.5% in October. Accumulated IIP for 11M 2016 rose 7.3% YoY vs. 9.9% in 11M 2015. The manufacturing and processing sector continued to strengthen its role in the economy, by surging 13.1% YoY in November and 11% in 11M 2016. In contrast, the mining sector continued to be affected by the poor performance of international crude oil prices, resulting in a drop of 13.8% in November and a decline of 1.3 percentage points of the total growth in 11M 2016.

Sectors with high IIP growth included textiles (17.3% YoY), metals (17.3%), vehicles (16.5%), fabricated metal products (12.7%) and electronics, PCs & optical products manufacturing (13%). Products with the highest growth rates included TVs (68.2%), mobile rolled steel (25.9%) and cars (21%).

Vietnam’s PMI outperformed regional countries. Vietnam’s manufacturing sector continued to show its solid expansion with November’s Purchasing Managers’ Index (PMI) having reached 54.0, the highest level in 18 months. The impressive reading was thanks to a significant improvement in new orders, which were driven by rising overseas and domestic demand. Strong new orders led output to accelerate at the highest rate in 16 months and employment rose for the eighth consecutive month. Supply shortage, which was caused by increasing purchasing activities, in conjunction with rising commodity prices, including gasoline prices, led to higher input costs, which in turn pushed output prices to surge at the sharpest rate in 5 1/2 years.

OUTLOOK: We expect the IIP growth rate to accelerate further in December – ahead of the Tet holiday. In addition, strong new orders should positively affect the IIP growth rate in the coming month. However, regional manufacturing actually contracted in November, with ASEAN’s PMI recorded at only 49.4. China’s PMI declined from 51.2 in October to 50.9 in November indicating slower growth and signalling a challenging global environment ahead.

Government Expenditure

State revenue collection achieved better results in 11M 2016 than previous months. In the first eleven months of the year, state revenue increased by 6.3% YoY (9M 2016: +5.2% YoY, 10M 2016: +6.1% YoY) and reached 89.8% of the full-year plan. Domestic revenue still performed well by attaining steady monthly growth and reaching 92.8% of the FY16 plan. Meanwhile, revenues from crude oil and export-import still incurred negative growth in 11M 2016 due to low oil prices negatively affecting petroleum enterprises’ performance and declining tax revenues caused by some FTAs taking effect. For example, the tax rate on oil imported from South Korea decreased from 20% to 10% when Vietnam – South Korea FTA become effective from December 2015, making tax revenue collected from oil imports drop by VND5 trillion (USD224 million). Budget spending also had higher growth in 11M 2016 (+6.2% YoY) compared to the previous month (+5.7% YoY), reaching 84.7% of the full-year target. Therefore, the budget deficit in 11M 2016 was VND167.25 trillion (USD7.5 billion), increasing by 7.5% YoY and completing 65.8% of the 2016 plan.

Vietnam’s public debt in 11M 2016 reached 87% of the full-year borrowing plan. According to the latest data released by Ministry of Finance, the government borrowed a total of VND389 trillion (USD17.47 billion) worth of both domestic and foreign debts in 11M 2016. The government planned to borrow USD20 billion of domestic and foreign debt this year, including USD9.7 billion of government bonds and USD4.4 billion of Official Development Assistance (ODA). As of the end of November, the government successfully issued VND276.8 trillion (USD12.4 billion) of government bonds, exceeding the full-year target. Moreover, the numbers provided by Ministry of Planning and Investment showed that Vietnam’s total registered ODA reached USD5.18 billion in 11M 2016, up 90% YoY due to a large amount of ODA from Japan initially scheduled to be signed in 2015, that was delayed to this year. In 2017, Vietnam’s government plans to borrow VND340 trillion (USD15 billion) of domestic and foreign debts, lower than the target in 2016, partly because of an expected large amount of capital from divestments of big state-owned companies. Vietnam expects to sign USD4.7 billion of ODA and concessional loan agreements next year. More expensive ODA from July 2017 will put more pressure on the state budget and make Vietnam more dependent on domestic debts.

2017 state budget plan: Deficit is targeted at 3.5% of GDP (excl. principal repayment). Total State revenue is planned to reach VND1,212 trillion (USD54.6 billion), strongly increasing by 19.5% compared to this year’s plan, likely stimulated by the government’s confidence and determination in equitizing SOEs. The State expenditure is projected at VND1,390 trillion (USD62.3 billion), up 9.2% YoY. Therefore, the planned State deficit in 2017 is VND178.3 trillion (USD7.9 billion), declining by 9.7% compared to the FY16 plan and equivalent to 3.5% of GDP in 2017 (target in 2016: 3.8% of GDP).

Trade Activity

November recorded the second consecutive monthly trade deficit, further reducing the YTD trade surplus.

Exports and imports were posted at USD15.6 billion and USD16 billion, respectively, in November. Consequently, the trade deficit was estimated at USD400 million this month. In 11M 2016, Vietnam had USD159.5 billion of exports and USD156.7 billion of imports, leading to the YTD trade surplus of USD2.85 billion.

Exports in November grew by 1.3% MoM after incurring two straight months of decreases while imports continued to expand by 0.97% MoM, lower than the same figure of 8.9% MoM in October. In the first eleven months of 2016, both exports and imports achieved an improvement in the YoY growth, increasing by 7.5% YoY (exports – 10M 2016: +7.2% YoY, 9M 2016: +5.5% YoY) and 3.5% YoY (imports – 10M 2016: +2.1% YoY, 9M 2016: +0.9% YoY), respectively. The stronger global and domestic demand at the end of the year was the main contributor to the higher growths of both exports and imports. The US economy, Vietnam’s biggest export market which made up 22% of the total exports in 10M 2016, attained an impressive growth of 3.2% YoY in Q3 2016 mainly thanks to stronger consumer spending, which rose 2.8% YoY compared to 2.1% previously estimated.

In 11M 2016, exports of the FDI sector grew 8.7% YoY while those of the domestic sector suffered a decline of 3% YoY. Exports of foreign invested enterprises (FIEs) made up 72% of the total exports and maintained steady growth over months, indicating the foreign sector’s essential role in sustaining Vietnam’s export growth. On the other hand, the heavy dependence on FIEs has made Vietnam more vulnerable. The apparent failure of TPP which has been blamed for a YoY decrease in registered FDI over the last three months has created concerns of strong negative impacts on the country’s future exports.

Export of smartphones and spare parts in November increased by 5.8% MoM after falling by 2.6% MoM in October due to Samsung’s recall of the Galaxy Note 7. In 11M 2016, export of this category still performed well when growing by 17.1% YoY. This eased concerns about unfavourable impacts of the Samsung incident on Vietnam’s exports. Although imports of equipment and machinery still declined 0.2% YoY in 11M 2016, the decrease was less significant than previous months (10M 2016: -1.5% YoY, 9M 2016: -2.9% YoY), reflecting stronger domestic production and consumption demand.

OUTLOOK: We expect that exports and imports will continue stronger growth with another monthly trade deficit in the last month of the year. Given Vietnam’s 18-month high PMI of 54 and increasing PMI of the US (54.1) and the EU (53.7) in November, we believe that global and domestic demand will strengthen next month. We reiterate our year-end forecast of a trade surplus at USD 2.5 billion.

Vietnam’s exports can still maintain a sufficient growth despite Trump’s trade protectionism.

The Obama administration’s official abandonment of efforts to pass Trans-Pacific Partnership (TPP) and the US President-elect Trump’s announcement of his plan to withdraw from the TPP trade deal on his first day in office made the likelihood of the TPP ratification with the participation of the US nearly impossible. The other 11 TPP countries (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) continued to show their determination to ratify the deal with Japan being the leading player in the pact. Japan indicated it

would also probably lobby other signatories to join the deal. However, we are doubtful that these efforts could succeed. Furthermore, TPP without the US, the biggest contributor, would be different and unable to provide Vietnam with the benefits as expected.

Since Vietnam joined WTO in 2007, the country has actively taken part in various free trade agreements (FTAs) and bilateral trade agreements (BTAs) and restlessly sought for new opportunities to integrate globally. Vietnam has signed 12 FTAs and been negotiating other five trade deals Moreover, despite the prominence of TPP, the trade relationship between Vietnam and the US is still governed by WTO accession agreements safeguarding the rights of both countries.. Therefore, we believe that with advantages Vietnam can gain from these FTAs and BTAs, the country’s export growth rate can remain at around 6% – 7% next year. More importantly, the continued improvement in business and investment environment that Vietnam has made since the TPP negotiation was launched provides the country with the most concrete and sustainable foundation for a long-term economic development.

The US’s apparent refusal to join TPP should weaken this giant’s influence in the Asia Pacific region and would be a good opportunity for China to promote RCEP, a critical deal leading to the larger arrangement of the Free Trade Area of the Asia Pacific (FTAAP). The RCEP includes ten ASEAN countries and China, India, Japan, Korea, Australia, and New Zealand. These countries cover nearly half of the world’s population and 30% of the global GDP. Despite RCEP’s more limited scope than the TPP, this trade deal is strongly believed capable of replacing the TPP’s promised role of boosting trade volume across Asia and improving the ASEAN’s attractiveness as a production base.

Foreign Direct Investment

Disbursed FDI continues to grow in November while registered and additional FDI hit a three-year low. Disbursed FDI continued its solid uptrend by adding USD1.6 billion in November, bringing the YTD capital disbursement to USD14.3 billion, up 8.3% YoY. In contrast, registered and additional FDI recorded only USD490 million in November, the lowest monthly level since January 2013. In 11M 2016, total registered and additional FDI declined 10.4% YoY to USD18.1 billion.

FDI inflows continued to be focused in the manufacturing and processing sector, with registered and additional capital of USD13.4 billion in 11M 2016, accounting for 74.1% of total inflows. Although the real estate sector ranked second, with registered capital of USD740.9 million, it is much lower compared to 11M 2015 (USD2.78 billion) and 11M 2014(USD1.27 billion).

South Korea is still the leading investor in Vietnam, with registered and additional FDI reaching USD5.28 billion, taking up 29.2% of total inflows. South Korea was followed by Singapore (USD2.0 billion) and Japan (USD1.95 billion). The Vietnam – Korea FTA, which took effect last December, will continue to enhance Vietnam – Korea trade as well as Korean investment in Vietnam.

OUTLOOK: The significant drop in registered FDI coincided with market concerns over Trump’s expected policies. However, we believe Vietnam is an attractive destination for investors thanks to its political and social stability, competitive labor costs, tax incentives and the ongoing improvement in the investment environment and infrastructure. In addition, the long list of regional and bilateral FTAs that Vietnam has signed negotiated would be supportive factors for FDI inflows. On November 23, Binh Duong province signed an MOU with Kolon Industries Group. After two years of exploring Asian countries, the Korean group plans to invest around USD1.0 billion in a factory in Binh Duong, manufacturing industrial fabric for automobile tires and airbags. USD220 million is projected to be disbursed in 2017. Thus, the drop this month could be temporary and we expect registered FDI will rebound in the coming month, though the long-term prospect is still uncertain due to global risks.

Rising inflows from tax haven countries. Along with the large, traditional investors – South Korea, Japan, Taiwan, Singapore and Hong Kong, we have seen rising capital inflows from tax haven countries such as British Virgin Islands, Samoa, Cayman Islands and Luxembourg in recent years. In 11M 2016, capital inflows from these tax haven countries continued to surge significantly (Samoa: USD504 million, +42% YoY; Cayman Islands: USD419 million, +87%; Luxembourg: USD297 million, which is ten times compared to 11M 2015). Despite falling 44% YoY in 11M 2016, capital inflows from British Virgin Islands reached USD21.35 billion as of November 2016, ranking fifth among 114 foreign countries invested in Vietnam.

Macro Indicators

Consumer Price Index

Higher prices of transportation and healthcare remained the key drivers of inflation in November.

November CPI rose 0.48% MoM, less strongly than in October (0.83% MoM), and 4.52% YoY. This has been the highest November inflation over the last three years because CPI increased by only 0.11% in November 2014 and November 2015 due to sharp petrol price declines during those months. CPI of nine out of eleven categories in the CPI basket escalated this month. Price hikes of transportation and healthcare continued to be the principal forces driving November inflation when surging by 1.63% MoM and 0.9% MoM, respectively.

• The two petrol price hikes by the total of VND490/liter on October 20 and November 4 caused the price index of gasoline to rise 3.69% compared to last month, thus increasing fees of buses and taxis by 0.15% MoM and 0.02% MoM and contributing 0.15% to the headline CPI. As a result, CPI of this group surged quite strongly by 1.63% MoM. Nevertheless, the sharp decline of VND520/liter in the petrol price on November 19 after six consecutive gasoline price increments helped CPI of transportation to increase less significantly than in October (2.02% MoM).
• Healthcare had the second strongest monthly inflation of 0.9% MoM in November because medication fees were adjusted up in Hai Duong province under the Joint Circular No. 37/2015/TTLT-BYT-BTC dated October 29, 2015. But this third round of healthcare fee increase did not affect CPI of this group as strongly as the two previous rounds in August (+6.18% MoM) and October (+10.07% MoM) because it was implemented in only one province instead of 16 cities and provinces in the last round.
• CPI of food, foodstuff, and catering service group jumped by 0.49% MoM, the highest monthly inflation since February 2016 (+1.98% MoM), because of the stronger demand for foodstuffs (+0.71% MoM) in the wedding season. As this category has the highest weight in the CPI basket (36.12%), the inflation of 0.49% contributed 0.18% to the headline CPI.
• CPI of the housing & construction material category also increased by 0.49% MoM because pas price hike of VND19,000/12-kg cylinder on November 1 pushed the price index of gas to rise 6.07% MoM.

As of the end of November, YTD inflation was 4.5%, mainly boosted by price surges of healthcare (+47.89% YTD), education (+10.81% YTD), and housing & construction materials (+3.06% YTD). We can see that the government’s administrative decisions on medication and education have made a great contribution to the inflation this year. The accumulated core CPI in 11M 2016 was unchanged from the previous month at 1.82%, indicating that the aggregate demand has still been kept stable since the beginning of the year.

OUTLOOK:
December inflation forecast – We expect that December CPI will continue to rise by around 0.5%, mainly fueled by stronger domestic demand.

• The stronger domestic consumption at the end of the year due to closely approaching Tet holiday will be a principal factor driving the inflation in the last month of the year.
• The fourth round of healthcare fee hikes was scheduled in December. However, there is a possibility that the government will delay the next medication fee increase to next year or execute the fee adjustment in a smaller number of items or provinces than previously planned in order to curb the inflation. Therefore, the pressure from healthcare fee increases on the year-end inflation may be mitigated.
• The strong petrol price decline of VND520/liter on November 19 will lessen the pressure on CPI of transportation next month. However, OPEC production cuts by 1.2 million barrels per day in the next six months, starting from January, may cause crude oil prices to increase during December. Thus, domestic gasoline prices will also rise correspondingly, putting upward pressure on transportation CPI which is expected to increase next month but not as strongly as in November.
• The slight decrease of VND2,500/12-kg gas cylinder from December 1 and the lower consumption of electricity in the winter will likely make CPI decline from this month.

Foreign Exchange Rate

The dong was affected strongly by the US. election.

In November, the USD/VND increased considerably by around 1.5% to VND22,666 per USD as of November 30. During the month, the VND has suffered strongly by the following external and internal factors:

• US. election: The greenback has appreciated significantly since Trump won the presidential election. The US election result has raised December’s Fed rate hike possibility to nearly 100%, causing a strong winning streak of the US dollar.
• Upbeat economic results: The rallies of the US dollar against almost other peers were also attributed to the upbeat U.S. economic data, including better-than expected retail sales, impressive revised third quarter GDP and consumer spending, strong corporate earnings and a low unemployment rate.
• Foreign outflows: We have seen capital outflows from both Vietnam’s bond and equity markets. From November 8 to 30, foreign investors net sold VND6,520 billion (USD288 million) in bond market and VND1,629 billion (USD71 million) in the Ho Chi Minh Stock Exchange.
• Seasonal factor: High demand for foreign currency at the end of the year to meet payments would also put some pressure on the exchange rate toward the end of this year.

OUTLOOK: Exchange rate could continue to be under pressure toward the end of the year due to sentimental, which could lead to foreign currency speculation and seasonal factor, which will increase demand for USD around the year-end period. On the other hand, the dong will be supported by high FX reserves, estimated at around USD40 billion, and the ample inflow of overseas remittance ahead of the Lunar new year. We maintain our forecast that the USD/VND will continue to rise but the dong will not depreciate over 2% for 2016.

Credit and Deposit Growth

According to SBV’s official data, as of the end September 2016, credit has grown 10.46%, much lower than 12.12% in the same period last year. In contrast, deposit growth rate reached 12% in 9M 2016 vs. only 9.25% in 9M 2015. Deposits accelerating faster than credit disbursed to the economy, was one of the main reasons for excessive liquidity in the banking system.

In 9M 2016, service sector posted the highest credit growth rate (21.7%) in 11M 2016 and also accounted for the largest proportion of the total credit (37%).

OUTLOOK: In the recent press conference, the SBV officials have revealed that credit growth has quickened to 14.57% as of the November 28. Even though this rate is far lower than this year’s target of 18%, we still expect credit growth rate will speed up strongly in the last month of the year to close to the annual target.

Government Bond Yields,/h3>
Bond yields slightly rebounded during the first half of November but then started to drop after reaching the highest rate since September 21st.

1Y, 5Y, and 10Y bond yields at the end of November increased by 52 bps, 26 bps, and 3 bps from October 31. In particular, 5Y bond yields, after increasing to 5.51% on November 18, started to decline throughout the remainder of the month and was recorded at 5.37% as of November 30. The current 5Y bond yield was lower than our expectation at this point of time. The winning rate on the primary market in the last three weeks was 38.7%, lower than the rate of 40.4% from mid-October to mid-November. The winning-to-offering ratio of government bonds also decreased from 76% in the latest reviewed period in our Fixed Income report to 61.6% in the last three weeks. On the secondary market, the outright trading value in the last three weeks (USD1.2 billion per week) was also lower than that from mid-October to mid-November (USD1.9 billion). These numbers, together with increasing interbank interest rates and accelerating credit growth (+14.57% YTD as of November 28), reflected tightening bank liquidity which was supposed to make 5Y bond yields increase. However, contrarily, 5Y bond yield dropped over the last three weeks, possibly because of decreasing bond supply when the government already reached 98.5% of the full-year bond issuance target as of the end of November.

OUTLOOK: We still believe that 5Y bond yield will bounce up during December due to stronger credit growth which will tighten bank liquidity in the last month of the year. However, given the current level of 5.37%, our forecast of 5Y bond yield at 6% at the end of the year becomes less likely. 5Y bond yield will rebound but close the year at a rate lower than 6%.

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