Vietnam Macro: Consumption Jump Dragged by Agriculture Slump

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May 11, 2016

Consumption jumps but agri’s slump hurt growth

GDP growth in Q1 2016 slowed to 5.46% from 6.12% in Q1 2015, on an unexpected drop in agricultural production.
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  • Agriculture, aquaculture, and forestry faced an output contraction for the first time in over 15 years as drought and saltwater intrusion dampened production in the Mekong Delta, the major agricultural hub of Vietnam.
  • Meanwhile, growth in the manufacturing sub-sector decelerated after surging for the past 1½ years. However, we believe the pace will quicken in the coming quarters given that the second half of the year is peak season for manufacturing and that robust FDI disbursements earlier this year need time to ramp up their operations.
  • Resilient domestic demand came to the rescue. The service sector posted its highest Q1 growth since 2011, while construction activity continued expanding.
  • As such, we still maintain a positive view on domestic demand and manufacturing. However, the poor performance of the agricultural sector amid the uncertainty of its full recovery led us to lower our full-year GDP growth forecast to 6.6% from our earlier bullish estimate of 6.8%.

Inflation spiked in March as expected, stemming from a mandatory healthcare price hike.

  • March CPI rose 0.57% vs February as the healthcare category saw prices surge 24%. YoY CPI climbed to 1.69% while the average inflation in Q1 2016 came in at 1.25%.
  • We expect inflation to slow in April with petrol price hikes being the primary variable. We estimate April CPI to nudge up 0.3% vs March.

YTD trade surplus estimated at USD776 million, Q1 2016 exports at USD38 billion (+4.1% vs. Q1 2015) & imports at USD37 billion (-4.8% vs. Q1 2015).

  • Export growth remained far below last year’s pace, reflecting pressure from slowing global demand while import growth turned negative as imports of machinery and equipment dropped from a high base.
  • However, we expect improvement will come in the second half of the year given that new FDI projects will kick-in. Of note, March PMI showed a faster increase in new export orders.
  • Breaking down the trade results, cellphones and electronics remained the top export categories, together making up 30% of Vietnam’s shipment in Q1 2016 while electronics & spare parts took over machinery to become the largest proportion on the import side (accounting for 17%). The biggest client of Vietnam’s exports was still the US at USD7.9 billion (or 21% of total export value)

FDI off to a strong start

  • FDI disbursement reached USD3.5 billion in Q1 2016, up 14.8% vs Q1 2015, which is well on-track toward our full-year target of USD16 billion. Of note, Q1 is the seasonal low for FDI disbursement due to the LNY holiday.
  • Registered FDI also recorded impressive results with USD4 billion licensed in the first quarter, doubling the amount from the same period one year earlier. 72% of committed capital was channeled into manufacturing. South Korea remained the largest FDI contributor by country at USD889 million (of which USD300 million was additional investment from Samsung in its Bac Ninh plant).

The dong appreciated 0.85% in Q1 16 on abundant US dollar supply.

  • The return of a trade surplus coupled with robust foreign investment bolstered the dong amid the implementation of a new SBV exchange rate mechanism and applied forward contracts when selling US dollars to commercial banks.
  • Moreover, the Fed’s decision to lower the expected number of rate hike from four to two this year pushed the USD index down (the index fell 0.4% in Q1 2016), which eventually helped lessen pressure on the dong.
  • We expect the dong to continue tracking around 22,300 (interbank rate) during April. Starting from March 31, the SBV forbade banks from offering loans denominated in foreign currencies to local businesses for the purpose of capital expenditure (Circular 24), which was framed as another bid to thwart dollarization. Meanwhile, on the supply side, we expect another bright month of foreign investment into the country.

The Macro Picture

Economic Activity

Economic growth came in lower than expected as agricultural production faced headwinds posed by climate change.

What happened? – GDP growth slowed to 5.46% in Q1 2016, from 6.12% in Q1 2015.

The agricultural sub-sector was the main reason for the slowdown, contracting 2.67% in Q1 2016 vs expanding 1.54% in Q1 2015. The unprecedented severity of drought and saltwater intrusion in the Mekong Delta, one of Vietnam’s major hubs for agricultural production, led to a drastic drop in agricultural output from the region.

Moreover, the industry and construction sector witnessed some cool-off.

  • Declining crude oil production may or may not have been related to subdued oil prices but had the clear effect of dragging down production of the mining subsector. Of note, crude oil production (in volume) fell nearly 4% in Q1 2016 vs Q1 2015 (cf. up about 10% in Q1 2015 vs Q1 2014)
  • Meanwhile, manufacturing expanded at a slower pace, up 7.9% in Q1 2016 (cf. 9.5% in Q1 2015) as the growth of electronics production was normalized after stellar expansion over the past few quarters. Softening global demand was also pressuring Vietnam’s manufacturing, reflected by the less spectacular PMI in Q1 2016.

On the bright side, domestic demand continued accelerating on the recovery path. The service sector posted its highest growth since Q1 2012 at 6.13%, driven by wholesale and retail sales and real estate (brokerage services). Meanwhile, construction was firmly on a solid growth trajectory.

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What’s next? – As the second half of the year is the peak period of most economic activities, we believe that growth will accelerate in the coming quarters. However, the poor performance of agricultural production in Q1 2016 due to climate change prompted us to become more conservative regarding this year’s pace of growth.

  • That said, we retained our view on the growth momentum of the manufacturing sector given that new foreign investment in manufacturing needs time to kick-in. For example, the new factory of Samsung in Ho Chi Minh City will start its operation in Q2 2016. Meanwhile, the recent recovery of oil prices should give a boost to mining activities. Therefore, we believe industrial production will gain more pace in the coming quarters.
  • We are still of a bullish view on growth of the service sector, on the back of resilient domestic demand (as reflected in Q1 2016).
  • However, we are sceptical on a full recovery of agricultural production due to the unpredictability of weather conditions. Also, as quoted in most media, several solutions were carried out to cope with saltwater intrusion, but up to now, there has been marginal improvement. As such, we believe that the growth of the agricultural sector will fail to match our initial forecast of 2%.

Therefore, we lower our GDP growth forecast to 6.6% from the previous bullish 6.8%. Our new forecast implies the economy will expand at 6.86% over the next nine months (2015’s equivalent figure was 6.81%).

Consumer Price Index

March inflation jumped due to a mandatory price hike across healthcare services
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  • March CPI marked the strongest monthly price appreciation since January 2014.
  • The new pricing scheme applied to 1,800 types of healthcare services was unsurprisingly the main contributor fuelling the jump in March inflation as the healthcare category surged 24% during the month.
  • However, prices across other categories, including food and foodstuffs, declined on the back of cooling consumption after the Tet holiday and a drastic pump price cut within the tracking period. This was reflected by the drop of core inflation in March, marking the first time core inflation registering on-month price depreciation since the data series was introduced in April 2015.

April inflation forecast – The rate of price increases will soften

  • The headline reading should post a softer pace of increase as there are no price hikes in government-regulated categories in April.
  • Meanwhile, we believe that the recent rise in petrol prices as well as the impact of price recovery of some commodities (e.g. steel) will begin to be felt on April price levels.

As such, we estimate April CPI to rise 0.3% from March.

Year-end inflation forecast – We reiterate our year-end inflation forecast of 3.5%. However, we shall watch inflation carefully in the coming months as oil prices have shown a decent recovery as of late while drought and salt water intrusion are raising concerns over Vietnam’s agricultural output (which could boost prices of food and foodstuffs which are the biggest category in the CPI basket).

Domestic Activity

Consumers continued opening their pockets as real retail sales still saw healthy growth
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Auto sales and imported CBUs growth normalized after last year’s strong rally

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Industrial Production

Manufacturing activities surged in March from February’s low but failed to match last year’s pace as mining output remained lackluster

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Macro Indicators

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Disclaimer

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