June 2012

Vietnam Monthly Economic Update Review of major economic movements:

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1 quarter GDP growth numbers illustrate the slowdown in the economy…inflation continues to fall

Snapshot of June economic data:

First quarter 2012 GDP figures highlighted a growth rate of 4%, significantly behind 1Q11 which was 5.57%. CPI numbers continued to reflect the downward trend with May’s year on year CPI coming in at 8.34% compared to 10.54% in April, the first single digit return in two years. Retail growth sales over the period January to May 2012 was 20.8% which continues to lag behind the corresponding period in 2011which returned a growth rate of 22.5%. Year on year industrial growth was down from 7.5% in April to 6.8% in May. The trade account reported exports of USD9.1bn in May with imports totalling USD9.8bn. FDI numbers showed new projects totalling USD4.12bn though the period of January to May 2012, with USD4.51bn disbursed slightly behind the corresponding period in 2011 at USD5.51bn and USD4.52bn respectively.

• First quarter GDP comes in at 4% and manufacturing activity continues to slide…

GDP growth slowed to a three year low of 4.1% y-o-y in Q1, which is slower than expected. Manufacturing activity, as measured by HSBC’s PMI index, continued to contract in May, suggesting that Q2 growth is unlikely to exceed 5%. Inflation has reached single digits for the first time in two years. While the slowdown reflects weaker demand rather than gains in productivity, price stability is important to preserve the purchasing power of consumers as well as operating costs of businesses. For the rest of the year inflation is expected to stay at single digits and the outlook for inflation in 2013 remains good due to expected low uptick in demand.

• Single digit inflation reported for the first time in two years.

Slower but steadier:

Single digit inflation is here:

Price stability had been an elusive quest for Vietnam, a country that experienced volatile inflation throughout its history. The imbalance reflects high credit expansion, a mismatch between sluggish growth of supply and rapid expansion of demand, and currency devaluations. This problem was particularly acute from September 2010 to September 2011: following a 27.7% growth in 2010 and a sharp 8.5% currency devaluation in February as well as several supply shocks, inflation rose almost 2% per month seasonally adjusted during that period. The government responded by tightening credit growth through both interest rate hikes and administrative measures. Additionally, the SBV

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enforced policies to regulate the circulation of gold as well as foreign currencies. The measures successfully curbed inflation by dampening domestic demand as well as demand for gold and USD. Notably, the central bank governor Nguyen Van Binh ensured that the VND would not face a sharp one-off devaluation and has been successful at maintaining a stable exchange rate.

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Domestic demand remains low:

Industrial production as well as retail sales both decelerated to 6.8% yo-y and 20.0% in May from 7.2% and 25.1% in April, respectively. Notably, retail spending on hotel and restaurant decelerated significantly to 24.8% y-o-y from 28.5%. Both of these indicators suggest that demand in Vietnam is still low despite the government’s effort to ease policy to boost spending. The May HSBC Manufacturing PMI also reflects Vietnam’s difficult operating environment. The index dipped further to 48.3 in May from 49.5 in April, suggesting that business conditions in Vietnam continue to deteriorate. The worsening of manufacturing activities is reflected in all of the sub-indices, with the exception of the employment index. New orders and new export orders declined from above 50 in April to below 50 in May. The decline in output shows another reduction of manufacturing levels resulting from shortages of new orders. New export orders shrank from the previous month after expanding for three straight months. While demand in China is recovering slowly, both a contraction in Europe and weaker spending in Japan drove down new export orders. With new orders declining, firms are reducing their quantity of purchases as well as implementing stock reduction policy. As a result, stocks of purchases as well as stocks of finished goods declined. On a positive note, employment continued to trend upward, reflecting firms’ expansion plans. This suggests that while firms are implementing cautious policies, they are anticipating a pickup of economic activity in the coming months; thus preparing by increasing their workforce numbers. The deceleration of input prices also lowered the cost burden on companies. Additionally, with most of the rise due to oil-related products and oil prices declining in Vietnam, input prices could further decelerate in the coming months. However, at the same time, output prices declined in May due to strong competition for new business. This means while input costs are rising, producers are unable to pass on the cost increases to consumers.

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• Rates cut for the third time in two months in an attempt to stimulate domestic demand…

Continued downward rate pressure:

The State Bank of Vietnam announced that it will cut the discount rate, the refinance rate and the deposit cap by 1% to 10%, 12% and 11%, respectively on 25 May 2012. This is the third easing measure by the SBV to spur domestic spending since March. The filtering through of tightening measures in 2011 has been effective in dampening demand, to subsequently slow growth more than expected. With inflationary pressures easing and expected to slow further due to still-weak demand and lower oil prices, the SBV is likely to cut rates further in the coming months. The lower-than-expected headline inflation reading of 8.3% y-o-y in May (down from 10.5% in April) gave the SBV the impetus to push for its third policy rate cut in two months. While this is certainly a bold decision, it is worth noting that credit growth in Vietnam remains subdued due to weak domestic demand. Credit contracted in the first quarter, reflecting tough operating conditions for businesses. Businesses have been either unable to access loans due to high interest rates or lacked the necessary collateral holdings.

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Slowdown in domestic demand is good for the trade balance…

While the slowdown of domestic demand hurts business conditions, Vietnam’s trade deficit has improved significantly; exports in Vietnam continue to be resilient while imports slowed. In May, exports accelerated to 24.9% y-o-y on the back of improved crude oil and computer and electronic exports. On a trend basis, textile and garments as well as agriculture products are decelerating. Textiles and manufacturing is the largest export earner for Vietnam, and its slowdown reflects weak external demand from Europe. Weak demand for consumption and production has slowed down imports significantly. Year-to-date growth of imports is only 6.2% while the accumulated expansion of exports is 24.3%. Low demand has dragged down the demand for petroleum imports, with imports for petroleum declining by 13.4% y-t-d. Imports for items such as steel, sewing materials, machinery and spare parts also decelerated to around 5% year-to-date growth from double-digits expansion in the previous year. However, for the month of May, imports picked up and rose by 13.4% y-o-y after two months of contraction. On a trend basis, imports are expected to pick up in the coming months, as consumption and production gradually recover. Notably, the pickup of imports of fertilizer, machinery and spare parts, sewing materials and electronic productions suggest that manufacturing activities might pick up in the coming months, albeit at a still modest pace, as Vietnam’s production is highly dependent on imported goods.

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