HSBC Raises Vietnam’s 2020 Growth Forecast

Diep Nguyen

HSBC raises whole-year inflation forecast to 3.3% for 2020 from 2.7% previously, factoring in elevated food prices that HSBC thinks may persist.

HSBC Raises Vietnam’s 2020 Growth Forecast
Lockdowns are bad news for economies driven by consumption. However, the corresponding impact on mobility has proven useful in forecasting growth: the two ASEAN economies with the most stringent lockdowns and declines in mobility - the Philippines and Malaysia - saw the sharpest drops in consumption. In Vietnam and Indonesia, where restrictions were shorter or less severe, spending was more resilient. The good news is that a supply shock can be reversed if lockdowns are successful and COVID-19 is contained, ideally alongside plentiful fiscal support. Malaysia, Singapore and Thailand look set for improvement in 3Q, while in the Philippines there is a risk of a "double-dip" consumer recession given new lockdowns.
Investment. The collapse in investment in 1H20 resembles the dark days of the Asian Financial Crisis. Private construction fell nearly 50% y-o-y in the Philippines in 2Q, alongside sharp declines elsewhere. As HSBC argued in ASEAN Perspectives: Re-thinking growth (30 July), this hits at the core of the region's growth model, and will leave a scar on potential growth. But there are silver linings: Thai public investment surged in 2Q, offsetting a drop in private investment, and authorities in Indonesia, the Philippines, and Malaysia are eager to restart public projects, although financing may be harder to obtain. Investment will likely remain subdued in 2H20 before leading growth recovery in 2021.
External. While net exports contributed sharply to growth in the Philippines and Indonesia in 1H20, this simply reflects a collapse in domestic demand. The attendant current account deficit improvement is nonetheless positive for Indonesia's central bank as it pursues a form of debt monetization. Overall, broad export growth will likely remain subdued in 2H20, even as imports recover. That said, tech and pharma should be relative outperformers, benefitting Singapore, Malaysia and Vietnam. On the flip side, we are more cautious about a recovery for Thailand's tourism and machinery-heavy exports.
Policy. It remains the case, in our view, that effective fiscal policy is the best way out of the crisis. Robust spending in Thailand clearly blunted the hit to GDP in 2Q, while various government measures in Singapore and Malaysia have prevented a more severe deterioration in unemployment, which should pay dividends in 2H20. In Indonesia, however, slow stimulus disbursement is weighing on the near-term recovery. As for monetary policy, much of the heavy lifting is likely already out of the way, but we forecast an additional 25bp rate cut in 4Q20 in Malaysia, the Philippines, Thailand, and Indonesia. Instead of rate cuts, we think the focus should be more on central bank balance sheet expansion, especially in Indonesia, where BI may pursue some form of QE through 2021.
Although Vietnam has seen its weakest y-o-y quarterly growth on record, it still registered positive growth in 2Q, surprising the market to the upside. True, its external-facing services sectors suffered a harder hit, as tourism fell close to 100% in 2Q. That said, the domestic sector has been rather resilient. Thanks to its high exposure to global tech supply chains, its electronics-related production has somewhat offset the weakness in traditional manufacturing sectors. Overall, Vietnam is showing signs of a quicker recovery than we previously anticipated, thanks to its success so far in containing the COVID-19 outbreak after re-opening its economy.
As a result, HSBC raise Vietnam’s 2020 GDP growth forecast to 3.0% from 1.6% previously and trim HSBC’s 2021 growth forecast to 8.5% from 9.1% previously. In addition, HSBC raises whole-year inflation forecast to 3.3% for 2020 from 2.7% previously, factoring in elevated food prices that HSBC thinks may persist. Given a quicker-than-expected growth recovery and relatively subdued inflation this year, HSBC now no longer expects a 50bp cut by the State Bank of Vietnam in 3Q. HSBC expects Vietnam’s re-financing rate to stay at 4.5% throughout 2020.