Vietnam at a glance:Higher but manageable -inflation rising

Vietnam has a history of drastically higher inflation in August: the two highest peaks ofinflation in the past decade came in August: 28.3% in 2008 and 23.0% in 2011. Thus,when prices accelerated from 7.3% y-o-y in July to 7.5% this August, concerns aboutrunaway inflation resurfaced. Admittedly, these concerns are not without foundation: thegovernment is raising social service and energy costs to reduce its fiscal burden at a timewhen commodity prices are rising due to geopolitical tensions and the prospect of astronger global recovery in H2 2013. But while we expect headline inflation to continue torise in September due to higher education, healthcare and energy costs, the y-o-y print willlikely remain below 8% for the rest of the year, thanks to a favourable base effect andstill-low domestic demand.

    There are other reasons to believe things were different this August. The two instances ofhigh inflation in 2008 and 2011 resulted in the government reconsidering its managementof the economy. Though the latest inflation figure was the highest since May 2012, themacroeconomic environment in Vietnam has improved since 2011. The trade balance wasin surplus in 2012 and the year-to-date trade deficit from January to August is manageableat USD577m. The reduced trade deficit is a result of both increased foreign directinvestment in electronics and manufacturing, which has boosted exports, and reducedimport growth due to lower consumption appetite.

    With the fiscal and trade deficit trimmed, the question is whether policymakers will tacklethe non-performing loan issue head-on. Major reform initiatives are under way, includingResolution 11, Decision 254 on banking restructuring and the Master Plan on EconomicRestructuring in 2013-2020. While we are less optimistic on the pace of the reforms andthe impact of efforts such as the opening of the asset management company, Vietnam hasindeed made a U-turn and is more committed to stable growth. The August HSBCmanufacturing PMI shows that the economy is still weak with the index rising to 49.4from 48.5, although still below 50. Output will likely rise in the coming months, asinventories are reduced and global demand will likely stage a recovery in Q4 2013. Butwith the bad debt issue still unresolved, and private and public consumption appetite low,growth rates should remain sub-trend.