Vietnam’s economy in Q1: A tale of two demands, says ANZ

ANZ’s latest report showed that external driven demand remains the driving force of economic growth. Strong foreign direct investment (FDI) will likely fuel manufacturing exports as Vietnam moves up the value chain in the production of high-tech semiconductors and steers away from an over reliance on garment exports.

On the other hand, easing inflation points to the slow improvement in weak domestic demand. The central bank decided to further ease monetary conditions by cutting its policy refinancing rate 50bps to 6.50% in mid-March, thus making a limited effect on the already tepid credit growth. Banks’ high NPL ratios are weighing on risk appetite, leading to tight credit supply.

ANZ forecast Vietnam’s GDP growth at 5.6% and 5.8% in 2014 and 2015 respectively on the back of slow but stable improvements. “We see downward risks to our 2014 inflation forecasts of 7.0-7.5% if the planned government projects fail to prop up domestic demand in the second half of the year,” the report said.

Vietnam’s Q1 GDP growth maintained its steady but slow path of recovery. Economic growth at 4.96% year on year came in below market expectations, despite posting a two-year high for Q1 growth, noted ANZ’s report.

The strong external sector is picking up the slack from the tepid domestic demand and strengthening the current account. Foreign direct investments continue to be the pillar of support propping up industrial production and external trade, it concluded.