Inflation expected to remain stable, enable lending: HSBC

Inflation expected to remain stable, enable lending: HSBC

HSBC's Vietnam at a Glance monthly report has said inflation is likely to gradually accelerate, especially in the second half, but remain under control, enabling the central bank to keep interest rates low.

The prognosis is based on the fact that the April headline CPI rose slightly (4.4 per cent year-on-year). However, core inflation decelerated to 5.3 per cent from 5.7 per cent in March.

The latter excludes food and energy from the basket of goods whose prices are tracked.

"We expect core and headline inflation to converge. Even as domestic activity picks up, thanks to measures such as lowering the deposit and OMO [the central bank's open market operations] rates to induce lending growth, as the year progresses, headline inflation is expected to only rise slightly," the report said.

It expected the rate to end at 5.6 per cent this year even with an assumption of higher social services and electricity costs in August and September.

The manufacturing sector would be the main bright spot for Viet Nam, it said.

Negotiations are underway for the Trans Pacific Partnership and the EU Free Trade Agreement. Should they prove successful, tariffs on Viet Nam's key items such as garments and textiles should decline in major markets such as the US and EU.

But more promising for the country's economic development is the discussion of non-tariff issues, including revamping of infrastructure, streamlining administrative measures, reorganising the supply chain in sectors such as rice and textiles, and increasing energy production output by deregulating prices.

Addressing these issues would help change how Viet Nam competes in the international market in the future. Only then could the country replace raw, low-quality commodity and low-value added manufacturing exports with processed and high-quality products.

Getting hotter

The Purchasing Managers' Index increased sharply to 53.1 in April from 51.3 in March. Output, new orders, new export orders, and employment all rose. New export orders have increased in the past two months to reflect rising demand from the US and eurozone.

Output surged ahead in Q1 2014 and into Q2, as destocking measures in early years reduced inventories sharply. With new orders high, manufacturers increased production to keep up with demand. Even with stocks of finished goods increasing on the month in April in anticipation of better demand, inventories are still relatively low.

This means that output is likely to increase in the coming months, as the leading indicator, new orders minus inventories, still shows a large gap.

The rather red PMI heat-map mirrors export trends. Textiles, footwear, and mobile shipments rose on a year-on-year basis and are likely to perform better in the second half as new investments begin operations.

Besides manufacturing goods, some agricultural commodities also benefitted from higher international prices: A drought in Brazil has stoked coffee prices, rice has done well in the year-to-date thanks to higher demand in places like the Philippines.

However, Thailand is expected to dump its rice stockpile on the global market this quarter, pushing global prices lower and reducing the value of Viet Nam's rice exports.

Overall, the report forecast exports to benefit from higher manufacturing output.

The trade balance too is likely to be slightly positive, thanks to lower costs of petroleum imports (due to both prices and higher domestic production), new investment in manufacturing, and low domestic demand for foreign goods.

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