Credit Suisse says Viet Nam’s GDP will rise 6.3 per cent next year, the third-fastest in emerging market economies after China (6.6 per cent) and India (7.8 per cent).
However, this relatively strong growth rate marks a decline from the 6.7 per cent growth rate of 2015, thanks to sluggish global growth. Still, even as Vietnamese exports slow down, Credit Suisse analysts note that burgeoning domestic consumption is helping sustain economic expansion, a growth pattern the bank’s analysts call “slower, but safer.”
Credit Suisse said Viet Nam’s growing popularity as a global manufacturing hub was one of the reasons for the growth.
“As labour costs have risen dramatically in China over the last several years, a growing number of manufacturers have moved operations from the Middle Kingdom to Việt Nam, or have even decided to set up shop there in the first place,” Credit Suisse said.
Credit Suisse also expects Viet Nam’s export growth to moderate slightly from 7.1 per cent in 2015 to 6.9 per cent in 2016, due to a recent slowdown in the United States and China’s declining appetite for imports. However, Credit Suisse said it was important to keep the slowdown in perspective.
Vietnamese export growth has outstripped that of non-Japan Asia by between 10 and 15 percentage points for the last five years, and foreign investors are still flocking to the country. Credit Suisse expects total foreign direct investment (FDI) of US$13 billion this year, which, though strong, is down from a spectacular $14.5 billion in 2015.
The manufacturing sector, which accounts for 24 per cent of Viet Nam’s GDP, attracted 57 per cent of the FDI inflows last year. The country stands to gain even more investment from the Trans-Pacific Partnership, a free-trade agreement among 12 countries.
However, the Vietnamese equities market still has its challenges, such as liquidity, a relatively small number of listed firms, and limits on foreign ownership.
Credit Suisse equities analysts suggest focusing on strong consumer plays, such as food and beverage company Vinamilk and broadband Internet and IT Company FTP Corp.
However, the bank’s equities analysts are more cautious on credit-related assets, including banks and real estate companies. An increase in non-performing loans in the wake of a credit-fuelled property bubble over the last five years has put pressure on banks’ capital ratios. If lending continues at the pace of the last several years, four of the six largest banks will have capital adequacy ratios of less than 10 per cent by the end of 2016.
Furthermore, the Vietnamese government has tapped 10 major banks to implement Basel II capital requirements, and Credit Suisse believes capital ratios could fall by up to three percentage points as banks put the more stringent requirements in place. That would leave half of the six largest banks with capital ratios below the nine per cent level that international banking standards require, necessitating capital raises of between $0.4 and $0.9 billion (between eight per cent and 35 per cent of their market caps) to come into compliance.