Vietnam government hinting at pro-growth orientation

Although this could be difficult to achieve.

It has been noted that Vietnam's economy is on track for a Q2 16 pick-up.

According to a research note from HSBC Global Research, Vietnam's growth slowed to a disappointing 5.6% y-o-y in Q1 16, but the latest data releases offer further evidence that momentum improved in Q2 16. The manufacturing PMI marked a 10-month high in May, rising to 52.7 from 52.3 previously.

The improvement was led by a strong rise in new orders, which suggests the pick-up in manufacturing activity can be sustained in June. Both industrial production and exports are tracking higher sequential growth in Q2 16. Lingering El Niño effects continue to crimp agricultural production, but HSBC Global Research expects Q2 16 GDP to rise to 6.1% y-o-y. Its full-year 2016 GDP forecast is unchanged at 6.3% y-o-y.

Here's more from HSBC Global Research:

New government’s stance suggests pro-growth bias: The risks to our forecast stem from government policy. Vietnam's new leadership has confirmed the original 2016 GDP target of 6.7%. We think this is going to be difficult to achieve, given the weakness of the Q1 16 growth number and larger-than-expected headwinds to exports.

That means the onus will fall on domestic demand to pick up the slack. One risk is that authorities will try to loosen credit conditions further to stimulate private sector spending. The other is increased government spending.

But fiscal wiggle room is limited: The concern we have is that greater pump- priming will lead to a build-up of risks when Vietnam's macro buffers are still running relatively thin. The government's fiscal policy space is particularly constrained. In 2016, we forecast the budget deficit to widen again to 6.6% of GDP, causing the public debt-to-GDP ratio to approach the National Assembly's limit of 65%.

Regaining fiscal wiggle room requires efforts to broaden the revenue base and reduce current expenditure, but these reforms will take time. In the interim, we think slower but ultimately more sustainable growth may be preferable.