Lewes, DE -- (SBWIRE) -- 06/08/2016 -- Vietnam completed its leadership transition on April 9 2016, and we expect the new government to maintain its strategic non-alignment foreign policy. In the latest maritime dispute between China and Vietnam, the new administration adopted an unyielding tone against Beijing, suggesting that it will not be subservient to its larger neighbour.

However, we expect Hanoi to seek to maintain a delicate balance as it attempts to appease Vietnamese at home, while preserving crucial economic relations with China.

We forecast the State Bank of Vietnam (SBV) to embark upon on a relatively shallow rate-cutting cycle of 50 basis points over the course of the year in order to reduce lending rates and provide support to the economy. The low inflationary environment (we forecast consumer price inflation to average 2.1% in 2016) will also provide sufficient room for the central bank to act. However, still-strong economic growth momentum and concerns over external stability will likely moderate the central bank's easing bias.

The strong orientation of Vietnamese exports to the US and steady inflows of foreign direct investment should sustain Vietnam's export growth over the coming quarters. However, we expect import growth to remain similarly strong as the country relies heavily on imported input materials for production. As such, we expect Vietnam's trade deficit to widen further to 3.2% of GDP in 2016, from an estimated 2.1% of GDP in 2015.

Major Forecast Changes

We believe that Vietnam's industrial and services sectors will continue to benefit from a resilient export sector, strong foreign investor interest and robust domestic demand. However, extreme weather conditions and subdued oil prices will continue to act as a drag on the economy, capping its short-term growth potential. As such, we have downgraded Vietnam's real GDP growth forecast for 2016 to 6.3%, from 6.6% previously.

Although we forecast Vietnam's budget deficit as a share of GDP to narrow over the coming years, progress will be slow, as unrealistic fiscal projections, low oil revenue, an increase in current expenditure and high debt repayment costs will impede the government's efforts to consolidate its fiscal position over the near term. Accordingly, we forecast Vietnam's budget deficit as a share of GDP to come in at 6.0% in 2016, marking little change from the 6.1% recorded in 2015.

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