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Thursday,  12/12/2019

Vietnam’s fiscal deficit forecast at 6.6 percent of GDP in 2019

Hanoi (VNS/VNA) – Vietnam’s fiscal deficit, including principal repayments, would come in at 6.6 percent of GDP this year and next year, up from 5.9 percent in 2018, Fitch Solutions Macro Research forecast.
Illustrative photo (Source: VNA)

It was revised from 5.7 percent and 5.8 percent projected previously.

According to Fitch analysts, this follows a 7.4 percent deficit based on its estimates (including principal repayments, otherwise 3.2 percent without according to official figures) in the first half of 2019.

“We expect falling Vietnamese government bond yields in line with the decline in global bond yields to ease growth in interest payments on new issuances going forward. However, we expect this to be more than offset by increased government borrowing to fund key public infrastructure projects to ease the congestion in major cities and ports exacerbated by the influx of companies relocating  their operations to Vietnam as a result of the ongoing US-China trade war,” the analysts said.

Global yields have fallen as a result of a rush to safety amid growing economic and geopolitical uncertainty globally, as well as expectations of further monetary easing by the US Federal Reserve and major global central banks.

This has supported a decline in Vietnamese credit default spreads and also yields offered on new Vietnamese government bond issuances. Given that risks to the global economy appear to be firmly weighted to the downside, government bond yields are likely to head even lower over the coming quarters.

However, Fitch believes that the positive impact of this on fiscal accounts will be outweighed by an increase in government borrowing to expedite key infrastructure projects, which would put upside pressure on interest payments.

Besides, according to Fitch, evidence has so far shown that Vietnam is the main beneficiary of the relocation of manufacturing operations out of China.

“We expect the rush by companies to relocate manufacturing operations from China to Vietnam to avoid the US’ tariffs on Chinese exports to continue worsening congestion in major cities such as Ho Chi Minh City and Hanoi, as well as at Vietnam’s sea ports,” the analysts said.

According to Fitch, an important point to note is that delays to land acquisition for these projects would also increase project costs for the government as the influx of businesses to the country would increase competition for land, particularly in and around the major cities, putting upside pressure on land prices. –VNS/VNA

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