Vietnam's  industrial  production  rose  to  5.9%  y-o-y  in October,  from  +5.6%  in  September  and  compared  with +4.4%  in  August  (see  Table  1).  This  was  reflected  in  a smaller decline in the production from the mining & quarrying sector and a faster  increase  in  water  supply  output, but  was offset  partially  by  a  slower  increase  in  manufacturing  and utilities  output  during  the  month.  As  it  stands,  production from  the  mining  &  quarrying  sector  fell  by  a  smaller  margin of  2.8%  y-o-y  in  October,  compared  with  -5.1%  in September.  The  manufacturing  and  utilities  output,  on  the other  hand,  eased  to  8.2%  and  9.0%  y-o-y  respectively  in October, from the corresponding rates of +8.5% and +9.4% in  September. Correspondingly, m-o-m, industrial production picked  up  to  6.7%  in  October,  from  +0.5%  in  September. This was on account of a pick-up in manufacturing production and  a  rebound  in  mining  &  quarrying  and  utilities  output during  the  month. A slower  increase  in water supply  output, however,  offset  the gains  partially.  The  pick-up  in  industrial activities  in  October  suggests  that  a  recovery  in  Vietnam's economy is gaining traction, albeit at a gradual pace.

Exports, on the other hand, weakened to 13.4% y-o-y in October, after rising to +17.9% in September and compared with +15.7% in August (see Table 2). This was on account of a  slowdown  in  the  exports  from  domestic  companies  and foreign direct investment (FDI) sector. This was reflected in a slowdown in shipments from the manufacturing sector and  a drop in exports from the agriculture sector during the month. A smaller decline in the shipments of mining products during the  month,  however,  mitigated  the  slowdown  (see  Table  3). Indeed,  the  weaker  growth  in  exports  of manufactured goods was attributed to a slowdown in machinery equipment &  parts  and  electronics & computer  parts  products of  14.6% and 24.9% y-o-y respectively in October, compared with the corresponding  rates  of  +10.4%  and  +59.8%  in  September. Similarly,  the  exports  of  telephones  &  parts,  footwear  and plastic  products  eased  to  53.6%,  8.9%  and  13.9%  y-o-y respectively  in  October,  from  the  corresponding  rates  of +74.4%, +18.7% and  +19.2% and  in September. A  drop  in the  shipments  of  petroleum  products  of  41.8%  y-o-y  in October,  compared  with  +29.2%  in  September  made  it worse.  These  were,  however,  mitigated  by  a  faster  increase in  the exports of textiles and wooden products of 30.2% and 20.9% y-o-y respectively in October, from the corresponding
rates  of  +24.2%  and  +15.4%  in  the  previous  month.  A rebound  in  the  exports  of  rubber  of  3.0%  y-o-y  in  October, compared  with -2.9%  in  September  also  helped. A  proposal to  reduce  the  export  tax  rate  on  condensed  latex  rubber  to 1.0%, from 3.0% and for mixed rubber to 1.0%, from 5.0%, will  likely  provide  support  to  rubber  exports,  going  forward.
In  the  same  vein,  the  exports  of agricultural products dropped  in  October,  on  account  of  a  bigger  decline  in  the exports of coffee of 41.0% y-o-y in October, compared with -14.1%  in  September,  while  the  exports  of  aquatic  products slowed  to  16.0%  y-o-y  in  October,  from  +22.1%  in  the previous  month.  The mining exports,  however,  fell  by  a smaller  margin  due  to  a  smaller  decline  in  the  shipments  of crude  oil  of  15.7%  y-o-y  in  October,  compared  with -45.2% in  the  previous  month.  A  larger  decline  in  the  shipments  of coal  of  49.8%  y-o-y  in  October,  compared  with -34.9%  in September,  however,  offset  part the  gains.   This was  due  to imposition  of  export tax  of  10.0% on coal  exports  to  restrict
the exports  of  the  scarce  commodity. Imports also slowed to 17.1% y-o-y in October, from +21.1% in September and compared with +10.3% in August. Imports have risen in recent months due to increases in purchases of equipment and raw materials following the government's tax breaks to help businesses. Meanwhile, the trade deficit widened to USD200m in October, compared with a deficit of USD88m in  September. As  a  whole,  the  government  is  striving  to  earn  USD131bn  from  exports  in  2013,  an  increase  of  14% against  last  year  and  4%  higher  than  the  target set  by  the  National  Assembly.  This  will  be  led by exports  of  mobile phones  (USD15.5bn),  followed  by  garment  (USD13.1bn);  footwear  (USD6.0bn)  and  wood  and  wooden  products (USD3.87bn), according to the government.

Meanwhile,  Vietnam's  Prime  Minister,  Nguyen  Tan  Dung,  said  on  28  September  that  the  government  is planning  to devalue its currency as much as 2% by the end of this year, as it considers the dong overvalued and wants to weaken it to help boost export competitiveness as other currencies in the region slump. Earlier the central bank had weakened its reference exchange rate by 1.0% to 21,036 VND per US dollar, effective 28 June, after keeping it at 20,828 since 26 December 2011.  The VND, which is allowed to trade by as much as 1% daily on either  side of the reference rate, has depreciated by about 1.3% this year against the US dollar, after gaining by about 1.0% in 2012. As a whole, we believe the currency will likely remain weak due to trade deficit and a stronger US dollar. This will likely be  made worse by a cut in interest rates, on the back of rising inflationary pressure. We expect the VND to weaken slightly to around VND21,500 in the near term.

Retail sales also edged higher to 12.6% y-o-y in January-October period, from +12.5% in January-September period  (see  Table  4).  This  points  to  a  gradual  improvement  in  consumer  spending,  following  the  moves  by  the authorities  to  stimulate  economic  growth.  This  was  reflected  in  a  faster  increase  in  retail  sales  at  private- and collective-owned  enterprises,  rising  to  11.6%  and  16.8%  y-o-y  respectively  in  January-October  period,  from  the corresponding  rates  of  +11.5%  and  +16.0% in January-September.  Similarly,  the retail  sales at  individual- and  FDIowned  enterprises  inched  up  to  16.9%  and  35.8%  y-o-y  respectively  during  January-October  period,  from  the corresponding  rates  of  +16.7%  and  35.4%  in  January-September  period.  These  were,  however,  offset  partially  by  a bigger  decline  in  retail  sales  at  state-owned  enterprises  of  7.6%  y-o-y  in  January- October  period,  compared  with -7.2% in January-September  period.  As a  whole,  consumer  spending  will likely remain  resilient  in  the country,  as  the economy  recovers  after  the  authorities  eased  monetary  policy  to  support  economic  growth.  The  rising  numbers  of foreign visitors will also help to drive a strong upturn in retail sales in the months ahead.

Elsewhere,  the headline  inflation slowed  to  5.9%  y-o-y  in  October,  the  lowest  level  since  August  2012, from +6.3%  in September  and  compared  with  +7.0%  recorded  in  the  same  month of  last  year  (see  Table  5),  suggesting easing  price  pressure  after  the government  ordered  retailers  to  cut gasoline prices  by at  least VND387  per  liter  on  7 October, following an earlier cut of at least VND300 per liter on 22 August. The fuel prices was also reduced by at least VND257 per  kilogramme on 22 August. As a result, the cost of transportation slowed to 2.8% y-o-y in October,  from +3.6%  in  September  and  after  jumping  to  +7.8%  in  July-August.  Similarly,  the  prices  of  household  appliances  and textiles,  footwear  &  hats  eased  to  4.6%  and  7.4%  y-o-y  respectively  in  October,  from  the  corresponding  rates  of +4.7% and +7.6% in the previous month. A moderation in the costs of culture, sports & entertainment and housing & construction materials  to  3.5% and  3.4%  y-o-y  respectively  in  October,  from  the  corresponding  rates  of  +3.6% and 4.0% in September also helped. Likewise, the costs of education and medical products & healthcare slowed to 11.8% and 25.1% y-o-y respectively in October, from the corresponding rates of +13.3% and 32.4% in the previous month.

These  were,  however,  offset  partially by a faster  increase  in the costs of food &  foodstuffs  of  4.1%  y-o-y  in  October, compared  with  +3.6%  in  the  previous  month,  as  the  effect  from  the  earlier  fuel  prices  hike  continued  to  be  felt. Meanwhile, the cost  of beverages & tobacco remained stable at 4.2% y-o-y in October, unchanged from the previous month,  while  the  cost  of communications  fell  by  0.6% y-o-y  in October,  the  same  pace  of  decline  as  in  the previous month.  Correspondingly, m-o-m,  the  inflation  rate  inched  lower  to  0.5%  in  October,  after  rising  to  +1.1%  in  the previous  month. Despite  the  slowdown in October's  inflation  rate,  inflation  pressure  will  likely  gradually  build up,  as economic  growth  recovers  after  the central  bank  reduced  interest  rates  aggressively  and following  the  government's push to encourage banks to cut lending rates to help businesses. The government has also mentioned that it will adjust retail  prices of  electricity  based  on  the  prevailing  inflation  rate. Furthermore,  the  government commissioned  the establishment  of  a  National  Wage  Council  to  oversee  national  wage  levels  throughout  the  country. The  Council  will likely propose a new minimum wage for 2014 to reflect the rising inflation rate. As it stands, Vietnam has increased its minimum  wage  ten  times  since  2003,  with  the  most  recent  hike  effective  from  1  July  2013,  bringing  the minimum wage  to  VND1.15m  per  month,  from  VND1.05m.  Indeed,  the  government  highlighted  that  inflation  may  quicken towards  end  of  the  year, as  the  costs  of  some  goods  and  services,  including  power  prices,  hospital  fees,  may  be adjusted  in  the final  months  of  the  year,  leaving  it  with little room  to  cut  interest rates  further. As  a whole,  the government is targeting to keep inflation under 7.0% in 2013-2015, and bring inflation below 5% after 2015.

Earlier,  the central  bank  cut  the  repurchase  rate, also  known  as  the  open-market  operations  rate,  to  5.5% from  6%, effective  19  July,  after  it has  slashed  its  refinancing  rate  for  the  eight  times since  the  beginning  of  2012  to  spur lending. It also cut the dong deposit rate cap and lowered the ceiling of USD deposit rate cap for both institutional and individual depositors. The reductions will result in lower lending rates, which will enable businesses to borrow more. For the  priority  sectors,  which  include  agriculture,  exports,  high-tech  businesses  and  small  and  medium  enterprises,  the lending rates would be cut to 9%, from 10%. As it stands, bank lending grew by 6.8% in January-September period, compared with +5.6% in January-August period, well short of a full-year target of 12% for the entire year. The central bank's efforts will likely speed up credit flow into the economy, as a high ratio of non-performing loans in the banking system  has  prevented  banks  from  boosting  their  lending  despite  the  central  bank's  aggressive  interest-rate  cuts. On balance, we  believe  the  central  bank  is  likely  to  have  done  with  its  monetary  policy  easing in  2013,  after cutting interest rates twice this year.

As a whole, the key  economic data suggest that Vietnam's economic activities is poised for a stronger growth, albeit  at  a  gradual  pace, on  a  sustained  growth n  exports,  while industrial  production is  picking  up. A  resilient domestic  demand,  as  indicated  by  a  sustained  growth  in  retail  sales,  will  also  likely  help  to  support  the  economic growth.  Similarly,  foreign  investment  will  likely  remain  as  another  key  driver  of  growth,  moving  forward. Acknowledging  this,  the  government  is  seeking  to  ease  limits  on  foreign  ownership  in  banks  and  telecommunication companies. Overseas investors could be allowed to own as much as 49% of state-owned banks, from the current 35%. The central bank is also encouraging foreign banks to invest, buy and acquire stakes and merge with weak local banks. The  Prime  Minister  is  also  planning  to  complete  a  revamp  of  state  enterprises  by  2015  and  has  set  up  an  asset management unit to resolve non-performing loans. Elsewhere, the government said it will simplify administrative steps for  investors,  which  would  include approval  of  investment  certificates  and  construction  plans.  The  lower  income  tax rates,  investment  tax  incentive,  higher  state spending  and  central  bank-led  interest-rate  cuts  will  also  encourage investment  in  the  country. In  addition,  the  government  has  launched  a  VND30  trn  (USD1.43bn)  package  to  provide soft loans to home buyers and developers to support the property market and it is watching state budget collection and spending  vigorously  to keep  the  fiscal  deficit  within  the  target  of  4.8%  of  the  GDP. The  government  expects  the economy to grow at a faster pace in 2H 2013, bringing the full-year growth to +5.3-5.4% in 2013, amidst challenging external environment and soft domestic demand. The economy is projected to pick  up further to +6.0% in 2014-215. As it stands, the country's real GDP growth grew by 5.1% y-o-y in January-September 2013, compared with a growth of  +4.9% in the 1H and  +4.7%  in the corresponding  period  of  2012. On  balance,  we  expect  Vietnam's real  GDP  to bounce  back  and  grow  by  5.4%  in  2013,  compared  with  +5.0%  in  2012.  The  real  GDP  growth  is  projected  to strengthen to +5.9% in 2014.

Source: OSK