In the first quarter of 2019, the country’s fiscal deficit came in at 5.9%.
According to Fitch Solutions, revenue collection growth continues to face downside pressure from lower tariff collection and the slow progress of state-owned enterprise (SOE) divestment. That said, falling government bond yields of new debt should somewhat help ease the expenditure burden from interest payments.
Fitch expected Vietnam’s continued pursuit of trade liberalization to weigh on tariff revenue growth, while the country’s resilient economic growth outlook, particularly amid the ongoing US-China trade dispute, will support stronger import growth over the coming quarters.
However, Vietnam has been actively pursuing an open-door trade policy, with 11 Free Trade Agreements signed and in effect to date, with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) being the latest agreement which was ratified on January 14.
Another 13 agreements are currently in negotiations or in consultative study. The elimination of most tariffs lines under these agreements implies that while imports growth is likely to see significant upside over the coming quarters, this is unlikely to translate proportionately into tariff revenue growth.
Additionally, the progress of SOE privatization remains slow, and this would also weigh on fiscal revenue collection.
The first five months of 2019 saw only 30 SOEs being approved for privatization out of a total of 127 SOEs the government had targeted to privatize by 2020.
Meanwhile, 87 SOEs have completed their divestment process from 2017 to May-2019, and this contributed VND8.7 trillion (US$373 million) to the state coffers.
Fitch stated three factors will likely continue to hold up the privatization process. First, the sheer scale of SOE businesses and their assets make business valuation a tedious process, particularly after the government issued more stringent regulations on valuation and the review and appraisal of land prices in 2018.
Second, SOE managers could also be hesitant to push forward with the privatizationprocess as this would likely imply more frequent financial reporting. Given the generally poor operational efficiency of most SOEs, increased transparency into these SOEs could negatively impact the privileges these managers currently enjoy. Third, slowing global growth and elevated trade disputes between US and its major trading partners bodes poorly for risk sentiment, and this will likely continue to weigh on the already poor investor interest in Vietnam’s SOE stock market listings.
Indeed, the valuation as measure by the Price/Earnings ratio of Vietnamese equities have failed to play catch up relative to its emerging market Asian peers in recent weeks, and “we believe that this suggests poor risk sentiment towards Vietnamese listings.”
Falling new issuance yields to ease interest burden
Falling yields offered on Vietnamese government bonds should help ease the pressure on expenditures from interest payments, which account for about 10% of current expenditures.
Fitch maintained the view that that the wave of global monetary easing in response to slowing economic growth will allow the Vietnamese authorities to issue new debt to both rollover old debt and fund its growing expenditures at lower interest rates.
Moreover, it is expected the global search for yield amid falling yields offered on developed market bonds to increasingly favor relatively higher yielding emerging market government bonds such as those of Vietnam, and this would support demand for the government’s issuance.
Indeed, Vietnamese government bond yields have reversed the uptrend over most of 2018 and begun to decline since the start of 2019 on the back of an increasingly easing global monetary environment, with the Vietnamese 10-year bond yield falling to 4.67% in May, from 5.06% in last December.
Risks to Fitch’s forecast are for a larger fiscal deficit. Another trend under Fitch’s observation in Asia is one of fiscal stimulus amid a weakening economic outlook as in the case of India and Indonesia.
While Fitch still places Vietnam as a regional outperformer with its 2019 real GDP forecast at 6.5%, this nonetheless reflects its view for a deceleration from 7.1% in 2018.
Accordingly, the slowdown could see the Vietnamese authorities shift its focus to growth support from fiscal prudence at present, pushing expenditures higher.