HCM CITY — The HSBC Viet Nam Manufacturing Purchasing Managers' Index (PMI), based on sub-indexes of new orders, output, employment, suppliers' delivery times and stock of items purchased, was 47.9 in August, up from 43.6 in July.
An index reading above 50 indicates an overall rise in that variable; below 50, an overall decrease.
"While business conditions in Viet Nam remain challenging, the slowdown of the rate of manufacturing deterioration suggests that economic activities will likely gradually recover in the fourth quarter," said Trinh Nguyen, Asia economist at HSBC.
New orders of purchases slumped to 47.7, although the pace of contraction was much less than the previous month of 41.1.
New export orders almost hit the 50 mark, rising to 49.3 in August from 48 in July. This suggests that despite the global slowdown, demand for Vietnamese goods is still holding up, according to the HSBC report.
The employment sub-index, which hit 49.8, is a significant improvement from July's drop to 46.9.
HSBC said this meant that while managers slightly reduced the number of jobs in August, they were not anticipating the business environment to worsen significantly.
The index for stocks of purchases mirrors this sentiment: deterioration slowed to 45.8 from 37.6.
While sales continued to be weak due to high competition and low demand, the quantity of purchases did not drop significantly.
The trend of the PMI suggests that a recovery period might be ahead, but the rise in input prices could dampen some of the resurgent momentum.
The average input prices rose in August, ending a two-month period of decline, but there was a gap between input and output prices, which means manufacturers have been unable to pass on some of the higher costs to consumers due to low demand.
While the latest August headline CPI figure slowed to 5 per cent year-on-year from 5.5 per cent in July, this was partly caused by an effect from the high prices recorded in the previous year.
On a month-to-month seasonally adjusted basis, headline inflation rose 0.9 per cent from 0.2 per cent in July.
The significant jump parallels with the uptick of the PMI input prices. Core inflation, excluding food and energy, rose to 8.8 per cent year-on-year from 8.1 per cent in July.
On a trend basis, inflationary pressures are rising.
The stabilisation of the PMI index, following recent weakness, confirms the recovery of domestic demand. Thus, domestic consumption is expected to recover slightly towards year-end, especially with the credit expansion filtering through the economy.
There was increases in exports and imports in August (the number is just an estimate based on the first 15 days of custom data).
Exports climbed to 13 per cent year-on-year from 1.6 per cent in July. This was supported by strong electronics and computer exports.
The import number was also encouraging, rising 8 per cent year-on-year from 12.8 per cent in July.
Although tourists continue to arrive in high numbers and restaurants are filled with patrons in such places as HCM City, a closer look reveals construction sites have stalled and car sales have declined.
The economy is still expanding but at a much slower pace than before. The August year-to-date retail sales print mirrors this phenomenon.
Year-on-year growth slowed to 24 per cent in August from 24.6 per cent in July, according to the monthly Viet Nam at a Glance report for HSBC Global Research, which was also released yesterday.
"While the recent arrest of a Vietnamese tycoon, Nguyen Duc Kien, stoked some concerns of an economic meltdown and a banking crisis, we believe the economy is robust enough to handle the ongoing de-leveraging process," the HSBC report said.
Exports continue to generate high income for the economy and the service sector remains resilient.
The drag coming from inefficient SOEs and slowing real estate sales should be corrected once the SBV speeds up its banking sector restructuring process.
The overinvestment in real estate and non-profitable businesses needs to be adjusted, and the sooner policy-makers get actively involved, the faster the economic engine will run, according to the HSBC report.
With the big drag, the private sector is still pulling its weight.
Policy-makers need to stabilise the economy as well as increase productivity.
The SBV has shown its commitment to a brighter future in Viet Nam by curbing credit growth in 2011 and launching a banking-sector reform process.
However, what it will do with the bad debts remains unknown, as the central bank is employing an ad hoc process.
The recent action to put pressure on banks to trim balance sheets and become more transparent with non-performing loan ratio problem (closer to 8.6-10 per cent of total lending in 2012, up from 2 per cent in 2010) bodes well for the prospect of more reforms, according to the report.
Additionally, the hesitancy of the central bank to pump out cheap credit to boost growth, as it had previously done, boosts its credibility.
The amount pumped out through open market operations has slowed significantly, although there was a slight pick-up recently to ease liquidity conditions.
"Thus, we are optimistic that the Vietnamese government will ultimately do what's good for the economy. Policy makers have proven in the past that they are willing to address challenges when they need to. This requires a more patient approach to reform, which mops up bad debt and creates an economic system that rewards productive behaviours," the report said.
The report expects Viet Nam's economy to expand by 5.1 per cent in 2012. — VNS