Boston, MA -- (SBWIRE) -- 07/17/2012 -- Vietnam's real GDP growth for 2011 and 2012 should continue to moderate in 2012 as a result of economic headwinds in the US , eurozone and China. We see increasing risks that the recent decline in manufacturing sector growth, which indicates weak demand for Vietnamese exports, could be sustained over the coming quarters, presenting significant downside risks to growth. T he State Bank of Vietnam's decision to hike its benchmark policy rate (refinancing rate) by 100bps from 14.00% to 15.00%, presents downside risks to an already weak economic growth outlook over the coming quarters. Consequently, we believe that monetary normalisation could come early in Q112 as the bank reverses its monetary policy stance in response to a faster-than-expected slowdown in economic activity over the coming months. I nflationary pressures are starting to wane, and this should help to ease fears that the Vietnamese dong will come under further selling pressure. A narrowing trade deficit, coupled with government efforts to de-dollarise the economy, are also helping to reinstall investor confidence in the currency. Thus, concerns over a potential devaluation in the currency are unwarranted, in our view. We are maintaining our forecast for the exchange rate to remain relatively stable at around VND 20,650/US $ over the coming months. Major Forecast Changes We have revised our end-2011 policy rate forecast from 14.00% to 15.00% to reflect the central bank's 100bps rate hike in October 2011. We expect 400bps worth of rate cuts in 2012 to bring the policy rate to 11.00% by the end of the year. We have downgraded our real GDP growth forecast from 6.3% to 6.0% for 2011 and we expect growth to remain subdued at 6.5% in 2012. Key Risks To Outlook Downside Growth Risks From Rising Commodity Prices: Should commodity prices continue to trend higher in 2012, we could see the central bank adopting a more hawkish stance on monetary policy. Delays in normalising interest rates would present significant downside risks to economic growth. Devaluation Risks From Persistent Trade Deficit: Despite multiple devaluations since late 2009, Vietnam's trade deficit has only witnessed a mild improvement. Should we fail to see compelling evidence of a sustained improvement in the trade balance, we would not be surprised to see the dong coming under further selling pressures.

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