Economists Point Out Challenges Ahead for Vietnam’s Economy

Recently, HSBC released the report named “Vietnam at a Glance”, in which HSBC gave out some comments and predictions about Vietnam’s inflation and economic growth.

After an impressive growth rate of 17% y-o-y in 1H, Vietnam’s exports started 2H on a weaker-than-expected note. Export growth moderated to 8.9% y-o-y in July, well-undershooting HSBC and market expectations (HSBC: 26.6%; Bbg: 22.2%). The main drag came from muted growth in electronics, in particular phone shipments.

Although the trend was not entirely surprising – given the impact of inflation on real incomes and a rotation from goods to services in the West– how quickly it reflected in Vietnam’s trade data was surprising. Indeed, Samsung’s 2Q results signalled weakening demand for consumer electronics, affecting smartphones, TVs and other products.

That said, textiles and footwear saw strong growth of 30% y-o-y, albeit in part due to favourable base effects. As Ho Chi Minh City (HCMC) and the surrounding areas suffered from a harsh lockdown in 3Q21, the base effects will likely last through 3Q22. However, the Vietnam Textile and Apparel Association warned of falling orders ahead, raising questions on how resilient these shipments could last.

Meanwhile, import growth also eased, moderating to only 3.4% y-o-y from double-digit growth in previous months. Part of the reason lies in falling energy prices, thereby reducing bills for commodity imports like iron and steel, coal and crude oil. That said, worth noting is the 8% y-o-y decline in phone- related imports, as this may reinforce the slowdown in the consumer electronics cycle.

Although growth in both export and import moderated, the trade balance remained flat in July. As HSBC has flagged previously, Vietnam is likely to run the second consecutive year of current account deficit, posing downside pressure on VND.

In addition, PMI is also pointing to a similar trend. While remaining in expansionary territory, July’s PMI moderated to 51.2. Key indices, including new orders and new export orders, eased too.

However, Vietnam still registered stronger manufacturing activity than most regional peers, especially when the majority of Asia saw contraction in new export orders. Firms continued to take in more labour, with the employment indicator seeing its fourth consecutive rise. While manufacturing growth may slow in the coming months, the outlook nonetheless remains positive.

Despite a less rosy external picture, the domestic economy continued to gain traction. Retail sales growth hit a record high of over 55% y-o-y. Albeit partly due to favourable base effects, the strong momentum in consumption continued across both goods and services. In particular, tourism-related sales stood out, seeing double-digit growth on a m-o-m basis for the fourth consecutive month.

When it comes to tourism, the summer months also do not disappoint. Vietnam attracted 350k international tourists in July, three times more than the monthly average in 1H22, taking the country to welcome almost 1 million visitors YTD. Tourists from Korea (25%), Europe (13%) and the US (10%) accounted for close to half of total visitors, followed by rising interest from ASEAN.

Striving for an annual target of 5 million tourists, Vietnam National Administration of Tourism seeks to work more with foreign ambassadors and enact travel campaigns, while eyeing new markets, such as India and the Middle East. Indeed, Vietnam is issuing 6k visas per day to Indian tourists, compared to only 250 prior to the pandemic. That said, one looming question is whether supply of labour can keep up with rising demand, as some popular tourism sites are already reported as not fully re-opened due to a lack of workers.

Inflation moderated, but watch for food

Headline inflation rose 0.4% m-o-m, translating into 3.1% y-o-y, broadly in line with HSBC expectations but slightly overshooting consensus (HSBC: 3.0%; Bbg: 3.3%; Prior: 3.4%). Inflation momentum eased slightly in July, due to lower transport costs. This is in part due to a pull-down in oil prices, but also thanks to further reductions in the environment tax on various fuels in early July, with tax on gasoline and diesel fuel halving to VND1,000 per litre and VND500 per litre, respectively.

That said, food continues to surprise on the upside, rising 1.4% m-o-m. With the exception of stabilising rice prices, other items saw ongoing notable pick-ups in prices, ranging from pork and cooking oil to vegetables, given higher animal feed and transport costs. Aside from food, core inflation continued to recover, reflecting an ongoing improvement in household consumption. As such, despite relatively a low inflation print, it is worth watching inflation momentum closely. HSBC expects stronger inflation pressures to kick-in from 2H22, pushing headline inflation to breach the SBV’s 4% ceiling temporarily for a few quarters.

This begs the question about when the SBV will start to normalise its monetary policy. After all, it is one of the few Asian central banks that have not started their tightening cycles. That said, despite keeping its policy rate unchanged at 4.0%, the OMO rate was pushed up to 3.8% on 26 July, from 2.5% previously.

Given how aggressively the Fed is pressing its tightening brake, HSBC believes the move was a signal in the direction of tightening, but by first withdrawing the liquidity. HSBC expects 3Q to be the start of the SBV’s tightening cycle, possibly by 50bp.