HSBC Raises Vietnam’s 2022 Growth Forecast

Vietnam saw an 11-year-high growth rate of 7.7% y-o-y in 2Q22, largely reaping the benefits of re-opening tailwinds

However, surging global commodity prices are starting to squeeze its terms of trade and push up inflation

HSBC raises 2022 growth forecast to 6.9% (prev: 6.6%), but lower our 2023 growth forecast to 6.3% (prev: 6.7%)

Impressive pace

Similar to many countries, fading Omicron risks and easing restrictions have set the basis for Vietnam’s return to normalcy. Its 2Q22 GDP expanded firmly by 7.7% y-o-y, thanks to broad-based recovery.

Services, which once bore the brunt of an economic hit, have seen a meaningful recovery. In particular, tourism-related and consumer-facing services have largely benefitted from sustained re-openings.

Meanwhile, manufacturing continues to roar, taking exports to historical highs.

Not to forget growth risks

However, the impact of high energy prices is becoming increasingly clear. For one, elevated commodity prices have turned the trade balance into deficit in 2Q22, likely exacerbating the deteriorating current account. Also, despite a firm rebound in household consumption, high oil prices will likely take a bite out of residents’ wallets, dampening the pace of its continued recovery. Indeed, price pressures have started to kick in, albeit at a still manageable pace compared with regional peers.

Updates to HSBC’s forecasts

Thus, HSBC expects Vietnam’s economy to grow 6.9% in 2022, likely topping the region. That said, HSBC trims 2023 growth forecast to 6.3%, taking account of mounting downside risks, particularly from the energy side. On prices, HSBC expects inflation to average 3.5% in 2022, but inflation momentum is likely to exceed the 4% ceiling temporarily for some time, increasingly calling for monetary normalisation.

Regional outperformer

After two quarters of sustainable re-openings, Vietnam’s recovery continues to be a regional outperformer. Its 2Q22 GDP growth hit 7.7% y-o-y, easily beating market expectations (HSBC: 5.8%; Bbg: 5.9%). This represents the highest growth Vietnam has seen in a quarterly GDP print since 2011, thanks to strong broad-based recovery across sectors. That said, when dissecting the breakdown closely, another hidden message is also surfacing. Despite rosy headline growth, the energy crunch has started to take a toll on Vietnam’s growth.

At first glance, it is encouraging to see a significant improvement in services. Thanks to removals of major local curbs and border restrictions in mid-March, travel-related sectors, particularly transportation and accommodation, have started to see meaningful revivals. Meanwhile, retail sales overshot 17% y-o-y in 2Q22, signalling a return of rebounding household consumption.

Indeed, part of the success was attributed to a gradual recovery in its labour market. The unemployment rate dropped to 2.3% in 2Q22, while employment continued to expand close to its pre-pandemic levels.

Tourism is also making headway as the summer season approaches. Take Hanoi’s Noi Bai airport as an example: parking lots are reportedly at full capacity, prompting airport authorities to respond with measures, such as opening all exit lanes to ticket control, to reduce traffic congestion.

Scheduled flights in the Noi Bai airport have doubled since the start of 2022, exceeding those at the outset of the pandemic. This translated to daily passenger traffic of over 100k, a 40% increase from the same period in 2019, also exceeding the designed capacity of 100k at its T1 terminal.

Indeed, following the border re-opening on 15 March, Vietnam has seen a substantial pick-up in tourist arrivals. In 2Q22, Vietnam welcomed 0.5m visitors, almost five times more than those in 1Q22, taking total tourists to 0.6m in 1H22. Prior to the pandemic, 80% of tourists came from Asia, topped by those from mainland China (32%) and Korea (24%). Now, only 65% of tourists are from the region: European (16%) and US (11%) tourists have accounted for a large chunk of tourists post-pandemic, right after Korea (18%).

The Vietnam National Administration of Tourism (VNAT) set an ambitious target of 5m foreign tourists in 2022, a little shy of 30% of 2019’s level. However, the recovery in tourism is likely to be gradual, particularly given the lack of Chinese tourists.

That said, Vietnam has exceeded the VNAT’s annual target of receiving 60m domestic tourists. To put this into context, take the resort island of Phu Quoc as an example: roughly 1.4m visitors visited the island in 1H22, of which over 95% were local tourists (VNA, 29 June). However, despite high number of domestic tourists, tourism receipts were worth USD11bn, only hitting 66% of the year’s target.