Vietnam’s GDP grew 5.03% y/y in 1Q22, extending the 5.22% pace in 4Q21 as services sector rebounded after more parts of its economy were reopened with relaxation of mobility and distancing restrictions.
Manufacturing sector continued to take the lead, and most significantly, overall services sector expanded 4.58% y/y, from 1.22% in 4Q21and 3.62% in 1Q last year. It was clearly that services activities were able to benefit from the lifting of COVID-19 restrictions imposed during 2H21.
The data shows that Vietnam’s underlying growth momentum remained intact in 2Q22. Manufacturing sector continued to power on, registering 9.24%
y/y gain in May YTD, vs. 8.28% in Apr, and the strong performance of 12.59% in May 2021. This performance is also reflected in the purchasing managers’ index (PMI), which was in its 8th month expansion in May.
A forward indicator, foreign direct investment (FDI) inflows, pared back somewhat in May amid uncertainty from the Russia-Ukraine conflict and elevated commodities prices. Registered FDI recorded a decline of 16.3% y/y YTD to USD11.71 bn, the fourth straight month of negative readings. High base from the strong inflow of registered FDI in 2021 at USD31.15 bn also resulted in subdued readings so far. Annualizing the YTD inflows would give an amount of USD28 bn, matching the figure achieved in the pandemic-stricken year of 2020.
On the consumer side, lifting of domestic COVID-19 restrictions and reopening of cross border travels have injected new vigour in the services sector. Overall retail
trade accelerated 9.69% y/y YTD in May, vs 6.54% in Apr and well ahead of the 3% drop in 2021, led by travel services (+34.7% YTD in May) and accommodation and catering (15.75% rise). We expect tourism dependent sectors such as accommodation & food will return to growth in 2Q22 after 9 straight quarters of declines. With the latest data as well as the headwinds ahead, we are keeping our 2022 GDP growth forecast for Vietnam at 6.5%, in line with official projection of 6.0- 6.5%. Our forecast assumes GDP growth in 2Q22 to pick up its pace to 6% y/y and then further to 7.6% in 3Q22.
However, several external risks are posing challenges to this outlook: 1) the Russia-Ukraine conflict and its impact on commodity prices (and the resulting inflation risks on domestic and external demand), 2) global supply chain disruptions, 3) policy tightening globally, and 4) COVID-19 risks. After touching the lowest in nearly a year at 1.4% y/y in Feb, inflation in Vietnam has been trending up since to 2.86% in May which is still below the State Bank of Vietnam’s (SBV) target of 4%. Elevated prices of global energy and food as well as supply chain disruptions have contributed to the jump in Vietnam’s inflation. Particularly, transport-related costs have been rising at double digit y/y pace in the past 14 months.
As Vietnam is able to supply food stuffs domestically, the upside pressure on prices is largely dominated by the transportrelated components of the consumer price basket, accounting for about 3/4 of the inflation thus far, compared to an average of 50% in 2021. With the Russia-Ukraine conflict stretching beyond 100 days and showing no signs of easing of tensions and sanctions, we expect Vietnam’s headline inflation rate at 3.7% in 2022 and rising further to 5% in 2023.
Accommodative Stance To Support Growth
With the uncertain outlook from geopolitics and domestic inflation remaining well managed, the SBV can afford to keep its policy rate steady for now to support the recovery efforts.
We expect the current refinancing rate at 4.0% and rediscounting rate at 2.5% to remain at these record low levels until at least end-2022. However, with the US Federal Reserve poised to be more aggressive in its policy tightening,
we anticipate the SBV to lean towards beginning its rate hiking cycle from 2Q23 or earlier, if growth momentum stays intact and external risks less concerning.
Further Weakness In VND
The VND is not spared from the Asiawide weakness inflicted by the aggressive repricing in Fed rate hike expectations and concerns of a deeper China slowdown. USD/VND rose about 1.7% in 2Q22 to 23,215, the highest level since Aug 2020. Cushioned by a strong growth outlook and domestic inflation remaining under control, the VND weakness is modest when compared to the Asia Dollar Index (ADXY) which fell over 4% in the quarter.
Going forth, we expect Asia emerging currencies such as the VND, weighed by the risk off sentiment as the Fed looks set to front load its rate hikes further in 2H22. As such, we update our USD/VND forecasts to reflect a steeper upward trajectory. Our updated forecasts are at 23400 in 3Q22, 23500 in 4Q22, 23550 in 1Q23 and 23600 in 2Q23.
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