Vietnam’s GDP grew 5.03% year on year in 1Q22, extending its pace from 5.22% in 4Q21 as the services sector recovered after more parts of the economy reopened with mobility easing and distance restrictions.
Manufacturing continued to lead, and most importantly, the general services sector grew 4.58% year-over-year, from 1.22% in 4Q21 and 3.62% in 1Q last year. It was clear that the services business could benefit from the lifting of the COVID-19 restrictions imposed during 2H21.
The data shows that Vietnam’s underlying growth momentum remained intact in 2Q22. Manufacturing industry continued to grow, registering 9.24%
Full Year Earnings in May YTD, vs. 8.28% in April and the strong performance of 12.59% in May 2021. This performance is also reflected in the Purchasing Managers Index (PMI), which entered its 8th month of expansion in May.
A leading indicator, foreign direct investment (FDI) inflows eased somewhat in May amid uncertainty over the Russia-Ukraine conflict and high commodity prices. Foreign direct investment registered was down 16.3% year-on-year to $11.71 billion, the fourth straight month of negative numbers. The high base of strong inflows of registered FDI in 2021 of $31.15 billion of USD 31.15 billion has also resulted in subdued results so far. The annualized YTD inflow would total USD 28 billion, which is in line with the figure achieved in the pandemic-ravaged year 2020.
On the consumer side, the lifting of domestic COVID-19 restrictions and the reopening of cross-border travel have given the service sector a new boost. General Retail
trade accelerated 9.69% YTD in May, versus 6.54% in April and well ahead of the 3% decline in 2021, led by travel services (+34.7% YTD in May) and accommodation and catering (15 .75% increase). We expect tourism-dependent sectors, such as lodging and food, to grow again in 2Q22 after 9 consecutive quarters of declines. With the latest data and headwinds, we keep our 2022 GDP growth forecast for Vietnam at 6.5%, in line with the official projection of 6.0-6.5%. Our forecast assumes GDP growth to accelerate to 6% y/y in 2Q22 and then continue to 7.6% in 3Q22.
However, several external risks challenge this outlook: 1) the Russia-Ukraine conflict and its impact on commodity prices (and consequent inflation risks on domestic and external demand), 2) global supply chain disruptions, 3) global policy tightening, and 4) COVID-19 risks. After hitting its lowest level in nearly a year at 1.4% yoy in February, inflation in Vietnam has risen to 2.86% since May, still below the State Bank of Vietnam (SBV) target. of 4%. Increased prices of global energy and food, as well as supply chain disruptions, have contributed to the inflation jump in Vietnam. In particular, transportation-related costs have increased at a double-digit annual rate for the past 14 months.
Given Vietnam’s ability to supply food domestically, the upward pressure on prices is largely dominated by the transport-related components of the consumer price basket, which so far represent about 3/4 of inflation, compared to an average of 50% in 2021 With the conflict between Russia and Ukraine lasting for more than 100 days and with no signs of tensions and sanctions easing, we expect headline inflation in Vietnam to reach 3.7% in 2022 and rise further to 5% in 2023 .
CENTRAL BANK
Accommodating attitude to support growth
With the uncertain prospects of geopolitics and domestic inflation remaining well under control, the SBV can afford to keep its key rate stable for the time being to support recovery efforts.
We expect the current refinancing rate of 4.0% and the rediscount rate of 2.5% to remain at these record lows until at least the end of 2022. However, with the US Federal Reserve poised to be more aggressive in its policy tightening,
we expect the SBV to lean towards the start of its rate hike cycle from 2Q23 or earlier, if growth momentum remains intact and external risks are less of a concern.
CURRENCY
Further weakness in VND
The VND is not spared the weakness in Asia caused by the aggressive price revision in Fed expectations and concerns about a deeper slowdown in China. The USD/VND rose about 1.7% in 2Q22 to 23,215, its highest level since August 2020. Supported by a strong growth outlook and domestic inflation that remains under control, the VND’s weakness is modest compared to the Asia Dollar Index ( ADXY), which dropped. 4% in the quarter.
Going forward, we expect emerging Asian currencies such as the VND to be weighted by sentiment risk as the Fed is poised to accelerate its rate hikes further in 2H22. Therefore, we are updating our USD/VND forecasts to reflect a steeper upward trajectory. Our updated forecasts are 23400 in 3Q22, 23500 in 4Q22, 23550 in 1Q23 and 23600 in 2Q23.
