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Friday, October 7, 2022

Recovery in sight amid uncertainty

By Pham Le

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HSBC Vietnam’s “Vietnam at a glance” report says highlighting that Vietnam’s economy maintained its strong momentum in the first quarter of this year. The country is expected to return to steady growth but is likely to face higher inflation in 2022.

On track to recovery

According to the report, Vietnam’s recovery momentum has been sustained into the first quarter of 2022, thanks to both external and domestic pillars of growth. The country saw a rosy start to 2022, with its first-quarter GDP growing firmly by 5.0% y-o-y, thanks to a broad-based recovery. Private consumption continues to rebound, albeit slowly. More encouragingly, Vietnam has joined its peers to re-open its borders from mid-March, paving the way to revive its damaged tourism sector.

In addition to its firm external engine, Vietnam’s domestic demand has gradually been recovering, as the country insists on its strategy of living with Covid. Despite the major spike in Omicron cases, the authorities have not ramped up restrictions to the same extent as last year. Part of the confidence is thanks to Vietnam’s accelerated vaccination progress: 80% of the population has been fully vaccinated, with closer to 50% being boosted.

Similar to the fourth quarter of 2021, Vietnam’s manufacturing sector remains the key driver for growth in quarter one of 2022. Manufacturing output expanded by 7.8% y-o-y, driven by double-digit growth in electronics production. Indeed, the strong performance is also reflected in Vietnam’s steaming external engine. Export growth hit almost 15% y-o-y in March, bringing first-quarter growth to almost 13% y-o-y. This is mainly thanks to the elevated demand for electronics products.

Aside from benefitting from an extended tech cycle, Vietnam’s exports were strong across all sectors: textile/footwear, machinery and wooden products. Its export outperformance also reflected an easing of the significant shortage of labor, especially after the Tet holidays, though some parts of the economy are reported to still face a lack of labor.

After two years of closure, Vietnam re-opened its borders fully to all vaccinated international visitors from March 15. Over 40,000 tourists flocked to Vietnam in March alone, almost tripling the monthly average during the past two years of the pandemic. The number of arrivals from the U.S. and Europe rose substantially while the other chunk came from Asia. Vietnam aims to attract 8 to 9 million foreign arrivals in 2022, around 40-50% of 2019’s level.

Challenges remain

Despite the optimism, growth headwinds prevail. In particular, Vietnam is facing multiple challenges given the elevated global energy prices. It will increase its energy bills, deteriorating its trade position terms. This is likely to shrink Vietnam’s external metrics, making it run a second consecutive current account deficit.

While retail sales have rebounded sharply from last October’s troughs, their growth was still slow at 2.5% y-o-y in the first quarter of this year. In particular, HCMC still saw a distant 5% gap below its pre-pandemic retail levels. Another part of the equation is Vietnam’s weak labor market. Meanwhile, high oil prices are also likely to squeeze residents’ real incomes, especially when the labor market is at a nascent stage of recovery.

Despite the strong export performance, Vietnam’s trade surplus shrank to a minimal level of only US$0.8 billion in the first quarter. This is not entirely surprising, given the import-intensive nature of its manufacturing sector. Amid the energy crunch, rising energy bills merit great attention.

According to the report, energy inflation continues to gain momentum, consistently driving consumer prices. Headline inflation accelerated to 0.7% m-o-m in March, translating into y-o-y growth of 2.4%. Similar to previous months, a surge in transport costs remains the primary driver. Domestic gasoline prices were raised seven consecutive times since early December, reaching record highs in March.

Given a surge in global oil prices, the trend is expected to last a while, putting upward pressure on inflation. Considering the high energy prices, inflation is forecast to be 3.7%, still below the SBV’s 4% inflation target in 2022.

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