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Tuesday, June 18, 2024

Trade grows, but headwinds stiffen

By Pham Le

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Vietnam’s external sector continues to shine, thanks to booming electronics shipments and consistent FDI inflows. However, vigilance is needed as shifting global demand and supply chain disruptions may dampen export growth.

Steaming as before

In its Vietnam at a glance report, HSBC Vietnam said that ever since the country embarked on its reopening, the external engine has been roaring. April’s export growth was strong, driven by its burgeoning electronics exports.

The bank remarks that Vietnam has transformed into a global tech manufacturing base, gaining substantial market shares in phone and processor chip exports. Despite being affected by the pandemic, the country continues to benefit from consistent FDI inflows from tech giants, both traditional and new players.

Export growth helps the country claim its past glory once again. After seeing a strong pace of 13% y-o-y in Q1-2022, April’s export growth more than doubled to 25% y-o-y. While seeing broad-based growth across key sectors, almost 40% of the growth was thanks to steaming electronics shipments, up 33% y-o-y.

Since Covid-19, the country has seen some ups and downs in its external engine. One of the first Asian countries to be hit in early 2020, Vietnam has emerged strongly from the pandemic after suffering from severe local supply chain disruptions due to prolonged lockdowns in the summer of 2021.

As the Omicron risk fades, the country continues to benefit from its grand reopening strategy. More migrant workers are returning to cities, alleviating labor shortages in factories, which are seeing strong export orders. In addition to exports, April saw a massive inflow of tourists, while household spending continued to rebound.

Headwinds stiffen

According to the bank, whether Vietnam’s exports can be sustained at such a fast pace is worth thinking about. Indeed, its bounce in industrial production is stronger than its peers, partly reflecting a boost since Vietnam reopened its economy last October. That said, trade headwinds are stiffening.

For one, as the impact of Covid-19 on household spending fades, global consumption is shifting from goods to services. The other factor is China.

There is a popular argument that Vietnam may reap the benefits from China’s supply chain disruptions, as more firms are likely to diversify their production lines. However, Vietnam itself is affected by China’s supply chain disruptions, evidently shown at the start of Covid-19 in early 2020.

While Vietnam’s exports have been shining over the years, its manufacturing base is quite import-intensive. Around 30% of its imports come from China, most of which are concentrated in electronics (30%) and machinery equipment (22%).

As such, prolonged logistics bottlenecks in China pose headwinds for Vietnam’s future export growth. Securing materials amid Covid-19 restrictions in China remains a major concern for local producers.

Optimism continues

According to HSBC, Vietnam’s inflation pressure remains low in ASEAN. While oil prices were hiked, April’s inflation of 2.6% was still relatively low, in line with market expectations. As local demand continues to recover and global commodity prices remain elevated, the bank expects Vietnam’s inflation to rise by 3.7% in 2022. This means the price pressure is likely to remain below the State Bank of Vietnam’s 4% inflation ceiling.

Since announcing the reopening of its border from March 15, the country has seen some imminent benefits of returning tourism. It welcomed some 100.000 tourists in April, three times as much as in March.

According to Destination Insights with Google, Vietnam and the Philippines are the only two Asian countries in the top 10 with the highest growth in tourism demand in April. Tourists from Europe (19%), South Korea (14%) and the U.S. (13%) accounted for half of the total tourist arrivals.

Outside of tourism, domestic demand is also set on a strong footing, thanks to the easing of local restrictions. After a slight pull-back in the first quarter of this year, mobility has exceeded pre-pandemic levels since early April. The improvement has led to a continued recovery in retail sales, rising 5.8% y-o-y in April. Not only were goods up by 2% m-o-m, but services- and tourism-related spending were up by 7% m-o-m, signalling a rosy start to the recovery of services.

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