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UOB forecasts Vietnam’s inflation at 5% in 2023

The Saigon Times

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HCMC – Singapore’s United Overseas Bank has forecast Vietnam’s headline inflation rate at 3.7% in 2022 and 5% in 2023 due to multiple challenges and risks.

The bank released a report on its economic growth and forecasts for the next quarter for various markets, including Vietnam.

After touching the lowest level in nearly a year at 1.4% in February, inflation in Vietnam has been trending up to 2.86% in May, which is still below the State Bank of Vietnam’s (SBV) target of 4%. Rising 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 a double-digit pace in the past 14 months.

As Vietnam can supply foodstuffs domestically, the upside pressure on prices is largely dominated by the transport-related components of the consumer price basket, accounting for some three-fourths of the inflation thus far, compared to an average of 50% in 2021.

The country’s gross domestic product (GDP) growth for 2022 was maintained at 6.5%. The forecast was made based on the 6% and 7.7% GDP growth forecast in the second and third quarters of this year, respectively.

According to UOB, Vietnam’s growth momentum remained intact in the second quarter of the year. The manufacturing sector continued to power on, registering year-on-year growth of 9.24%.

The growth was also reflected in the purchasing managers’ index, which was in its eighth-month expansion in May.

A forward indicator, foreign direct investment (FDI) inflows, pared back somewhat in May amid uncertainty from the Russia-Ukraine military conflict and elevated commodities prices.

On the consumer side, the removal of domestic Covid-19 restrictions and the reopening of cross-border travel have injected new vigor into the service sector. Overall retail trade in May accelerated 9.69% over the year-ago period, well above the 3% drop in 2021, led by travel, accommodation and catering services.

“We expect tourism-dependent sectors such as accommodation and catering will return to growth this quarter after nine straight quarters of declines,” UOB said in its report.

However, several external risks are posing challenges to this outlook, including the Russia-Ukraine military conflict and its impact on commodity prices, resulting in inflation risks on domestic and external demand, global supply chain disruptions, policy tightening globally, and Covid-19 risks.

With the uncertain outlook from geopolitics and well-managed domestic inflation, the Vietnamese central bank can afford to keep its policy rate steady for now to support the recovery efforts.

The current refinancing rate was expected to be kept at 4%, and the rediscounting rate at 2.5% to remain at these record low levels until at least end-2022. However, with the U.S. Federal Reserve poised to be more aggressive in its policy tightening, SBV may lean toward beginning its rate hiking cycle from the second quarter of next year or earlier if the growth momentum stays intact and external risks become less concerning.

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