While global trade is still to see any meaningful rebound as yet, Vietnam began the second half of 2023 with a degree of stability in its external sector, according to an HSBC report released on August 2.
On the external front, exports fell 3.5 per cent year-on-year in July, partly due to base effects. Similarly, imports fell by a smaller magnitude than previously, by 9.9 per cent year-on-year . Trade was still in surplus, by a sizeable $2.2 billion.
Meanwhile, subdued sentiment in the trade outlook continued in July, with the manufacturing Purchasing Managers’ Index (PMI) remaining in contraction territory at 48.7. This marked the fifth consecutive month that Vietnam’s PMI was below the 50-point threshold. That said, high frequency indicators are starting to show signs of some stabilization.
Retail sales rose 7.1 per cent year-on-year in July, with consumption of services an ongoing driver, rising 7.5 per cent year-on-year. International tourists also continued to arrive in larger numbers, with July seeing more than a million visitors. Arrivals from mainland China and Taiwan (China) continued to see greater momentum, thanks to the ongoing recovery in flight frequency.
Headline inflation rose 2.1 per cent year-on-year in the month, remaining well below the State Bank of Vietnam (SBV)’s target of 4.5 per cent for 2023. More encouragingly, core inflation trended lower to 4.1 per cent year-on-year; further away from the ceiling.
“After lackluster GDP growth of 3.7 per cent in the first half of 2023, green shoots have quietly emerged,” the report noted. “Alas, the challenges are not fading, but high frequency indicators point to some positive stabilization.”
The biggest surprise was on the external front. While exports did not cease to fall year-on-year, the magnitude was much smaller at 3.5 per cent.
Though this was in part due to favorable base effects, the level of exports in July rose to the highest in nine months. While major exports, including textiles and footwear and phones, continued to suffer double-digit declines, computer and electronic components surprisingly offset some weakness, jumping 32 per cent year-on-year.
Granted, base effects came to the partial rescue, but signs are pointing to some valuable stabilization, especially from computer-related imports. However, the same cannot be said for the smartphone cycle, which continues to face intensifying headwinds. Despite being still at an early stage, forward-looking PMI indicators point to some stabilization in Vietnam’s near-term trade prospects, with no further deterioration being the first step before a meaningful trade rebound.
Despite the ongoing external drag, Vietnam’s FDI prospects remain intact. New FDI stood at 3 per cent of GDP in the second quarter of the year; on par with the figure in 2022. While it slowed from Vietnam’s peak of over 7 per cent in 2017, tighter global monetary conditions in recent years partly explain the slowdown.
But regionally, Vietnam still remains the second-largest FDI recipient in ASEAN, as measured as a percentage of GDP, just after Malaysia. Tech giants from around the world, including Infineon, LG, and Foxconn, continue to announce expansion plans in Vietnam. All of this provides hope for Vietnam’s external sector to rebound strongly once the trade cycle turns.
Outside of trade, Vietnam’s domestic services continue to act as a pillar of support. A large part of this support was thanks to the uplift from international tourists, with mainland Chinese visitors continuing to steadily flock to the country, reaching around 45 per cent of 2019’s level. For the first time in more than three years, Vietnam welcomed more than a million visitors in a month. Interesting to note was the pace of recovery in Chinese visitors being the highest in Vietnam, exceeding that in Thailand, which is a traditional market for outbound Chinese tourism in ASEAN. This is perhaps thanks to Vietnam’s steady recovery of flights with China, which now stand at 53 per cent of 2019’s level, just after Singapore (75 per cent) and Malaysia (57 per cent). In addition, with the recent policy change in visa exemptions, which is expected to be implemented from mid-August, Vietnam’s tourism outlook continues to be favorable.
Elsewhere, inflation continues to deliver some good news. Headline inflation rose only 2.1 per cent year-on-year in July, well below the SBV’s 4.5 per cent ceiling, thanks to continuing energy disinflation.
While robust services mean that inflation will likely decelerate at a slower pace than headline inflation, inflation dynamics have become less of a concern for the SBV.
“We expect the SBV to deliver another 50bps rate cut, the last one in the current easing cycle,” the report stated. “Recently, the SBV has also signaled its openness to do more if ‘market conditions allow’. That said, we remain cautious of potential upside risks to inflation, not least due to the evolving El Nino phenomenon. Indeed, food inflation momentum has been strong for the past two months. Another factor stems from any subsequent energy price hikes, with Electricity of Vietnam (EVN) recently seeking the government’s permission to hike electricity prices once again due to financial difficulties.”
All in all, though the tide has not fully turned, it is positive to see Vietnam start the second half of 2023 with some improvements in economic activity.
Google translate