Vietnam has experienced a lot of ups and downs, economically, given its open economy and integration to the world, according to HSBC.

Vietnam economic picture

From a challenging in the first quarter of 2024, the domestic economy outlook has turned more positive as the recovery continues to firm up as the year progresses, which brings Vietnam back as ASEAN’s growth star. In particular, growth improved and surprised on the upside, rising to 6.9 per cent and 7.4 per cent in the second quarter and in the third quarter, respectively.

The recovery in the external sector has started to broaden out beyond consumer electronics, although the domestic sector remained relatively muted despite seeing incremental improvements. There were concerns that the impact of Typhoon Yagi, the strongest storm Vietnam faced in 70 years, would weigh on growth. The northern provinces were hit particularly hard in early September with damages estimated at over $3 billion. However, the impact has been primarily concentrated in the agriculture, forestry and fishery sector. Meanwhile, manufacturing and trade remained resilient and continued to lead the recovery.

Particularly, the momentum of the second half of 2024 economic recovery continued to be led by manufacturing, with IIP grew 8.4 per cent year-on-year in 11 months. This was corroborated by healthy trade data, with exports rising 15.4 per cent year-on-year in 11 months. Encouragingly, the trade recovery that was initially centred around electronics is showing signs of broadening out, with textiles and footwear exports rising 16.7 per cent year-on-year in the third quarter of 2024.

On FDI, Vietnam continued to attract foreign inflows as fundamental prospects remain positive. Although growth in newly registered FDI moderated in the third quarter of 2024, sectors beyond manufacturing such as real estate and energy saw increases in investment. A total of $21.68 billion was disbursed, up 7.1 per cent year-on-year. This marks the third consecutive year in which Vietnam’s FDI disbursement exceeded $20 billion. Intra-ASEAN investments are leading the way, making up 40 per cent of inflows to date.

In a research, Mr. Ngo Dang Khoa, Head of Markets and Securities Services, and Mr. Vu Binh Minh, CFA - Associate Director of Rates Trading at HSBC Vietnam said that looking ahead, manufacturing inflows are also likely to remain resilient, with General Secretary To Lam’s recent visit to the US yielding investment intentions from various firms. Authorities also continue to actively expand and enhance diplomatic ties, with Vietnam recently elevating ties with France to Comprehensive Strategic Partnership and signing a comprehensive economic partnership agreement with the United Arab Emirates (UAE).

However, Vietnam has also had notably tough time. Data showed that Vietnam has been the most vulnerable to US’s consumer demand in ASEAN. US’s better-than-expected consumption indicators partly explains Vietnam’s recent strong recovery in manufacturing sector. However, it also comes with the downside risk that makes Vietnam most vulnerable to the slowdown in US’s household spending as well as its trade policy to avoid Chinese exports coming from “intermediary trade partners”.

Vietnam has the highest exposure to the US market in ASEAN, led by textiles and garments, footwears, wooden furniture and machinery. With president-elect Donald Trump in charge, trade and tariff policy is likely a challenge for short-term trade growth outlook.

In addition, one of the key growth pillars – domestic sector - is recovering more slowly than initially expected, with retail sales growth still below the pre-pandemic trend and signs of a firm pick-up haven’t yet to be seen. Services continues to provide supports to retail sales with tourist arrivals rising to 1.7 million in November, bringing the total year to date number to 15.8 million, up 41 per cent year-on-year.

Encouragingly, the government has put in place measures to support a wide range of domestic sectors. Environment tax cuts on fuel and value-added tax cuts for certain goods and services will last until year-end 2024, while the revised Land Law effective from August will buttress the outlook for real estate. The fiscal and monetary policy is likely to remain accommodative to accelerate economic recovery, helping Vietnam achieve Government’s annual economic growth targets and paving the way for next year.

On monetary policies, on the back of more favourable price developments vis-à-vis oil and commodity prices, inflation has shown notable moderation in recent months. While risks such as from supply-side disruptions from Typhoon Yagi and geopolitical conflicts remain present, inflation well below from the State Bank of Vietnam’s (SBV) 4.5 per cent target ceiling will allow the SBV to maintain an accommodative stance and focus on supporting growth, which contributes to stablise macro economy and continue to control inflation.

On foreign exchanges (FX), USD-VND exchange rate continues to see another year full of uncertainties. Similar to other currencies in the region, Vietnam Dong’s outlook has recently faced more fluctuation due to the volatilities before

On interest rates, as the Government is commited to achieve this year’s growth targets, it’s not an easy task for the SBV to maintain accommodative monetary policy to support growth through lowering its policy rate and driving credit growth. However, the FX upside risks, and the monetary policy of the US and other countries not yet converged have put more weight on SBV’s objectives. In fact, the interbankinterest rates continued to face upside pressure.

2025 – ready for the new era

The National Assembly aims 2025’s GDP growth target at 6.5-7 per cent, asking the Government for efforts to achieve 7-7.5 per cent, which is higher than this year’s budget and equalling the actual target of 7 per cent for 2024, reflecting a high hope for improvement of the economy next year.

In fact, it is reasonable for this expectation. The manufacturing sector has emerged strongly from last year’s woes. This has supported export growth at 2-digit pace, with broadened growth in other sectors including agriculture products. Accordingly, HSBC Global Research has raised its GDP forecast for 2024 to 7.0 per cent (from 6.5 per cent), while maintaining GDP forecast for 2025 at 6.5 per cent.

On inflation target, price developments are turning more favourable in 2H24. Pressure on some agricultural products is expected to lessen as the weather transition from El Niño to La Niña brings more favourable harvesting conditions to Southeast Asia. Taking all these into consideration, HSBC Global Research maintain inflation forecasts at 3.6 per cent in 2024, well below the State Bank of Vietnam’s target ceiling of 4.5 per cent. For 2025, we keep our inflation forecast at 3.0 per cent.

However, there are risks that should be watched closely next year. In addition to global energy prices, Vietnam is also vulnerable to food shocks. For instance, pork prices have been elevated as pork supply has been affected by African Swine Fever.

Besides, whether end-demand for goods improves further will be key in determining the strength of Vietnam’s recovery, as Western markets make up close to half of Vietnam’s exports. The trajectory and pace of consumer spending in the West will therefore need to be closely watched.

"Clearly, president-elect Donald Trump in charge and a Republican-controlled Congress will affect the outlook for global economiy and trade in upcoming time. It’s still early to comment on Trump administration, however, no matter how US policy could have important consequences for ASEAN, including Vietnam, in many ways," said Mr. Khoa and Mr. Minh.

In particular, the Republican proposed to implement a minimum 60 per cent import tariff on China and 10-20 per cent universal import tariff on the rest of the world. Since 2018 when US tariff increases on China started, Vietnam has gained substantial share in the US market. Footwear exports have jumped from 20 to over 30 per cent of US import demand. More importantly, Vietnam exports over 40 per cent of its garments and 33 per cent of its footwear to the US. While Europe is the second largest importer of these products, its market would not be able to fully absorb the US share in the short term.

As result, exporters may have trouble finding alternative markets to substitute production away from the US if tariffs become an issue. Although it might be difficult to switch to alternative markets in the short term, Vietnam can perhaps hedge against potential tariff risks from the US over the medium-to-long term through multiple free trade agreements. Currently, Vietnam has signed FTAs with major trading partners, including China, Japan, South Korea, and the EU.

In addition to tariffs, currency concerns may re-emerge as an issue for policymakers. Vietnam was named as a currency manipulator by US Treasury Department in December 2020 and has been removed from the list in April 2021. Vietnam is still in in the most recent US Treasury monitoring list. While being on the list has few direct short-term implications, it is likely that the US authorities will closely monitor Vietnam’s trade data. Beside the impact from Fed policy, the USD movement in international market is also worth considered for upcoming FX trend.

Meanwhile, given uneven recovery and next year’s high growth target, HSBC Global Research expects the SBV to maintain an accommodative monetary policy and keep its policy rate at 4.5 per cent until end-2025.