2024 – a look back at ups and downs

Ngo Dang Khoa, head of markets and securities services, and Vu Binh Minh, associate director of rates trading at HSBC Vietnam offers an insight into Vietnam's economic landscape in 2024 and their 2025 forecasts.

2024 started with a firm belief of economic recovery and a hope for a brighter global economic outlook as well as the expection of Fed to start their rate cut cycle soon.

However, it turned out to be a volatile year for the world’s economy, with a lot of uncertainties. The lingering geopolitic tensions, the reversal of globalization, the U.S. presidential election scenarios and many other political-social events have accentuated the fragmentation of the global economy.

In the U.S., there were worries that the world’s powerhouse would heading for a slowdown with a hard landing which has yet come. In contrast, the recent macroeconomic data, particulaly in employment and consumption, showed positive signs of a growing economy.

On the other hand, another large economy of the world, China, has faced a completely opposite scenario. Disappointment has replaced the high hopes that accompanied China’s full reopening as its challenging real estate sector and weak domestic consumption have raise concerns of deflation risks.

China’s consumer confidence is lower, which is likely to negatively impact on its growth, due to the weakness of its property sector – the main driver that has undermined consumer confidence and spending.

Vietnam, on the other hand, has also experienced a lot of ups and downs given its open economy and integration to the world. From a challenging Q1/2024, 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% and 7.4% in Q2 and Q3, 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 H2/2024 economic recovery continued to be led by manufacturing, with index of industrial production (IIP) grew 8.4% year-on-year in 11 months.

This was corroborated by healthy trade data, with exports rising 15.4% year-on-year in 11 months. Encouragingly, the trade recovery that was initially centered around electronics is showing signs of broadening out, with textiles and footwear exports rising 16.7% year-on-year in Q3.

On FDI, Vietnam continued to attract foreign inflows as fundamental prospects remain positive. Although growth in newly registered FDI moderated in Q3, sectors beyond manufacturing such as real estate and energy saw increases in investment.

A total of $21.68 billion was disbursed, up 7.1% 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% of inflows to date.

Existing investors continue to make commitments, supporting Vietnam’s expanding manufacturing capabilities. Foreign investment into the real estate sector has also risen over recent months. This is likely being supported by the revised Land Law effective August, which relaxed some regulations to spur demand.

Looking ahead, manufacturing inflows are also likely to remain resilient, with General Secretary To Lam’s recent visit to the U.S. yielding investment intentions from various firms such as Meta.

Shunsin, a subsidiary of Foxconn, reportedly sought for a permit to invest 80 million to produce integrated circuits in the northern province of Bac Giang, indicative of improving production capabilities in Vietnam.

It is not just electronics manufacturing, but also other high value-add sectors that have been generating interest from notable MNCs, with Google set to launch its Vietnam office in April 2025 and Nvidia to open an R&D center to develop AI in the country.

Authorities also continue to actively expand and enhance diplomatic ties, with Vietnam recently elevating ties with France to a Comprehensive Strategic Partnership and signing a Comprehensive Economic Partnership agreement with the United Arab Emirates (UAE).

Having said that, Vietnam has also had notably tough time. Data showed that Vietnam has been the most vulnerable to U.S.’s consumer demand in ASEAN. The U.S.’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 U.S. 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% 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 the State Bank of Vietnam’s (SBV) 4.5% target ceiling will allow the SBV to maintain an accommodative stance and focus on supporting growth, which contributes to stablize 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, the Vietnamese dong's outlook has recently faced more fluctuation due to the volatilities before the U.S.’s presidential election, China’s stimulus packagge and other geopolitic tensions.

To summarize, the FX movement can be highlighted in three stages in the three most recent quarters respectively. In early Q2, USD-VND has increased significantly from 24,650 to this year’s peak of 25,460 within only two months, equalling a 3% depreciation.

During this time, declining Fed rate cut expectations resulted in differences in monetary policies and widening the VND-USD interest rate gap, ongoing better data in the U.S. and geopolitical risks have supported the greenback during this period.

To support the market, SBV had to intervene by selling USD from its reserve as well as issuing short-term bills to reduce pressure on the exchange rate. In Q3, the trend reversed as USD-VND rate fell to 24,600, an equivalence to a depreciation of 1.3% by the end of September.

Thanks to the support from the regulator as well as Fed’s first rate cut, the DXY was cooled off, narrowing VND-USD interest rate gap. However, in Q4, the FX pressure has returned. In October alone, Asian currencies have erased half of their gains in Q3 in comparision with USD as the greenback has restored its strength.

In general, some currencies were more vulnerable with capital outflows, for example, USD-INR reached a record high while USD-KRW is hovering near this year’s peak.

Similarly, USD-VND continued to rise strongly, nearly back to this year’s peak. The fluctuation before U.S. presidential election until Donald Trump won, together with its optimistic economic data, particularly in employment, as well as reduced Fed’s rate cut expectation in the new cycle.

Similar to previous period, the SBV employed a flexible monetary policy by setting the central rate of USD at 25,450 to support the market while continuing to reintroduce bill issuance tool to moderate the liquidity in interbank market, indirectly restoring the confidence for the market as well as lowering FX pressure.

At present, even after the U.S. presidential election, it’s still difficult to anticipate a clear scenario of FX movement in upcoming time. 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 U.S. and other countries not yet converged have put more weight on the SBV’s objectives. In fact, the interbankinterest rates continued to face upside pressure. Particularly, the average VND interbank interest rate increased sharply for one month or less in early November while the overnight interest rate was 6.2%/year, a year-to-date high in 2024.

From the beginning of October until now, the SBV has to flexibly employed liquidity management tool to stabilize exchange rate by bill issuance and ensure liquidity through open market operations.

2025 – ready for the new era

The National Assembly set 2025’s GDP growth target at 6.5-7%, asking the Government for efforts to achieve 7-7.5%, which is higher than this year’s budget and equalling the actual target of 7% 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 two-digit pace, with broadened growth in other sectors including agriculture products.

Given the strong recovery momentum in Q3, HSBC Global Research has raised its GDP forecast for 2024 to 7% (from 6.5%), while maintaining GDP forecast for 2025 at 6.5%.

On inflation target, price developments are turning more favourable in H2/2024. 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 maintains inflation forecasts at 3.6% in 2024, well below the SBV’s target ceiling of 4.5%.

For 2025, we keep our inflation forecast at 3%. 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 U.S. policy could have important consequences for ASEAN, including Vietnam, in many ways. In particular, the Republican proposed to implement a minimum 60% import tariff on China and 10-20% universal import tariff on the rest of the world.

Since 2018 when U.S. tariff increases on China started, Vietnam has gained substantial share in the U.S. market. Footwear exports have jumped from 20% to over 30% of US import demand. More importantly, Vietnam exports over 40% of its garments and 33% 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 U.S. share in the short term. As result, exporters may have trouble finding alternative markets to substitute production away from the U.S. 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 U.S. 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 U.S. 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 U.S. 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% until end-2025.

Dual transition – a pillar of growth

“Dual transition – digital transformation and green transition” has become a strategic growth trend in many countries, which helps them move towards both sustainability and digital targets, making the most of the benefits from this dual transition.

For instance, the world’s largest digital economy has launched the “Eastern Data and Western Computing” initiative to relocate data centers from the eastern region, where land and energy resources are limited, to the western region, leveraging natural cooling, clean energy, and cost-effective resources.

Vietnam has emerged as the most active country in Asia as well as in the world, which also keeps up with this trend, taking digital transformation and green transition as its important growth drivers. We can see the multi-dimensional efforts of Vietnam’s Government to keep up with dual transition trend.

For instance, they already have a National Strategy for Digital Economy and Digital Society Development to 2025, a vision to 2030, and a National Green Growth Strategy for 2021-2030 and a vision to 2050.

2025 will be a key milestone as Vietnam is going to achieve a lot of important goals, including the digital economy accounting for 25% of its GDP and green credit accounting for 10% of total outstanding debts. In response to the Government’s efforts, businesses are rewiring their organizations and deploying technology integration at scale.

As of 2023, 47% of businesses in Vietnam have undergone some kind of digital transformation, according to Enterprise Development Agency (MPI). They have also started working out their own net zero transition plans.

The awareness of local businesses has been rising. According to a PwC 2022 survey, 40% of them have planned for and set themselves ESG commitments. Net zero transition was said to be critical to them by 48.7% of businesses in a 2024 survey by the Vietnamese Government’s Private Economic Development Research Board.

In fact, Vietnam has conducive conditions to implement the dual transition. Its demographic tailwinds include a population of over 100 million, a work force that is 70% of the total population, almost 80% of Vietnam’s population using the internet, smartphone ownership has doubled from a decade ago, etc.

All of these have contributed to open up a huge potential of digital consumption for Vietnam. Vietnam is among the fastest-growing in ASEAN with impressive growth of 16%, according to the e-Conomy SEA 2024 report. Measured by gross merchandise value (GMV), the country has the potential to become the second-largest digital market in the region by 2030.

Moreover, Vietnam's renewable energy potential is also huge. As the most naturally suited country in Southeast Asia to develop wind and solar energy, Vietnam already ranks second among developing countries in attracting FDI into the renewable energy space.

However, some challenges remain. First, how to improve Vietnam’s digital literacy should be among top priorities. Encouragingly, the National Digital Transformation Program is a good example of Government’s efforts in playing an active role to facilitate the digital transformation of the economy.

All in all, digitalization brings both opportunities and challenges to Vietnam. In order to leverage its favourable demographics and achieve its digital ambitions, investments need to be channelled into not just new areas such as artificial intelligence (AI), but also foundational areas such as digital education and traditional infrastructure.

Both the digital and green transitions require enormous investments, in which finance will play a critical role. Vietnam’s state budget for fighting climate change can provide about $130 billion, less than half of what is needed. Cost is also the top challenge in digital transformation, as cited by 60% of businesses in a survey by the Ministry of Planning and Investment in collaboration with the USAID.

Global banks like HSBC can help to facilitate finance, to connect investors and to provide our clients with relevant expertise and to channel capital in the right direction.

Last but not least, Vietnam should continue to invest more on infrastructure, which is fundatmental to its economic growth and quality FDI attraction. The Government is commited to push public investment, focusing on strategic infrastructure projects which connect economic hubs. This will be a key booster to take Vietnam into the new era of transformation.