United Overseas Bank (UOB) is keeping its 2023 economic growth forecast for Vietnam at 6.6%, in line with the Vietnamese government's target of 6.5%, the Singapore bank said Tuesday.
The update took into account Q1/2023 growth, which was about 6.45% year-on-year, largely due to the low base in 2022.
Vietnam’s real GDP growth in Q4/2022 normalized to a more sustainable pace of 5.92% year-on-year after the 13.67% surge in Q3/2022, as signs of easing were seen in external demand. For 2022, Vietnam’s GDP accelerated 8.02% from 2.58% in 2021, the country's best annual performance since 1997.
While the annual data showed strong performances across the board, signs of moderating growth were apparent and concerning in a detailed breakdown of the data. The manufacturing sector barely expanded, while exports registered their third consecutive month of declines before turning positive in February.
UOB said recent data showed that much of the downward pressures were on external sectors. Exports turned positive in February (11.3% y-o-y) after three consecutive months of declines. However, in value terms, the first two months’ average export value of $2.6 billion was nearly 20% below that of the average of $30.8 billion in 2022, suggesting that export weakness could extend into the months ahead.
However, UOB pointed out that the service sector is picking up. Inbound tourists hit 1.8 million people in February, against the 50,000 people in the same month last year when Covid-19 restrictions were in force.
Several external risks continue to weigh on this outlook, the bank said. Among them are the Russia-Ukraine conflict and its impact on energy, food and commodity prices. The others include global supply chain shifts and disruptions, global monetary policy tightening, and the developments in the global banking sector with its impact on confidence.
Consumer prices are showing tentative signs of turning around, however, it is still early to tell whether the trend is sustainable. Of concern is that core inflation remains well above the overall target, which will be one key consideration for the central bank, according to UOB.
On March 16, Vietnam’s central bank lowered its discount rate by 100 basis points to 3.5% from 4.5% to boost economic growth amid global uncertainties as the U.S. and European banking sectors are in a crisis of confidence.
The State Bank of Vietnam (SBV) also reduced the overnight lending rate in the interbank market by 100 basis points to 6% and trimmed the cap on the lending interest rates for short-term loans in some sectors to 5% from 5.5%.
“But the most important part of the latest policy move was that SBV left the refinancing rate unchanged at 6%. This signals that the policy stance remains unchanged despite cuts in other interest rates,” UOB noted.
As the SBV balances economic growth with ensuring price stability, there will be an increasing bias to shift towards a more accommodative stance ahead, the Singapore bank said.
“With the U.S. Fed poised to end its rate hike cycle as soon as May 2023 and that domestic inflation rates are showing some tentative signs of turning, we anticipate that the SBV will cut its refinance rate sometime in Q2/2023 by 100 basis points to 5%.
“For now, we think this could be a one-off move, and more rate cuts may be on tap if domestic price pressures ease off further, although this is highly uncertain for now,” UBO added.
Despite SBV’s rate cut in March, a strong rebound in exports and industrial production together with easing inflation are likely to anchor the Vietnamese dong stability.
“Overall, we expect USD/VND to trace other USD/Asia pairs higher to 24,200 in Q2/2023 before easing lower to 24,000 in the third quarter, 23,800 in the fourth quarter, and 23,600 in the first quarter of 2024.”
In mid-March, the World Bank said that Vietnam’s economic expansion might ease to 6.3% in 2023 from a robust 8% last year, reflecting domestic and external headwinds.