Vietnam’s recovery story remains intact but uneven as domestic-oriented services lag behind external-facing sectors, HSBC researchers have said, highlighting better growth prospects for this year.
Vietnam’s GDP expanded in the first quarter of this year by a slower-than-expected pace of 5.66% year-on-year, undershooting HSBC and market expectations of 6.4%. However, this does not mean that the recovery story is derailed. Rather, Vietnam remains firmly on a rebound path, led by better trade prospects.
The biggest downside came from the services sector, which only expanded by 6.1% year-on-year in Q1. There continues to be a divergence in the recovery, with domestic-oriented sectors lagging behind external-facing sectors.
Information and communications, financial, and professional services have slowed from Q4/2023, and the real estate sector’s contribution continues to be minimal, reflecting ongoing weakness in the property cycle.
Although Vietnam’s export cycle has started to see green shoots, it has not translated into a meaningful boost to its domestic sectors. Tourism-related services continued to enjoy positive momentum. Vietnam’s monthly inbound tourists approached close to 1.6 million, exceeding pre-pandemic levels by 13%. A rally in mainland Chinese tourists’ return added some much-needed support.
Despite an uneven recovery in services, the external-facing manufacturing sector is returning to its past glory. Exports expanded by over 14% year-on-year in March, bringing quarterly growth to 17% year-on-year. This was largely driven by an upturn in the electronics cycle, benefiting from being a key production hub for Samsung’s smartphones.
While near-term trade is about to take off again, long-term foreign direct investment (FDI) prospects remain a bright spot. Greenfield FDI rose almost 60% year-on-year in Q1.
Looking at the source of investors, Singapore has regained the crown as Vietnam’s largest FDI provider, with an impressive share of 50%. Greater China, which accounted for half of Vietnam’s FDI in 2023, came second with a share of 30%. Korea and Japan, who traditionally are Vietnam’s two largest investors, only accounted for 15% combined.
Although Vietnam’s inflation remains largely benign and below the mandatory ceiling, researchers expressed their concerns about price pressures coming from rice and energy inflation. Headline inflation is forecast at 3.9% this year.
The researchers expect the State Bank of Vietnam to hold its policy rate steady at 4.5% through 2025.
Given a weaker-than-expected Q1 GDP growth, HSBC has kept its their yearly growth forecast unchanged at 6.0% for 2024, but has updated its quarterly forecasts, accounting for a stronger pick-up in activities in the second half of this year. Vietnam’s GDP is forecast to expand 6.0% in Q2, 6.2% in Q3, and 6.2% in Q4, versus the respective previous projections of 6.2%, 6.5%, and 5.5%.
“We believe Vietnam remains on track to see better growth prospects in 2024, but it will take time for the recovery to broaden out,” the researchers concluded.
In a note released on Tuesday, Singapore-headquarter international bank UOB noted that prospects for Vietnam this year remain positive despite downside risks stemming from geopolitical tensions.
The recovery in the semiconductor cycle, stable growth in China and the region, and the likely easing of monetary policy by major central banks in the months ahead will support the outlook for the year, said UOB researchers.
They also reaffirmed their growth forecast for Vietnam at 6% for 2024, compared to the official 6-6.5% growth target.
The Ministry of Planning and Investment on Wednesday proposed sticking to the GDP growth target of 6.5%, the mandatory upper limit, this year after the Q1 pace hit a five-year high.