UOB retains Vietnam’s 2024 GDP growth forecast at 6% despite Q2 acceleration

Singapore’s leading bank UOB has kept its GDP growth projection for Vietnam unchanged at 6% for this year, although the Q2 performance exceeded the bank’s and market expectations.

Vietnam’s real GDP expanded 6.93% year-on-year in Q2, extending the momentum from the upwardly revised 5.87% year-on-year pace in Q1/2024 and 6.72% year-on-year gain in Q4/2023, and well ahead of the 4.05% gain in Q1/2023.

Cumulatively, Vietnam’s economy expanded 6.42% year-on-year in the first half of 2024, well ahead of the 3.84% posted in H1/2023. “The robust outcome sets a positive tone for the rest of this year after a challenging 2023,” the bank said in a note on Tuesday.

The government has set a growth target of 6-6.5% this year.

Both the manufacturing and services sectors continued to provide support to business activities, while external trade maintained a strong pace in Q2/2024.

However, UOB analysts caution that the second half of this year is likely to see a more muted performance, due to the higher base in H2/2023 as well as downside risks that are still present.

The risks include conflicts between Russia and Ukraine and in the Middle East, which could disrupt global trade and energy markets. Nonetheless, the recovery in the semiconductor cycle, stable growth in China and the region, and the likely easing of monetary policy by major central banks will be supportive of the outlook.

Revival of domestic spending has put upward pressures on consumer prices, which saw Vietnam’s headline CPI accelerating for the fifth consecutive quarter to 4.39% year-on-year in Q2/2024 (3.77% in Q1), closing in on the government’s upper band of 4.50%.

Going forward, a factor that could impact on inflation is the planned 6% increase to the minimum wage from July 2024, a slightly larger increase compared to 5.88% in July 2022. Vietnam increased the minimum wage by 7.3%, 6.5%, and 5.3% in 2017, 2018, and 2019, respectively.

The recent weakness of the Vietnamese dong in the face of a strong U.S. dollar and the acceleration of inflation rates could see the State Bank of Vietnam (SBV) proceeding cautiously in any changes to its policy rates.

Keeping in mind that that growth momentum is likely to be less stellar in H2, the SBV is expected to maintain its refinancing rate at the current level of 4.5% for now, according to UOB.

With the European Central Bank taking a step forward by lowering interest rates in June, and the U.S. Federal Reserve likely to ease its policy stance in the second half of the year, this may open up an opportunity for the SBV to follow suit.

For now, instead of further lowering interest rates, the government is continuing its focus on non-interest rate measures to support the economy.

Foreign investors look past political uncertainty

Foreign investors are forecast to largely positive for Vietnam’s prospects in the coming years, brushing past the bouts of domestic political uncertainty that dominated headlines in most of early 2024.

Registered foreign direct investment (FDI) jumped 13.1% year-on-year to $15.2 billion in H1. Realized FDI inflows into the country came to $10.8 billion in H1, more than doubling the $4.6 billion inflow in Q1/2024, following a record high of $23.2 billion in 2023, surpassing the previous record of $22.4 billion in 2022.

According to UOB analysts, the FDI data suggests that businesses have looked past the political uncertainty in early 2024 and continued to view Vietnam as an important investment destination in the mid to long term, amid the ongoing reconfiguration of global supply chains; and the increase in both realized and registered FDI inflows will further boost domestic activities in the quarters ahead, including construction and employment.

In addition, strong FDI is an affirmation of foreign enterprises’ confidence and commitment to the country in the current wave of deglobalization, derisking, and supply chains shifts.

Despite recent developments in the political arena, Vietnam’s long-standing policy of welcoming investors and businesses is expected to remain in place, they added.

In its “Global Economic Prospects” report released last month, the World Bank retained its GDP growth forecast for Vietnam at 5.5% in 2024 and 6% in 2025.

The Hanoi-based Vietnam Institute for Economic and Policy Research (VEPR) said in its annual economic report on June 20 that the local economy is set to grow between 5.85% and 6.01% this year and could miss the government’s target of 6-6.5%.

In a note released in late June, S&P Global predicted Vietnam’s economy to expand 5.8% in 2024, accelerating from 5.05% in 2023.