Vietnam economy not out of the woods yet: HSBC

Vietnam’s slowing economy has not seen the light at the end of the tunnel on the trade front as external weakness has dampened growth, amid acute exposure to the global trade cycle, according to a new HSBC report.

“After a sluggish GDP performance in the first quarter of 2023, Vietnam is still not out of the woods,” the report said.

After falling 12% year-on-year in Q1, Vietnam’s exports continued their double-digit decline, falling 11.7% in April.

The global bank said the weakness continued to be broad-based, with key shipments like textiles, footwear, smartphones and wooden furniture seeing notable slumps. The only bright spot in April’s data was computer electronics, rising 5.4% year-on-year. This was a one-off surprise due to base effects, rather than a reflection of the tech cycle bottoming out.

While leading indicators like S&P Global's Purchasing Managers’ Index (PMI) showed some initial signs of stabilization, it will still take some time until there is a meaningful rebound in the global electronics cycle.

“Vietnam is clearly not alone in this while peers like Taiwan and Korea also continue to struggle amid current electronics doldrums,” the HSBC analysis noted.

Despite weakness in goods trade, services continue to provide some much-needed support. International tourist arrivals moved closer to one million in April, driven by a 70% month-on-month pick-up in Chinese tourists.

HSBC said the positive recovery is thanks to easing flight constraints and China’s inclusion of Vietnam as a destination for its group tour resumption in mid-March. However, as a major tourist source with 30% share prior to the pandemic, the recovery pace of Chinese tourism remains gradual, reaching only 25% of the same period in 2019. For example, Korean tourists, another major source, have recovered to 77%.

While tourism can provide some partial support, its recovery will only be a slow process, and will not be enough to offset this year’s challenges.

The global bank’s report noted that growth headwinds can be seen through the lens of extremely sluggish credit growth. Despite an annual credit growth target of 14-15% and two moves by the State Bank of Vietnam (SBV) to cut key interest rates in March, loans only grew around 2% by mid-April, half the growth in the same period in 2022, reflecting ongoing economic difficulties.

As a result, Vietnamese authorities have introduced a series of support policies recently, including a VND120 trillion ($5.12 billion) credit package for social housing, a 2 percentage point cut of the value-added tax until end-2023, and plans to restructure some loans. In particular, there are initial signs of a relaxation in the policy stance toward the property sector, which has been facing a liquidity crunch since last October.

Inflation pressure eased

Despite slowing growth, inflation has been better behaved, offering some relief to policymakers, HSBC said.

Headline inflation fell 0.3% in April month-on-month, translating into a benign year-on-year print of sub-3%, moving further away from the SBV’s 4.5% inflation ceiling. For one, food inflation momentum continued to ease, thanks to a decline of 1.6% month-on-month in pork.

However, energy prices saw a mixed picture. While transport costs rose marginally, due to higher oil prices, other energy inflation, like electricity and gas, fell. Caution is still warranted on the supply-side of inflation.

HSBC concluded that Vietnam continues to face challenges in the second quarter of 2023 after a tough first quarter economic performance. The bank expects the services sector to receive a punchier boost and the trade tide to turn in the second quarter, lifting whole-year growth to 5.2%.

The 5.2% GDP growth forecast by HSBC is lower than the International Monetary Fund's rate in mid-April. The IMF said Vietnam’s economic expansion might slow down to 5.8% this year and then rebound to 6.9% in 2024, among the highest figures in Asia.

Meanwhile, the World Bank’s April update revised downward its forecast for Vietnam at 6.3% this year, down from 6.7%