Watch out for inflation in Vietnam: HSBC

Inflation in Vietnam warrants a close watch in the near term as the latest reading is approaching the regulatory ceiling while the central bank is expected to hold the policy rate steady, HSBC has said in a note.

Headline inflation was flat at 4.4% year-on-year in May, hovering close to the government’s 4.5% ceiling.

According to the government-run General Statistics Office, the consumer price index (CPI), a measure of inflation, went up 4.03% year-on-year in the first five months of this year, driven by education, health, and entertainment. Core inflation was 2.78%.

The breakdown revealed a rather mixed picture, notes HSBC. While rice prices dropped on a month-on-month basis, pork prices pushed up the overall food price momentum.

Although oil price momentum dropped, a hike in electricity prices, which is typically reflected in the CPI with a one-month lag, was a reminder that Vietnam is easily exposed to global commodity volatility, the bank says.

It notes that a weaker Vietnamese dong is driving the rise in import prices. Currency developments led by a higher-for-longer U.S. interest rate environment have led the State Bank of Vietnam (SBV) to be more proactive in managing forex pressures.

The SBV, the country’s central bank, has been implementing a number of measures outside adjusting its refinancing rate, such as through more flexible open market operations (OMOs).

While the risk of a near-term hike in the refinancing rate rose, HSBC analysts expect the SBV to hold the policy rate steady as the economic recovery is still in its nascent stages.

Continued recovery in external sector

Export growth in May jumped 13.9% year-on-year, beating market expectations (HSBC: 9.5%, Bloomberg: 10.6%). Similar to previous months, consumer electronics took the lead, accounting for 60% of growth. The encouraging sales performance and outlook for Samsung’s new flagship, the Galaxy S24 series, is likely providing some uplift.

In addition to electronics, expanding market access is also helping Vietnam to buoy certain agricultural shipments. For example, Vietnam’s durian exports to China almost doubled in the first four months of the year, largely eating Thailand’s market share in China.

However, it is not rosy for all agricultural products. Coffee, which Vietnam is famous for, saw a surge in international prices. While coffee exports, on a value basis, continue to expand, the volume fell considerably. Crop output this year is expected to be the lowest in four years, a reflection of the increasing relevance of climate trends and the impact of El Niño on ASEAN’s agriculture sector.

In addition, ongoing disruption to trade, such as from the Middle East, is also weighing on certain shipments. Textiles and footwear continued to track sideways, likely attributable to its higher export exposure to Europe and its related trade routes.

In tandem with exports, import growth also hit double-digits. Imports rose 25.7% year-on-year, well beating consensus (HSBC: 19.3%, Bloomberg: 20.0%). Despite a broad-based pick-up, energy imports rose notably, likely reflecting the government’s efforts to address energy supply amid challenging conditions in hydropower generation due to adverse weather.

Long-term business interest also showed little sign of slowing. Foreign direct investment (FDI) remained well on track to sustain the momentum seen in 2023. Newly registered FDI grew double digits in five months, with incremental flows centering on the manufacturing and real estate sectors.

As a testament to Vietnam’s attractive investment for a range of manufacturers, Pandora, a Danish jeweler brand, has started construction of a $150 million factory in the southern province of Binh Duong.