Despite Vietnam’s GDP in the second quarter rising by a higher-than-expected pace of 4.1% on-year, HSBC reduced the growth forecast for 2023 to 5.0% from the previous figure of 5.2% due to mounting broad-based challenges.

Despite this, the bank points out that there will be a meaningful rebound occurring ahead in the fourth quarter of the year, according to July’s HSBC report “Vietnam at a glance”.

Trade remains subdued

With annual growth of 4.1%, the country’s second quarter (Q2) GDP print is a reflection of what high frequency data points to. The economic conditions have not deteriorated, but they have not improved in a meaningful way either. In other words, the nation is still grappling with heightened downside risks to growth, particularly from the trade cycle. Indeed, exports continued to endure a slump at a double-digit pace similar to that in Q1. Given Vietnamese sensitivity to the US economic slowdown, falling orders suggest that the trade downturn could be protracted, taking the weakness throughout Q3.

Services holding up

HSBC experts have outlined that services continued to provide a strong bedrock to offset some trade weakness. In particular, tourism recovery remains firmly on track and is likely to easily exceed the annual tourist target of eight million.

Progress can be in part attributed to its efforts to add flight capacity, as well as encouragingly the recent announcement on the relaxation of tourist visas which will further boost the country’s attractiveness as a popular tourist destination.

Support on the way

Amid intensifying headwinds, the authorities have been swift in introducing support. Not only has the State Bank of Vietnam (SBV) surprisingly cut its policy rate three times, each by 50bp, in Q2, but also the Government has announced fiscal measures, including tax deferrals and VAT cuts, almost by the same magnitude as those introduced during the pandemic. That said, an “all-in” fiscal package may remain limited.

Driving through the mist

Moving into the second half of the year, several of the nation’s challenges have yet to dissipate. With growth of 4.1% on-year, Vietnam’s Q2 GDP slightly overshot market expectations of 3.8%. That said, it does not overshadow the mounting challenges. After all, Vietnamese growth has slowed sharply compared to last year’s impressive growth of 8%, mainly due to external risks.

Trade, which has been one of the country’s main growth engines, has been losing steam since Q4 of last year. The manufacturing malaise is a notable reflection of the intensifying trade challenges that the nation has been facing. Although manufacturing growth in Q2 was a positive surprise, the contribution to lift growth was barely at a minimum. The positive news is that trade has not deteriorated further, although Vietnamese trade is not out of the woods yet due to there being no signs of a meaningful rebound.

Vietnamese exports continued to face a double-digit fall in Q2, a pace on par with that of Q1. The only bright spot could be found in agriculture exports, although this 10% share was too small to offset broad-based weakness elsewhere. Major shipments, including consumer electronics, textiles and footwear, as well as machinery and wooden furniture, all suffered double-digit declines.

This is largely due to a slump occurring in US import demand, as the US represents the dominant buyer in almost all products. As a result, Vietnamese exports to this market fell at a striking pace of 20% on-year, reflecting the severity of the trade downturn.

Furthermore, the Vietnamese manufacturing sector has been facing power shortages in the north throughout June due to heatwaves, with this region being home to large tech giants’ production facilities. While the energy issue have reportedly eased, cuts in production have added to manufacturing woes.

Despite this export drag, the nation’s services sector came to the partial rescue with its ongoing recovery. In particular, tourism-related services, including transport, accommodation and ‘food & beverage’ sectors continued to sustain strong growth. Halfway into the year, the country saw visitors return to 80% of 2019’s monthly level, welcoming a total of 5.6 million tourists during the first half of the year.

In particular, Chinese visitors, a major source of tourist arrivals, quickly approached 50% of the equivalent level. Part of the recovery could be put down to efforts to restore direct flights with China, with Vietnam topping ASEAN behind only Singapore. This progress therefore suggests that the nation is on a firm track to exceed its initial annual target of welcoming eight million visitors.

Moreover, the National Assembly has passed the long-anticipated law to further ease visa restrictions. Coming into effect from 15 August, the new rule will extend the validity for visa-exempt markets up from 15 days to 45 days and those with e-visa arrangements in 80 markets up from 30 days to 90 days. The change will come in time for the popular winter season, aiming to further facilitate easier travel whilst attracting an increasing influx of tourists.

Outside of growth, inflation has been consistently delivering good news. Headline inflation was moderated to 2.0% on-year in June, in line with expectations. The main driver was energy disinflation, which dragged down headline prices further away from the SBV’s 4.5% inflation ceiling.

While the electricity hike pushed up inflation momentum, being reflected in inflation with a one-month lag, the sub-3% magnitude added little impact. Even more encouragingly, core inflation cooled to 4.3% on-year, the first time below the ceiling in nine months. That said, upside risks linger, with food inflation momentum jumping in June to reflect a notable rise in pork prices. However, price pressures came from higher demand due to sustained recovery in tourism, not supply-side disruptions, such as previous African Swine Flu episodes. In addition, the El Nino impact warrants a close watch on agriculture production, especially in terms of staple foods like rice.

Amid intensifying economic challenges, Vietnamese authorities have stepped up efforts aimed at rolling out fiscal support measures, with the magnitude almost matching those introduced during the pandemic.

This includes a 2% VAT reduction for selective sectors, which has been recently approved by the National Assembly, tax payment deferrals on various taxes for between three and six months, as well as environment tax cuts on gasoline and diesel. That said, the authorities are also aware of fiscal constraints of revenue shortfall, suggesting limits of an “all-in” fiscal rescue package.

VOV