Vietnam's economy recovers, inflation risks remain: HSBC

In its "Vietnam At A Glance" report released on Thursday, the lender said the biggest surprise is the rebound in Vietnam’s manufacturing sector. While it is still too early, in its view, to call a material recovery in the global trade cycle, Vietnam's trade sector has had a much-needed reprieve recently.

Although due in part to base effects, exports saw their first growth in more than six months, reducing the severity of export falls from the double-digits in H1 to less than 2% y-o-y in Q3. While export weakness remains largely broad-based, decent growth in both computer and agriculture shipments offsets some risks.

The trend is also reflected in Vietnam's shipments to major trading partners. While exports to the U.S. (30% share) and the EU (15% share) have yet to see a turnaround, they have halted further deterioration. Meanwhile, Vietnam's exports to China (15% share) saw double-digit growth sequentially, largely thanks to its impressive growth in agriculture products.

Notably, HSBC experts said despite near-term cyclical challenges to trade, Vietnam’s long-term FDI prospects appear intact. Its manufacturing sector accounts for the bulk of FDI, providing hopes that it can climb up the value chain, paving the way for a robust rebound when the trade tide turns. New FDI continues to pour into the manufacturing space, this year already exceeding the total in each of the past three years.

In addition to manufacturing, Vietnam’s booming tourism sector remains the bedrock of its services, prompting the government to raise its annual tourism target.

With positive signs in trade and tourism, HSBC maintained its 2023 growth forecast at 5%, expecting a robust recovery in Q4. Nonetheless, inflation risks warrant a close watch.

While September inflation was contained at 3.7%, below the State Bank of Vietnam (SBV)’s 4.5% ceiling, sequential growth raises concerns. Food prices had risen around 3% m-o-m for two straight months, pushing y-o-y inflation to overshoot 10%.

According to the HSBC, while Vietnam's trade benefits from higher rice prices, international prices have pushed up the local prices of staple goods. Meanwhile, Vietnam is sensitive to the global oil market's recent volatility. Not only have transport costs ceased to decline on a y-o-y basis for the first time in a year, but domestic gas prices have seen sizeable increases.

The bank also expected the SBV to hold its policy rate steady at 4.5% until end-2024, barring any external shocks.