Vietnam continued to attract foreign inflows as fundamental prospects remained positive.

2024 started with a firm belief in economic recovery and a hope for a brighter global economic outlook, as well as the expectation of the Fed to start their rate cut cycle soon. However, it turned out to be a volatile year for the world’s economy, with a lot of uncertainties. The lingering geopolitic tensions, the reversal of globalization, the US presidential election scenarios, and many other political-social events have accentuated the fragmentation of the global economy.

In the US, there were worries that the world’s powerhouse would be heading for a slowdown with a hard landing, which has yet to come. In contrast, the recent macroeconomic data, particularly in employment and consumption, showed positive signs of a growing economy.

On the other hand, another large economy in the world, China, has faced a completely opposite scenario. Disappointment has replaced the high hopes that accompanied China’s full reopening, as its challenging real estate sector and weak domestic consumption have raised concerns of deflation risks. China’s consumer confidence is lower, which is likely to negatively impact its growth due to the weakness of its property sector—the main driver that has undermined consumer confidence and spending.

Vietnam, on the other hand, has also experienced a lot of ups and downs given its open economy and integration to the world. From a challenging 1Q24, the domestic economy outlook has turned more positive as the recovery continues to firm up as the year progresses, which brings Vietnam back as ASEAN’s growth star. In particular, growth improved and surprised on the upside, rising to 6.9 percent and 7.4 percent in 2Q24 and 3Q24 respectively. The recovery in the external sector has started to broaden out beyond consumer electronics, although the domestic sector remained relatively muted despite seeing incremental improvements. There were concerns that the impact of Typhoon Yagi, the strongest storm Vietnam faced in 70 years, would weigh on growth. The northern provinces were hit particularly hard in early September with damages estimated at over USD3bn. However, the impact has been primarily concentrated in the agriculture, forestry, and fishery sectors. Meanwhile, manufacturing and trade remained resilient and continued to lead the recovery.

Particularly, the momentum of 2H24 economic recovery continued to be led by manufacturing, with IIP growing 8.4% y-o-y in 11 months. This was corroborated by healthy trade data, with exports rising 15.4% y-o-y in 11 months. Encouragingly, the trade recovery that was initially centred around electronics is showing signs of broadening out, with textiles and footwear exports rising 16.7% y-o-y in 3Q24.

On FDI, Vietnam continued to attract foreign inflows as fundamental prospects remained positive. Although growth in newly registered FDI moderated in 3Q24, sectors beyond manufacturing such as real estate and energy saw increases in investment. A total of USD21.68 billion was disbursed, up 7.1% y-o-y. This marks the third consecutive year in which Vietnam’s FDI disbursement exceeded USD20 billion. Intra-ASEAN investments are leading the way, making up 40% of inflows to date. Existing investors continue to make commitments, supporting Vietnam’s expanding manufacturing capabilities. Foreign investment into the real estate sector has also risen over recent months. This is likely being supported by the revised Land Law effective August, which relaxed some regulations to spur demand. Looking ahead, manufacturing inflows are also likely to remain resilient, with General Secretary To Lam’s recent visit to the US yielding investment intentions from various firms such as Meta. Shunsin, a subsidiary of Foxconn, reportedly sought a permit to invest USD80mn to produce integrated circuits in the northern province of Bac Giang, indicative of improving production capabilities in Vietnam. It is not just electronics manufacturing but also other high value-add sectors that have been generating interest from notable MNCs, with Google set to launch its Vietnam office in April 2025 and NVIDIA to open a R&D centre to develop AI in the country. Authorities also continue to actively expand and enhance diplomatic ties, with Vietnam recently elevating ties with France to Comprehensive Strategic Partnership and signing a comprehensive economic partnership agreement with the United Arab Emirates (UAE).

Having said that, Vietnam has also had a notably tough time. Data showed that Vietnam has been the most vulnerable to the US's consumer demand in ASEAN. US’s better-than-expected consumption indicators partly explain Vietnam’s recent strong recovery in the manufacturing sector. However, it also comes with the downside risk that makes Vietnam most vulnerable to the slowdown in US’s household spending as well as its trade policy to avoid Chinese exports coming from “intermediary trade partners”. Vietnam has the highest exposure to the US market in ASEAN, led by textiles and garments, footwear, wooden furniture and machinery. With president-elect Donald Trump in charge, trade and tariff policy is likely a challenge for short-term trade growth outlook.

In addition, one of the key growth pillars – domestic sector - is recovering more slowly than initially expected, with retail sales growth still below the pre-pandemic trend and signs of a firm pick-up haven’t yet to be seen. Services continues to provide supports to retail sales with tourist arrivals rising to 1.7 million in November, bringing the total year to date number to 15.8 million, up 41% y-o-y. Encouragingly, the government has put in place measures to support a wide range of domestic sectors. Environment tax cuts on fuel and value-added tax cuts for certain goods and services will last until year-end 2024, while the revised Land Law effective from August will buttress the outlook for real estate. The fiscal and monetary policy is likely to remain accommodative to accelerate economic recovery, helping Vietnam achieve Government’s annual economic growth targets and paving the way for next year.

On monetary policies, on the back of more favourable price developments vis-à-vis oil and commodity prices, inflation has shown notable moderation in recent months. While risks such as from supply-side disruptions from Typhoon Yagi and geopolitical conflicts remain present, inflation well below from the State Bank of Vietnam’s (SBV) 4.5% target ceiling will allow the SBV to maintain an accommodative stance and focus on supporting growth, which contributes to stabilizing the macroeconomic environment and continuing to control inflation.

On foreign exchanges (FX), USD-VND exchange rate continues to see another year full of uncertainties. Similar to other currencies in the region, Vietnam Dong’s outlook has recently faced more fluctuation due to the volatilities before US’s presidential election, China’s stimulus packagge and other geopolitic tensions.

To summarize, the FX movement can be highlighted in three stages in the three most recent quarters respectively. In early 2Q24, USD-VND has increased significantly from 24,650 to this year’s peak of 25,460 within only two months, equalling a 3% depreciation. During this time, declining Fed rate cut expectations resulted in differences in monetary policies and widening the VND-USD interest rate gap, ongoing better data in the US and geopolitical risks have supported the greenbackduring this period. To support the market, SBV had to intervene by selling USD from its reserve as well as issuing short-term bills to reduce pressure on the exchange rate.

In 3Q24, the trend reversed as USD-VND rate fell to 24,600, an equivalence to a depreciation of 1.3% by the end of September. Thanks to the support from the regulator as well as Fed’s first rate cut, the DXY was cooled off, narrowing VND-USD interest rate gap.

However, in 4Q24, the FX pressure has returned. In October alone, Asian currencies have erased half of their gains in 3Q24 in comparision with USD as the greenback has restored its strength. In general, some currencies were more vulnerable with capital outflows, for example, USD-INR reached a record high while USD-KRW is hovering near this year’s peak. Similarly, USD-VND continued to rise strongly, nearly back to this year’s peak. The fluctuation before US presidential election until Donald Trump won, together with its optimistic economic data, particularly in employment, as well as reduced Fed’s rate cut expectation in the new cycle. Similar to previous period, SBV employed a flexible monetary policy by setting the central rate of USD at 25,450 to support the market while continued to reintroduce the bill issuance tool to moderate the liquidity in interbank market, indirectly restoring the confidence for the market as well as lowering FX pressure. At present, even after the US presidential election, it’s still difficult to anticipate a clear scenario of FX movement in the upcoming time.

On interest rates, as the Government is committed to achieving this year’s growth targets, it’s not an easy task for the SBV to maintain accommodative monetary policy to support growth through lowering its policy rate and driving credit growth. However, the FX upside risks and the monetary policy of the US and other countries not yet converged have put more weight on SBV’s objectives. In fact, the interbankinterest rates continued to face upside pressure. Particularly, the average VND interbank interest rate increased sharply for 1 month or less in early November, while the overnight interest rate was 6.2%/year, a year-to-date high in 2024. From the beginning of October until now, the SBV has flexibly employed liquidity management tools to stabilize the exchange rate by bill issuance and ensure liquidity through open market operations.