Michael Kokalari, chief economist at VinaCapital, is confident economic growth will rebound in the second half of the year. (Photo: courtesy of the company)

In his latest report, he said GDP growth in Vietnam slowed precipitously in Q1 as consumers in the US and other developed markets cut purchases.

Manufacturing accounted for a quarter of Vietnam’s GDP, and output contracted slightly in Q1 as against 9% growth a year earlier since most products made in the country were exported to the US and other developed countries.

Vietnam’s international trade accounted for a higher percentage of its GDP than in any other nation and territory in modern history, excluding Hong Kong and Singapore, and so weaker demand in the rest of the world weighed fairly heavily on its economy.

“Vietnam’s exports fell 12% year-on-year in Q1, driven by a 20% drop in exports to the US. Meanwhile, inventories at US retailers and other consumer-facing firms such as Nike and Lululemon are now contracting, which is why we expect FDI factories’ order books to start recovering later this year (inventories’ year-on-year growth looks likely to fall to 0% in H2, which should prompt a resumption of order growth for Vietnam).

“Finally, domestic consumption continues to grow at a healthy pace and consumer confidence has remained remarkably resilient despite the sharp slowdown in GDP growth.

“In addition, foreign tourist arrivals skyrocketed to over 60% of pre-COVID levels in Q1 despite the fact that Chinese tourists have not yet returned to the country en masse - which is another reason we expect Vietnam’s economic growth to recover in H2.”

GDP growth slowed from 8% in 2022 to just 3.3% in Q1, prompting the Government to launch several initiatives to boost growth.

The Ministry of Finance has finalised plans to cut the VAT rate from 10% to 8% in H2, equating to a stimulus of around 1.5 billion USD for Vietnam’s 450 billion USD economy.

The Government will also allow companies and individuals to defer payment of various taxes by three to six months.

Last month, the State Bank of Vietnam cut policy rates by 50-100bps, including a 50bp reduction in the refinancing rate to 5.5%, and a 50bp reduction in the maximum interest rates banks are allowed to pay savings deposits of up to 6 months to 5.5%.

The Government also walked back some stricter conditions it introduced in late 2022 on the issuance of corporate bonds, Kokalari said.

It had directed ministries to address various administrative bottlenecks impeding real estate and infrastructure development.

“The Government has taken a series of initiatives to address the country’s slowing growth, the most concrete of which are tax cuts and interest rate cuts, but administrative measures intended to ease bottlenecks impeding real estate development and infrastructure projects could have an even bigger impact on growth in 2023 and beyond.

“The fact that stock markets tend to start climbing in advance of economic rebounds, coupled with the fact that the VN-Index is trading at around a 10-year low valuation, leads us to believe that now could be an ideal time for investors to selectively purchase Vietnamese stocks.”

Interest rates on short-term deposits in Vietnam had peaked in late-2022, and the policy rate cut last month would create additional downward pressure on those rates.

“Consequently, there will be many bank deposits maturing in Q2 and Q3 and savers will essentially face a choice of rolling over their deposits at lower interest rates or plowing that money into the stock market (the vast majority of time deposits in Vietnam are 3-month and 6-month deposits).