Inflation pressures and world economic volatility

The survey of the most profitable companies in Vietnam (PROFIT500), conducted by Vietnam Report Joint Stock Company in August 2022, recorded a very positive recovery. More than two-thirds of businesses said their revenue has returned or exceeded the pre-pandemic levels. Notably, cost management proves to be quite effective when in the group of profitable companies, only about 6.2% are yet to reach the pre-pandemic profit level.

However, many thorns are lying on the path to post-pandemic recovery. More than two-thirds of respondents said that inflation pressure is rising and economic and political instability in the world are their biggest concern, followed by pandemic-caused disruptions (61.5%), supply chain disruptions (53.9%), reduced consumer purchasing power and shrinking consumer markets (48.1%) and manpower shortages (40.4%).

Upward pressures of input prices are posing new risks and challenges to businesses as well as the Vietnamese economy in boosting output growth at the micro level as well as economic growth at the macro perspective. According to a survey by Vietnam Report, up to 96.1% of companies are currently facing pressure from rising input prices. Especially, the intensity of such pressures is extremely in a third of these companies. The Vietnamese business community is facing a potential increase in production costs in the last months of this year, weighed by interest rates, exchange rates, gasoline prices, global logistics costs and tax rates.

Upward price pressures are forecast to last till the end of 2023. Rising input costs will erode corporate profits. That means, to fulfill fiscal targets in 2022 and short and medium-term plans established earlier, businesses must come up with the right, flexible and timely strategies. Developing high-quality human resources and increasing labor productivity (69.6%) are priority solutions for profit growth in the last months of the year, followed by new product/service research and development (60.9%). In addition, cost reduction, PR, social responsibility and digital transformation applications are focused by 52.2% of businesses in search of profit growth.

FDI firms operate most efficiently

According to the PROFIT500 Ranking, the average return on assets (ROA) ratio in 2019-2022 is higher than now. FDI companies always had the highest ROA during this period but suffered the strongest decline from 17% in 2019 to 11% in 2022. Private companies could not avoid this downtrend either but its ROA was almost unchanged from a year earlier at 9.4% in 2022. Meanwhile, the State-owned business sector still had the lowest ROA ratio of 7.8% in 2022 and tended to go lower over the years.

Regarding the average return on equity (ROE) ratio in 2019-2022, FDI firms showed a positive scenario when they still took the lead at 27.7%, followed by the private sector at 21.9%. Despite a slight improvement over the previous two years, the ROE of the private sector was yet to return to its pre-pandemic peak of 24.2%. While the foreign-invested and privately-held business sectors staged ROE growth, the State-owned business sector witnessed a significant decline from 23.6% to 16.5% in 2022 - the lowest in four years. Thus, ROE and ROA ratios of State-owned enterprises were the lowest among the three business sectors.

Optimistic outlook

In its latest report, the World Bank (WB) forecast that Vietnam's economy will grow at 7.5% in 2022, significantly higher than the 5.5% estimated in January 2022. According to a survey by Vietnam Report, 78.3% of companies expected economic growth at 5-6.5%, this is a safe forecast because the full-year growth depends on the remaining quarter of 2022, weighed by rising input price pressures plus risks of rising inflation and political instability in the world. The survey also showed that 73.9% of respondents are moderately optimistic about profit prospects this year.

In the next new economic context, businesses forecast industries that will grow in the next 1-2 years, including transport/logistics, tourism/entertainment, finance/banking, retail, pharmaceuticals /medical, information technology/telecommunications. Profits of two-thirds of industries above returned to pre-pandemic levels, so it is not difficult to understand that these industries are expected to further grow in the coming years.

The tourism/entertainment industry was hard hit for nearly two years due to the COVID-19 pandemic. Although it has not yet returned to the pre-pandemic level, 47.3% of respondents forecast that this industry will grow in the coming time. Although information technology/telecommunications fared well during the pandemic outbreak, driven by digital transformation, the growth is forecast to slow down amid inflation and recession risks in major economies (like the United States and Europe) which may result in weaker global demand for software.