Ben Thanh Market Center viewed from above with skyscrapers is gradually shaping the development of active urbanization in Ho Chi Minh City. Minh, Vietnam - stock photo

Despite persisting external weakness, the first two months of data paints a less severe picture than initially feared. The manufacturing PMI returned to the expansionary territory for the first time in four months. Meanwhile, trade also delivered some better-than-expected results. Alas, it was not rosy, as exports fell 10.3% y-o-y in the first two months of 2023, with ongoing broad-based weakness across major categories.

“We have been flagging that Vietnam has been on the frontline to suffer from an economic slowdown in the US, who has long remained as Vietnam’s largest exporting destination with a 30% weight. That said, the only exception lied in phones and related parts, growing almost 8% y-o-y YTD. Considering Samsung’s smartphone release cycle, this is likely thanks to its launch of the flagship Galaxy S23 Series from 17 February, with stronger pre-orders than its previous Galaxy S22 series”, said HSBC.

However, a degree of caution is warranted. As Vietnam’s manufacturing base is notably import- intensive, it is crucial to look at how imports fared. On the positive side, imports fell at a pace faster than exports, of 16.1% y-o-y YTD. This led to a trade surplus of USD2.3bn, a much needed one when Vietnam recovers from its two years of current account deficit. However, electronics imports continued to fall, with phones particularly slumping over 60% y-o-y YTD. This suggests that the electronics cycle will unlikely stage a quick turnaround soon, though recent global PMIs have pointed to some initial stabilisation.

On the domestic front, retail sales continued to register solid growth. While growth in goods moderated substantially, services, particularly tourism-related services continued its steam, thanks to booming international tourism. In February alone, Vietnam welcomed around 933k foreign visitors, a record high since the start of COVID-19. Among all, mainland Chinese tourists edged substantially higher, reaching 55k. While this was only 10% of the pre-pandemic average of Chinese tourists, keep in mind that this was against the backdrop of limit ed flight frequency and an absence of group tours.

In addition, it is not just mainland China to watch for, but tourists from Korea, another key market with c30% weight, have also held up firmly, with its monthly inflows recovering to around 85% of its pre-pandemic level. While global trade of goods has slowed significantly, international tourism can be a supportive growth pillar, if some bottlenecks can be eased. That said, the road back to 2019’s level might be lengthy.

One last word on inflation. While headline inflation moderated to 4.3% y-o-y in February, below the State Bank of Vietnam (SBV)’s 2023 inflation target of 4.5%, some caution is needed after looking at the nuances. Inflation momentum remained strong, growing at 0.4% m-o-m. Despite global commodity prices easing from their peaks last year, energy inflation remains elevated. For one, domestic oil prices continued to edge up higher, pushing up transport costs.

Meanwhile, housing and construction material costs also rose substantially, partly reflecting higher gas and electricity costs. Following a VND31trn loss by SOE Vietnam Electricity in 2022, Vietnam has raised its electricity price range from 3 February by double-digits (13.7-28.2%) for the first time since 2017, which are key inputs for the Ministry of Industry and Trade to determine its retail prices for 2023. While inflation may have likely peaked in January, elevated imported price pressures need to be watched closely.

“All in all, February’s better-than-expected data do not change the challenges Vietnam faces, but at least offer some optimism for the tide to turn. While external woes will likely continue in the near-term, some recovery in tourism may partially cushion some headwinds. That said, inflation still needs extra attention, as price pressures remain elevated”, emphasized HSBC.