VNDirect raised Vietnam’s GDP growth forecast for 3Q22 to 13.1% yoy (/- 0.6%)

VNDirect raised Vietnam’s GDP growth forecast for 3Q22 to 13.1% yoy (/- 0.6%) from a previous 11% yoy (/-0.5%). This higher forecast is attributed to the following factors:

First, domestic consumption and tourism have recently experienced a remarkable resurgence thanks to the government-backed policy. In particular, tax reduction measures adopted by the government on necessities like fuel and gasoline serve to control inflation and strengthen consumer confidence. Domestic consumption is boosted by policies included in the economic stimulus package that are currently being implemented, such as a 2% VAT decrease and cash assistance for tenants. As a result, total retail sales of consumer products and services in July and August saw very strong growth and above earlier projections from VNDirect.

Second, recent economic data revealed that, despite challenges brought on by supply chain interruptions and sluggish global development, Vietnam's industrial sector's growth momentum continued to improve in July and August. Data for August even exceeded our forecasts, with Vietnam's IIP increasing by 2.9% mom (15.6% yoy) and its PMI increasing to 51.7 points from 51.2 points in July.

According to Mr. Dinh Xuan Hinh, an analyst at VNDirect, this surprised the stock business because it had previously forecast that weaker external demand in developed economies with rising inflation could cause a slowdown in industrial production and export growth in 3Q22. The sustained rebound in domestic demand, which has increased orders for the manufacturing sector, is what is responsible for the stronger-than-expected rise. Additionally, Vietnam is receiving an increasing number of manufacturing orders from China as a result of the instability caused by the Zero-COVID policy in China as well as the drought and power outages.

“We anticipate that Vietnam's GDP growth may reach its high in the third quarter of this year (3Q22F), before slowing down in the fourth quarter (5–6% yoy). As a result, we increase our prediction for Vietnam's GDP growth in 2022 from 7.1% to 7.7% yoy (/- 0.3%), mostly due to stronger expectations for the third quarter of that year”, said Mr. Dinh Xuan Hinh.

According to VNDirect, the GDP of Vietnam could expand by 6.9% year over year in 2023F. This weaker growth outlook may be caused by a number of factors, including: (1) slowing economic growth in Vietnam's major trading partners, such as the US and Europe, which may harm export prospects; (2) higher inflation; (3) rising interest rates, which may increase costs and hinder plans for business expansion. However, there are still variables that will help Vietnam's economy thrive in 2023, including a large amount of public investment, steady FDI inflows, and a big rebound in international visitors.

However, Mr. Dinh Xuan Hinh said the Vietnam’s economy still faces both external and internal risks in the coming months, including:

First, to keep inflation under control, the Fed and ECB will continue their strict monetary policies. In the future, this will raise interest rates, which will decrease consumer demand, tighten the labor market, and restrict economic development in the US and Europe. In the upcoming quarters, less demand in the US and Europe will negatively affect Vietnam's exports to these two countries, which will make up about half of the country's entire export value in 2021.

Second, a severe drought and record-high temperatures in southwest China have damaged hydropower production and forced the closure of numerous facilities. It is the most recent setback to the Chinese economy, which is already suffering from weak consumer spending and a seriously unstable real estate market. Vietnam's exports to this market will be impacted by the decline in China's economy. In addition, the closure of factories in China as a result of the Zero-COVID policy or power outages could have a negative effect on Vietnam's production as many Vietnamese manufacturing sectors, such as textile, metallurgy, chemical, and electronics, import a significant amount of their raw materials from China.

Third, Vietnam's exchange rate is under a lot of pressure from a strong USD. The SBV recently had to intervene in the market and sell a sizable quantity of foreign exchange reserves in order to stabilize the exchange rate. The SBV will, however, be less equipped to handle a strengthening USD because its foreign exchange holdings are smaller than they once were. The SBV may need to think about raising policy interest rates, which would raise company costs and have a negative impact on economic growth.

Fourth, the ongoing Russia-Ukraine conflict continues to disrupt the world's supply chains, increasing the danger of inflation. Unexpectedly high inflation could stifle economic expansion and shift monetary policy toward being more hawkish. Less room exists for the SBV to continue an accommodating monetary policy to boost the economy.