Vietnam’s manufacturing sector remains the key driver for growth in 1Q22. Photo: Quoc Tuan

While Vietnam’s 2021 growth was the slowest in 30 years, it nonetheless started 2022 on a firm footing. Its 1Q22 GDP economy grew 5.0% y-o-y, albeit slightly overshooting HSBC’s expectation of 4.7% y-o-y and undershooting market consensus of 5.5% y-o-y. Well, the message is quite clear: Vietnam is back on track for a steady recovery. That said, we also need to be mindful of mounting growth headwinds, given the global energy crunch.

Similar to 4Q21, Vietnam’s manufacturing sector remains the key driver for growth in 1Q22. Manufacturing output expanded by 7.8% y-o-y, driven by double-digit growth in electronics production. Indeed, the strong performance is also reflected in Vietnam’s steaming external engine. Export growth hit almost 15% y-o-y in March, bringing 1Q22 growth to almost 13% y-o-y. This is mainly thanks to elevated demand for electronics products, though it also partly reflects a delay in shipments of Samsung’s flagship smartphone, the Galaxy S22.

Aside from benefitting from an extended tech cycle, Vietnam’s exports were strong across all sectors: textiles and footwear, machinery, and wooden products. Its export outperformance also reflected an easing of the significant shortage of labour, especially after the Tet holidays, though some parts of the economy are reported to still face a lack of labour. In response, the government has recently raised workers’ overtime limit s from 40h to 60h per week, with an annual limit  of 300h per year for almost all sectors, paving the way to accommodating high demand for orders until the end of 2022.

Despite strong export performance, Vietnam’s trade surplus shrank to a minimal level of only USD 0.8 billion in 1Q22. This is not entirely surprising, given the import-intensive nature of its manufacturing sector. Indeed, half of the import growth of c16% y-o-y, was accounted for by electronic components. However, amid the energy crunch, rising energy bills merit special attention. HSBC has flagged Vietnam’s domestic petrol shortage previously, and the recent data corroborates the trend that rising oil imports are set to continue: crude oil and petroleum imports in March alone doubled and quadrupled their respective 2021 monthly averages.

Indeed, a narrower trade balance has already eroded Vietnam’s current account advantage. In fact, it ran a current account deficit of 1.1% of GDP in 2021, the first deficit in four years.

Despite strong remittance inflows, a smaller trade surplus of around 5% of GDP was unable to offset a primary income deficit and a collapse in tourism receipts. The positive news in 2022 is indeed Vietnam’s border re-opening, which will boost its tourism revenue. However, the recovery will likely be gradual. Given the impact of higher global oil prices, HSBC predicts another year of current account deficit in 2022, though the magnitude will be modest, possibly around 0.2% of GDP.In light of the external headwinds, HSBC’s FX team slightly raised its near-term USD-VND forecasts but is maintaining its year-end projection at 22,800.

In addition to its firm external engine, Vietnam’s domestic demand has also been gradually recovering, as the country insists on its strategy of "co-living with the virus." Despite rising Omicron cases, the authorities have not ramped up restrictions to the same extent as last year. Part of the confidence is thanks to Vietnam’s accelerated vaccination progress: 80% of the population has been fully vaccinated, with closer to 50% being boosted. That said, some lingering local restrictions are still in place. This has dampened people’s mobility in 1Q22, slowing private consumption growth to 4.3% y-o-y, below the pre-pandemic pace.

Indeed, while retail sales have rebounded sharply from last October’s trough, their growth was still slow at 2.5% y-o-y in 1Q22. In particular, Ho Chi Minh City (HCMC) still saw a distant 5% gap below its pre-pandemic retail levels. Another part of the equation is Vietnam’s weak labor market. Although the unemployment rate dipped from its peak to 2.5% in 1Q22, an additional 200k workers were still unemployed compared to 4Q19, with wages falling across sectors. Meanwhile, high oil prices will also likely squeeze residents’ real incomes, especially when the labour market is at a nascent stage of recovery.

That said, there is still a silver lining in Vietnam’s domestic recovery. The grand re-opening theme is especially crucial for Vietnam’s services recovery, as a large chunk of the sector is a direct beneficiary of tourism. From 15 March, after two years of closure, Vietnam has re-opened its border fully to all vaccinated international visitors. Over 40k tourists flocked to Vietnam in March alone, almost tripling the monthly average during the past two years of the pandemic. The number of visitors from the US and Europe rose substantially, while the other chunk of tourists came from Asia. The authorities are aiming to attract 8 to 9 million foreign tourists in 2022, around 40-50% of 2019’s level. This is indeed a huge step for Vietnam. However, HSBC expects to see only a small rebound in tourism this year.

All in all, Vietnam’s recovery momentum has been sustained into 1Q22, thanks to both external and domestic pillars of growth. That said, challenges remain, particularly given the global energy crunch. As such, HSBC recently trimmed Vietnam’s 2022 growth slightly to 6.2% (previously: 6.5%), taking into account the growth headwinds.

What about inflation? No doubt, energy inflation continues to gain momentum, consistently driving consumer prices. Headline inflation accelerated to 0.7% m-o-m in March, translating into y-o-y growth of 2.4%. As in previous months, a surge in transport costs remains the primary driver. Indeed, domestic gasoline prices were raised seven consecutive times since early December, reaching record highs in March. In response, the authorities have decided to halve the environmental tax on fuel from 1 April until the end of 2022.

Given the surge in global oil prices, HSBC expects the trend to last a while, putting upward pressure on inflation. As such, HSBC recently upgraded our inflation forecast to 3.7% in 2022, still below the SBV’s 4% inflation target. Fortunately, inflation remains broadly manageable in Vietnam compared to other emerging markets, given that food prices and demand-led price pressure have so far been contained. Still, rising inflation risks, albeit supply-driven, will increasingly call for the need for monetary normalisation. As such, HSBC brought forward our expectation of the first 50bp rate hike to 3Q22 (from 4Q22), likely bringing the policy rate to 4.5% by end-2022.