With growth of 4.1% y-o-y, Vietnam’s 2Q GDP overshot market expectations of 3.8% slightly.

After half a year, challenges are not dissipating. With growth of 4.1% y-o-y, Vietnam’s 2Q GDP overshot market expectations of 3.8% slightly. That said, it does not overshadow the mounting challenges. After all, Vietnam’s growth has slowed sharply from last year’s impressive growth of 8%, mainly due to external risks.

“Trade, one of Vietnam’s main growth engines, has been losing steam since 4Q22. The manufacturing malaise is a notable reflection of the intensifying trade challenges Vietnam has been facing. Although manufacturing growth in 2Q was a positive surprise to us (we factored in a y-o-y decline), the contribution to lift growth was barely minimum. The good news is that trade has not deteriorated further. However, Vietnam’s trade is not out of the woods yet, as we see no signs yet of a meaningful rebound”, said HSBC.

Vietnam’s exports continued to fall by double-digit in 2Q23, a pace on par with that of 1Q. The only bright spot is agriculture exports, but its 10% share is too small to offset broad-based weakness elsewhere. Major shipments, including consumer electronics, textiles/footwear, machinery and wooden furniture, all suffered double-digit declines. This is largely due to a slump in US import demand, as the US is the dominant buyer in almost all products. Indeed, Vietnam’s exports to the US fell at a striking pace of 20% y-o-y YTD, reflecting the severity of the trade downturn.

In addition, Vietnam’s manufacturing sector has been facing power shortages in the north in June, home to large tech giants’ production facilities, due to heatwaves. While the energy issue has reportedly eased, cuts in production have added to manufacturing woes. The key question for Vietnam’s manufacturing sector is, when will the global trade cycle turn? The leading PMI indicators point to no reprieve in the near term, as the ongoing trade ‘pay-back’ in the West continues to weigh on orders.

HSBC expects the earliest change in the trade tide to be around 4Q23, but stabilisation will likely precede any meaningful pick-up in shipments. In other words, it expects Vietnam to suffer from a protracted trade downswing, particularly when unfavourable base effects intensify in 3Q23.

That said, one unintended positive spill-over is on Vietnam’s current account. Vietnam’s manufacturing sector is heavily import-intensive. Unsurprisingly, imports have plunged more than exports, leading to a sizeable trade surplus. Along with increasing tourism receipts that have minimised its services deficit, Vietnam’s current account improved notably to 6.1% of GDP in 1Q23, providing some much-needed anchor to the VND.

Despite the export drag, Vietnam’s services sector came to the partial rescue with its ongoing recovery. In particular, tourism-related services, including transport, accommodation and ‘food & beverage’ sectors continued to sustain strong growth. Halfway into 2023, Vietnam has seen visitors return 80% of 2019’s monthly level, welcoming a total of 5.6 million tourists in 1H23.

In particular, Chinese visitors, a major source of tourist arrivals, quickly approached 50% of the equivalent level. Part of the recovery was thanks to efforts to restore direct flights with China, with Vietnam topping ASEAN just after Singapore. This progress suggests that Vietnam is on a firm track to exceed its initial annual target of 8 million tourists.

Vietnam’s National Assembly has passed the long-anticipated law to further ease visa restrictions. Effective from 15 August, the new rule will extend the validity for visa-exempt markets to 45 days (up from 15) and those with e-visa arrangements in 80 markets to 90 days (up from 30). The change will come in time for the popular winter season, aiming to facilitate easier travel and attracting an increasing influx of tourists.

Outside of growth, inflation has been consistently delivering good news. Headline inflation moderated to 2.0% y-o-y in June, in line with our expectations. The main driver is energy disinflation, which has dragged down headline prices further away from the SBV’s 4.5% inflation ceiling. While the electricity hike pushed up inflation momentum, reflected in inflation with a one-month lag, the sub-3% magnitude added little impact. Even more encouragingly, core inflation cooled to 4.3% y-o-y, the first time below the ceiling in 9 months. That said, upside risks linger. For one, food inflation momentum jumped in June, reflecting a notable rise in pork prices. But price pressures came from higher demand due to sustained recovery in tourism, not supply-side disruptions, like the African Swine Flu episodes previously. In addition, the El Nino impact warrants a close watch on agriculture production, especially in staple foods like rice.

Amid intensifying economic challenges, Vietnam’s authorities have stepped up efforts to roll out stimulus measures. On the monetary front, the SBV made a series of surprising moves in 2Q. In less than three months, the SBV has delivered surprising cuts to its policy rate three times, each time by 50bp. Easing inflation has provided breathing room, while a relatively stable VND also provides valuable support for looser monetary policy. That said, upside risks linger for the former, while the latter may face downward pressure from eroding real interest rate yields. HSBC only expects growth to meaningfully stage a turnaround in 4Q23, warranting more monetary support. It expects the SBV to deliver another 50bp rate cut in 3Q23, bringing the policy rate to 4.0%. This will Flikely reverse the SBV’s tightening efforts in 2022, as well as matching the magnitude of monetary support during the pandemic.

On the fiscal front, the authorities have also announced various fiscal support measures, with the magnitude almost matching those introduced during the pandemic. This includes a 2ppt VAT reduction for selective sectors (which has been recently approved by the National Assembly), tax payment deferrals on various taxes for 3-6 months, as well as environment tax cuts on gasoline and diesel. That said, the authorities are also aware of fiscal constraints of revenue shortfall, suggesting limit s of an “all-in” fiscal rescue package.