Vietnam Economy Continues to Face Major Challenges

Still-weak external demand and global uncertainties are exerting an adverse impact on the Vietnamese economy, leading to shrinking exports and imports, and slowing industrial production. While domestic consumption (as reflected in retail sales) remains solid and comparable to pre-pandemic growth, credit growth continues to slow due to weak credit demand. These remarks are excerpted from the World Bank's Vietnam Macro Monitoring Report released in June 2023.

Vietnam’s Index of Industrial Production (IIP) in May 2023 is estimated to increase by 2.2% over the previous month and by 0.1% over the same period last year

According to the report, retail sales continued to expand at 11.5% year on year in May 2023, comparable to growth rates in the two previous months and to the pre-COVID-19 period. Sales of goods improved from 9.7% in April to 10.9% in May. Meanwhile, sales of services declined from 19.2% in April to 7.6% in May. This decline was largely driven by the moderation of tourism services and hospitality services. About 4.6 million international visitors came to Vietnam since January 2023, an increase of 11.6% compared to the same 5-month period of 2022, but 37% below the pre-pandemic level.

The report said that the Index of Industrial Production (IIP) edged up only 0.1% year on year in May 2023, down from the growth of 0.5% in April. Although merchandise exports in May increased by 4.3% over April, it was still 6% lower than a year ago due to weak external demand. Almost all key manufacturing sectors continued to experience contraction in their exports in May. Exports of garment and footwear (Vietnam’s key labor-intensive manufacturing sectors) sank 16.7% and 5.4% year on year, respectively, while exports of computers, machinery and smartphones (Vietnam’s key technology manufacturing sectors) contracted by 11.4%, 6.4% and 5.2% year on year, respectively. Imports fell by 18.4% year on year in May 2023, compared to a contraction of 23.1% in April, reflecting continued slowdown in demand for foreign inputs by both FDI and domestic firms. The fall was largely driven by contraction in imports of textiles materials, electronics and computer parts, machinery and smartphones.

According to the World Bank, the continued contraction of imported inputs may indicate that producers expect weak export performance in the coming months.

Notably, FDI commitment fell to US$1.98 billion in May 2023, down 42.3% from April as global uncertainties continued to weigh on investor confidence. Cumulative FDI commitment for the first five months of 2023 reached only US$10.9 billion, 7.3% lower than the same period in 2022. The manufacturing sector remained the main sector for FDI commitments. FDI disbursement registered US$1.8 billion in May 2023, a slight improvement from April, and comparable to a year earlier.

The consumer price index (CPI) inflation and core inflation continued to decline slightly but core inflation remained high. CPI inflation continued to trend down for the fourth month, declining from 2.8% in April to 2.4% in May. Falling global energy prices helped reduce domestic fuel and gasoline prices, resulting in a negative contribution (down 0.9%) of the transport sector to CPI inflation. In the meantime, food and foodstuff, as well as housing and construction materials, were the major drivers of CPI inflation. Core inflation, which excludes food, energy, and items whose prices are administered by the government such as education and health services, remained elevated, rising 4.5% year on year in May, compared to the growth of 4.6% in April.

Almost all key manufacturing sectors including garment and footwear continued to experience a contraction in their exports 

The report pointed out that credit growth continued to decelerate, indicating weak demand. To support the economy, the State Bank of Vietnam (SBV) cut policy rates for the third time since March 2023. The refinancing interest rate was reduced from 5.5% to 5% and overnight lending facility rate was reduced from 6.0% to 5.5%. The SBV also imposed a cap on the short-term deposit rate (6-month and below) at 5%, a 50-base point reduction. Various commercial banks’ deposit and lending rates have been adjusted downward in line with SBV’s policy rates adjustments. Notwithstanding these rate cuts, credit growth continued to decelerate from 9.2% year on year in April 2023 to 9.0% in May, the lowest level in recent years. This reflected slack credit demand given continued weak manufacturing and exports activities and weak demand from real estate and equity markets. Weaker growth in net business entry as well as lower average capital per newly established firm could also be a reason for weakening demand for credit.

Before this reality, according to the WB, as inflation appeared to be tapering, the SBV eased monetary policies to support the economy. However, monetary policy authorities will need to closely monitor whether the divergence in the monetary policy stance between Vietnam and other countries is creating pressures on capital flows and exchange rate.

Besides, accelerating public investment disbursement (including for national target programs) will support aggregate demand and economic growth in the short run. At the same time, prioritizing investments in digital and green technologies, infrastructure, and human capital will help promote sustainable long-term development. As manufacturing exports have slowed and employment in manufacturing has been affected, it would be important to quickly identify and support impacted workers and families through the social protection system. Streamlining administrative procedures and removing regulatory hurdles will help promote business activities and investments needed for economic growth.

Also according to the report, northern Vietnam started experiencing brownouts in late May, which, if not addressed promptly, could impact the economy.

By Anh Mai, Vietnam Business Forum