HSBC warns of biggest downside risk to Vietnam’s growth

“The biggest downside risk to Vietnam’s growth is intensifying trade headwinds,” HSBC stated in its latest report.

In details, since the advent of the US – China trade tensions, Vietnam has been one of the biggest beneficiaries in terms of both trade and FDI diversion, boosting its export share in the US market in particular. As a result, Vietnam has become increasingly vulnerable to a US economic slowdown.

The other risk comes from upward pressures to energy prices. Despite petroleum prices falling below June’s peaks, they remain at elevated levels.

To reduce the risk of potentially volatile onshore fuel inventories, the government has been directing domestic refineries and energy SOEs to plan to raise energy imports for at least the first half of 2023. This would likely squeeze Vietnam’s current account advantage, on the back of higher import bills.

For Vietnam, 2022 was a year of booming recovery, making the country likely to remain one of the outperformers in Asia. However, the growth outlook is now clouded by increasing trade headwinds.

Export growth sharply moderated in October, with November seeing the first meaningful year on year decline in two years. The primary drag came from electronics shipments, which account for 35 per cent of Vietnam’s total exports.

Recent data also show that export weakness is more broad-based, including textiles/footwear, wood and machinery products. In particular, the economic slowdown in the US has exacerbated the woes, as the US is the largest market for many of Vietnam’s goods exports.

On a positive note, domestic demand has come to a partial rescue, thanks to an ongoing recovery in its labour market. While the unemployment rate dropped, there is still potential for a further decline, as many jobs are concentrated in tourism-related sectors.

Given lingering re-opening tailwinds, HSBC raise its 2022 growth to 8.1 per cent (previously: 7.6 per cent). However, challenges will likely be more acute in 2023, particularly after the re-opening effect fades and the impact of high inflation starts to kick in with a lag.

“Therefore, we expect growth to moderate to 5.8 per cent (previously: 6.0 per cent),” said HSBC.

In addition, Vietnam has started to see stronger inflation pressures, with the latest data exceeding the State Bank of Vietnam’s 4 per cent “ceiling”. Not only has core inflation accelerated, but Vietnam has also seen a domestic energy shortage, keeping headline prices elevated.

“While we recently trimmed our inflation forecast slightly to 3.2 per cent (previously: 3.4 per cent) for 2022, we raised our forecast to 4.0 per cent (previously: 3.7 per cent) for 2023. This means the SBV will likely continue its tightening cycle,” added HSBC.

Policy issues

Unlike regional peers, such as Malaysia and Indonesia, Vietnam has limited fiscal room to introduce immediate relief measures to alleviate the impact of high energy prices.

Since April, the authorities have been cutting various taxes, including fuel and environment taxes. To combat rising inflation pressures, the Ministry of Finance is seeking to extend the current environment tax cuts on various fuels until end-2023.

This suggests that, while global oil prices may cool down in 2023, the authorities may opt to reinstate the environment tax as early as 2024.

In addition, other energy prices may rise in 2023. Vietnam Electricity Group (EVN) has recently filed for a price hike in 2023, the first major price adjustment in almost four years, citing high energy import costs.

On the monetary front, as the last ASEAN central bank to move, the SBV has been actively “playing catch up” in the face of a weakening VND and rising imported inflation.

Only starting in September, the SBV has delivered back-to-back rate hikes of 100bp each time, taking the refinancing rate to 6.0 per cent by end-October. For now, bolder rate hikes reflect more of a concern from external factors, such as the Fed’s rapid hiking cycle and FX volatility.

Granted, external factors have turned more favourable in recent weeks, with the Fed likely slowing down its rate hikes and easing exchange rate pressure. However, rising core inflation increasingly suggests the SBV’s hiking cycle is still under way.

“We expect the SBV to raise its refinancing rate by 50bp each in the first and second quarter of next year, taking the refinancing rate to 7.0 per cent by mid-2023,” HSBC said.