It expects inflation to average 2.8 per cent in 2021, well below the State Bank of Vietnam’s (SBV) 4 per cent inflation ceiling, providing the central bank with flexibility to maintain an accommodative monetary policy to support growth.
Vietnam would have been on track for early policy normalisation, but the latest restrictions will delay the recovery and, as such, delay the urgency to hike rates.
“We expect the SBV to deliver a 50bp rate hike in last quarter of 2022, bringing its refinancing rate to 4.5 per cent by the end of next year,” HSBC said in its update.
In addition to virus containment, another priority for Vietnam is to accelerate vaccine procurement and roll-out. Vietnam continues to lag behind its regional peers in terms of vaccination, as only around 3 per cent of the population has been vaccinated with at least one dose.
A different outbreak
Vietnam’s GDP expanded strongly by 6.6 per cent year on year in the second quarter of 2021. However, HSBC explained that the rosy headline growth number is largely thanks to a low base last year.
In fact, the underlying economic indicators reflect the challenges Vietnam is facing amid its worst Covid-19 outbreak. The daily number of new cases still remains elevated, suggesting the drag on the economy will persist at least through the third quarter of this year.
At first glance, the services sector was no doubt the hardest hit. Its contribution to growth shrank from 45 per cent before the pandemic to only around 20 per cent in the last quarter.
Meanwhile, Vietnam’s domestic demand has become even more bumpy. While retail sales still registered positive growth of 3.4 per cent year on year during 3 – 6/2021, it benefitted from a low base last year.
“If we look at its level, retail sales were the lowest since the end of the national lockdown in the second quarter of last year. In fact, since the start of the fourth Covid-19 wave, May and June data saw two consecutive declines in year on year terms,” HSBC stated.
In addition, the recent outbreak exacerbates the weakness in the labour market. Overall, the unemployment rate ticked up from 2.4 per cent in the first quarter to 2.6 per cent in last three month, with the total number of jobs shrinking 65,000 quarter on quarter, or 9 per cent below the pre-pandemic level.
Unlike developed markets that have introduced generous direct cash handouts to households emerging markets like Vietnam will likely wait for a long time to see a meaningful pick-up in domestic consumption until the job market achieves a fuller and sustained recovery, HSBC noted.
Forward-looking indicators also point to near-term risks of supply chain disruptions. PMI in June plunged to a one-year low of 44.1, with most key indices also falling by the same steep magnitude.
Despite imminent Covid-19 challenges, we believe Vietnam’s recovery prospects remain bright, given emerging green shoots.
For example, foreign direct investment (FDI), which reflects investors’ long-term confidence, defied recent challenges. New FDI rose 13 per cent year on year in the first half of this year, while FDI disbursement grew almost 7 per cent.
As such, Vietnam’s priority is to contain the outbreak as soon as possible to make sure it can quickly regain its momentum.
HSBC have recently trimmed its 2021 growth forecast from 6.6 per cent to 6.1 per cent.
However, this merely reflects the impact of the recent outbreak, and Vietnam should remain one of the regional outperformers after getting back on track for a sustained recovery. This also comes within the government’s growth target range of 6 - 6.5 per cent.