Despite the optimism when Vietnam saw a rosy start to 2022, it is facing multiple challenges given elevated global energy prices, HSBC said in its latest report.
Vietnam will increase its energy bills, deteriorating its terms of trade position, which will likely shrink the country’s external metrics, making it run a second consecutive current account deficit.
Meanwhile, higher oil prices will raise residents’ cost of living, dampening the pace of recovery for private consumption, especially when the labour market has shown signs of recovery.
Vietnam's inflation momentum has accelerated in March.
Against this backdrop, HSBC recently updated some of key forecasts. It expects Vietnam’s economy to grow 6.2 per cent this year, likely still making it one of the regional outperformers.
On inflation, it raised the inflation forecast to 3.7 per cent, taking into account high energy prices which is said to last a while. 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 needs of monetary normalisation.
“As such, we brought forward our expectation of the first 50bp rate hike to the third quarter of 2022, from the last quarter as in the previous forecaset, likely bringing the policy rate to 4.5 per cent by end-2022”, HSBC said.
In the first three months of 2022, Vietnam’s recovery momentum has been sustained, thanks to both external and domestic pillars of growth.
For one, its external engine is once again on fire. Not only does it continue to benefit from an extended tech cycle, other key sectors have also shown strong performance. In addition, private consumption continues to rebound, albeit slowly.
More encouragingly, Vietnam has joined its peers to re-open its borders from mid-March, paving the way to revive its damaged tourism sector.
Despite that, Vietnam’s trade surplus shrank to a minimal level of only $0.8 billion, and a narrower trade balance has already eroded its current account advantage. In fact, it ran a current account deficit of 1.1 per cent of GDP in 2021, the first deficit in four years.
Despite strong remittances inflows, a smaller trade surplus around 5 per cent 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 that will boost its tourism revenue, but the recovery will likely be gradual.
Considering the impact of elevated global oil prices, HSBC expects to see another year of current account deficit in 2022, though the magnitude should be modest, possibly around 0.2 per cent of GDP.
In light of the external headwinds, HSBC slightly raised its near-term USD-VND forecasts but is maintaining its year-end projection at 22,800.
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