Key Points

• We cut our 2023 GDP forecasts for Vietnam to 3.8% (from 5% previously), on the back of the softness in monthly indicators such as industrial production, exports and credit growth, but offset in part by resilient retail sales and tourism.
• Economic activity should improve gradually from 2H23 reflecting the lagged impact of policy easing, lower inflation, stabilisation in global demand and tourism recovery. The recent heatwave and power grid strain is a key risk to watch and poses some downside risk to exports and industrial activity.
• We pencil in another 25bps rate cut for both Vietnam’s refinancing and discount rates, and with a prolonged pause thereafter till 2024. While the Fed should cut rates in 2024, Vietnam’s inflation should bounce back in 1H2024. Authorities will rely more heavily on fiscal stimulus and quasi-credit measures to support the economy, and not just rate cuts.  
• We raise our 2023 current account forecasts to +1.8% of GDP, reflecting still low commodity prices, weak domestic demand, and tourism recovery. Stronger current account surplus, steady FDI inflows, coupled with continued reversal of resident outflows should support VND. We forecast USDVND at 23,200 in 12m.
• Over the medium-term, there remains many positives for Vietnam, including its continued attractiveness as a key beneficiary of global supply chain diversification, albeit with some tail risks to watch for including on domestic policy uncertainty.

Vietnam’s monthly indicators over the past 2 months have remained quite soft: For instance, industrial production declined by 15.9%yoy in May, and by our estimates, dropped by 2.2%mom sa. This was largely driven by the manufacturing component, indicating a still soft global demand outlook for the goods sector. Meanwhile, exports declined 12.2%yoy over the past 3 months, albeit with some signs that the weakness is levelling out. Imports also fell 19%yoy over the last 3 months, driven by a combination of lower commodity prices, and weak domestic demand including in the real estate sector.

Retail sales and tourism are the bright spots, but this is not enough to offset weakness in manufacturing and real estate: It’s nonetheless important to emphasise that there are certainly some bright spots. In particular, retail sales continues to grow at relatively robust rates of 11%yoy, while tourist arrivals are rebounding quite nicely, recovering closer to 69% of pre-pandemic levels as of May 2023. Moving forward, Chinese tourist arrivals should rise further, providing a further fillip to the employment-intensive tourism industry and as such also with positive spillovers to consumption spending.

We cut our 2023 GDP forecasts to 3.8% (from 5% previously), but expect some gradual improvement from 2H2023: Taking into account the latest available datapoints, we have lowered our GDP forecasts for this year to 3.8%. We expect some gradual recovery from 2H2023 as the lagged impact of policy easing, lower inflation, stabilisation in global demand, and tourism recovery helps. One key risk to watch out for is the recent heatwave that is putting some pressure on the electricity grid. Provincial governments seem to be on top of the issue, and prioritising power to major factories and employers. Nonetheless, there are also reports of sporadic blackouts. Our base case assumes that the macro impact of the heatwave will not be major, but suffice to say, it may pose some downside risk to industrial activity if it worsens meaningfully from here.

The flipside of the weakness in demand in Vietnam is that macro stability has improved meaningfully: Macro stability in Vietnam has improved from 3 perspectives. For one, inflation moderated further in May to 2.4%yoy from 2.8%yoy previously (see Chart 1 above). This has been driven mainly by lower food and energy prices thus far, but should increasingly also spread to lower core inflation as demand. Second, the trade balance has also picked up, especially on a seasonally adjusted basis (see Chart 6 below). Weaker imports together with subdued commodity prices were certainly important drivers, but are still important drivers in lowering US Dollar outflows and external financing needs for Vietnam. Third, credit outstanding has also moderated to 10.5%yoy in March, down from a local peak of 16.9%yoy in September 2022.

We now expect Vietnam to have a current account surplus of 1.8% of GDP in 2023: While we expect some gradual recovery in domestic demand, this will be concentrated more in consumption rather than investment (which is much more import intensive), given the weakness in the property sector. Goods exports should also pick up from current depressed levels as we move into 2024, overall providing support to the goods balance. Meanwhile, the improvement in tourism arrivals will also boost the services balance through 2H2023.

Capital flow picture looks quite decent, with USD hoarding unlikely to be repeated in 2023: A key driver for VND weakness in 4Q2022 was a sharp pickup in US Dollar hoarding, possibly driven by domestic policy uncertainty coupled with the strong US Dollar. Although we can’t know for sure, one way to proxy this is through the net errors and omissions component of the balance of payments, which rose to all-time highs of more than US$30bn in 4Q last year. Moving forward, we expect US Dollar hoarding to continue reversing through 2023. In addition, Foreign Direct Investment (FDI) continues to trend higher, providing further FX flows to Vietnam.

We continue to forecast a stable USDVND over the next 12 months and into 2024: With better external stability (ie. current account and capital flows) and internal stability (ie. inflation and credit), we continue to see USDVND remaining stable, and declining to 23,300 by the end of 2023, and 23,200 in 2024. Nonetheless, we think the upside for the currency will also be capped by the central bank’s desire to rebuild its FX reserves. The risk to our forecast and possible VND depreciation pressures could arise from a combination of rising domestic policy uncertainty and a much stronger US Dollar, both of which we stress are not our base case forecasts.

We pencil in another 25bps rate cut for both Vietnam’s refinancing and discount rate, and with a prolonged pause thereafter till 2024. While the Fed should cut rates in 2024, Vietnam’s inflation should bounce back in 1H2024. Authorities will rely more heavily on fiscal stimulus and quasi-credit measures to support the economy, and not just rate cuts (see Vietnam: More space to ease).