Vietnam’s Economy Slows Amid Global Headwinds, Experts Predict Rebound

A woman sitting next to Thu Bồn river in Hoi An, Vietnam
A woman sitting next to Thu Bồn river in Hoi An, Vietnam

Vietnam’s economy is confronting obstacles such as a slowdown in industrial production and declining exports due to weak external demand, as highlighted by the World Bank.

In May, the industrial production index (IIP) witnessed a meager year-on-year increase of 0.1%, a decline from April’s 0.5%. However, retail sales remained resilient, expanding by 11.5% year-on-year, mirroring the growth rate observed in April.

The World Bank’s June edition of Vietnam Macro Monitoring emphasized the impact of prevailing uncertainties on consumer spending, with goods sales improving from 9.7% in April to 10.9% in May, while service sales experienced a significant decline from 19.2% to 7.6% during the same period.

Trade-wise, the report indicated that exports of goods suffered a significant setback, declining by 6% compared to the previous year, primarily due to weak external demand. Concurrently, imports fell by 18.4% year-on-year in May, reflecting the prolonged slowdown in demand for foreign inputs essential for production and exports. The report cautioned that if global financial conditions continue to tighten, external demand may further weaken.

Amidst these challenges, Vietnam experienced a decline in consumer price index (CPI) inflation for the fourth consecutive month. In May, CPI softened from 2.8% year-on-year in April to 2.4% year-on-year, driven by falling global energy prices and reduced domestic transport costs. However, core inflation remained elevated at 4.5% year-on-year, slightly lower than April’s 4.6% year-on-year rate.

Foreign direct investment (FDI) commitments also slowed down, impacting investor confidence due to prevailing global uncertainties. Despite this, FDI disbursement remained stable at USD 1.8 billion, comparable to the same period in the previous year.

To stimulate the economy, the State Bank of Vietnam (SBV) implemented measures to ease monetary policies. The refinancing interest rate was lowered from 5.5% to 5%, while the overnight lending facility rate was reduced from 6% to 5.5%. This marks the third consecutive rate cut since March 2023.

However, analysts from the World Bank advised authorities to remain vigilant regarding potential pressures on capital flows and exchange rates resulting from diverging monetary policies between Vietnam and other countries.

Credit growth also decelerated, dropping from 9.2% year-on-year in April 2023 to 9% year-on-year in May, reflecting weakened demand. Additionally, the monthly budget balance recorded a substantial deficit of approximately $2 billion in May. This deficit can be attributed to a 35.8% year-on-year decrease in revenue collection, primarily due to one-off effects from high post-Covid revenue in 2022 related to land sales, property transactions, and value-added tax collections. Conversely, public expenditure increased by 27.8% year-on-year in May.

The challenges faced by the Vietnamese economy necessitate careful monitoring and proactive measures, as highlighted in the report. Urgent attention is required to address potential energy shortages in the Northern region that emerged in late May to mitigate further impact on the economy. Accelerating public investment disbursement, particularly for National Target Programs, would strengthen aggregate demand and foster short-term economic growth. Moreover, prioritizing investments in digital and green technologies, infrastructure development, and human capital would promote sustainable long-term development.

Given the slowdown in manufacturing exports and the impact on employment, it becomes crucial to swiftly identify and support affected workers and families through the social protection system. Streamlining administrative procedures and removing regulatory hurdles would facilitate business activities and attract investments necessary for economic growth, the report added.

Despite the challenges faced, HSBC has forecasted that Vietnam’s economy will rebound in the last quarter of this year, potentially achieving a 5% GDP growth for the entire year. The recent policy rate cut by the State Bank of Vietnam reflects its urgency to provide further support for growth via the credit channel, thereby reducing financing costs for businesses and households. HSBC’s outlook considers the tough year experienced by Vietnam’s economy, with sharp growth deceleration in the first quarter and ongoing headwinds in various sectors.

Although the country witnessed a significant decline in exports, there is a silver lining in the form of a positive influx of tourists. In the past two months, Vietnam has welcomed nearly 1 million tourists, equivalent to 70% of the levels seen in 2019. The central bank’s rate cut signifies confidence in controlling inflation, which is expected to remain below 3%.

Thanks to improving current account dynamics, the Vietnamese dong has remained relatively stable despite trade headwinds. HSBC, taking into account a protracted and deeper-than-expected trade downturn, has revised its GDP growth forecast for Vietnam from 5.2% to 5% for this year. The bank expects a meaningful economic rebound in the last quarter, prompting further monetary support. Consequently, HSBC anticipates another 50 basis-point rate cut by the State Bank of Vietnam in the third quarter.