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Vietnam’s externally oriented economy is likely to continue facing a challenging global economic environment, in our view. We expect continued accommodative policy to support sluggish although recovering growth. Yet, we see narrower room for further monetary easing, as policymakers balance between its macro stability objectives, amid a weakening currency, and rebounding inflation.

Growth rebounds, but external demand environment remains challenging

We remain cautious on Vietnam’s cyclical growth outlook. The trade reliant economy is facing near-term external challenges, notwithstanding its long-term promise as a growing manufacturing hub, given global supply chain diversification from China. Vietnam’s 3Q23 real GDP growth rebound to 5.3% YoY remained below the pre-pandemic (2017 to 2019) 7.2% average quarterly growth rate.

3Q23’s modest headline growth pick-up was mainly due to manufacturing improvement, helped by the gradual electronics exports turnaround. Yet, the manufacturing expansion remained almost half of the pre-pandemic (2017 to 2019) quarterly average trend of ~11% YoY. Moreover, Vietnam’s economy remains highly exposed to the global economy, notably to the US. The US accounts for ~30% of Vietnam’s overall goods exports. With the US economy likely to face a high-for-longer interest rate environment into 2024, we are, therefore, cautious on Vietnam’s 2024 growth rebound.

That said, Vietnam’s other sectors such as construction and services were resilient in 3Q23, and we expect this trend to continue, providing some buffers. Construction will likely be supported by public infrastructure spending. Services are likely to stay resilient, amid returning foreign tourists, and growing although softer labour market. Considering these factors, we maintain our 2023 full-year growth forecast at 4.6%, but lower our 2024 growth projection to 6.0% (from 6.5% previously).

Vietnam’s credit growth has been muted over the course of 2023, tracking only slightly better than the trend observed during the pandemic year of 2020. Year-to-date (YTD) credit growth as of Aug 2023 was about half of 2022’s YTD expansion in the same period at just 5.3%.

Having cut its refinancing rate by 150bps to 4.5% this year, we expect the State Bank of Vietnam (SBV) to keep monetary conditions accommodative and conducive to support credit demand and growth. That said, policy space to reduce interest rates is narrowing, given a weakening currency and rebounding inflation.

Currency weakening pressures

Depreciatory pressures on the Vietnamese dong intensified vs the US dollar in 3Q23, with the dong weakening to its worst level since early-December 2022. The depreciation of ~3% year-to-date in 2023 is now comparable to 2022’s full-year drop of 3.4%.

The negative differential between Vietnam-US interest rates, the first since the early-2000s, is putting significant pressure on the dong. The Vietnamese dong remains vulnerable to any hawkish US Fed expectations and rhetoric. With US interest rates likely to be high-for-longer, we expect Vietnamese policymakers to be cautious in cutting interest rates, which would exacerbate the negative spread and currency weakness, to the detriment of foreign investor confidence.

Inflation risks resurfacing

We also expect Vietnamese policymakers to be vigilant on the inflation rebound and upside risks. Vietnam’s headline inflation has started to tick up, similar to other regional economies such as Philippines and Thailand. Vietnam’s headline inflation picked up to 3.7% YoY in Sep 2023, after bottoming at 2.0% YoY in Jun 2023.
The inflation increase has been mainly due to rebounding commodity prices, with core inflation still above headline and trending lower. Notably, transportation has started to contribute positively to headline inflation from Aug 2023, after being a drag from Mar to Jul 2023. Global oil prices have rallied ~30% from its 2023 low, supported by OPEC+ cuts, and face upside risks from a tighter market. Food inflation, meanwhile, also started to tick higher in Sep 2023, after decelerating from Jan 2023’s peak, and face upside risks from El Nino weather disruptions. The SBV is still aiming to keep headline inflation below its 4.5% target in 2023. It would, therefore, be cautious in loosening monetary policy that might stoke upside imported price pressures.


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