Vietnam: Cautious cyclical outlook
Vietnam’s economy continues to face global cyclical challenges, despite a promising long-term outlook.
Group Research - Econs, Chua Han Teng3 Oct 2023
  • The growth rebound extended into 3Q23, but was still weak vs pre-pandemic
  • The manufacturing recovery faces challenges from high US interest rates
  • Public infrastructure and services sectors to provide buffers
  • We maintain our 2023 growth forecast at 4.6%, but lower 2024’s projection to 6.0%
  • Monetary policy to stay easy, but further loosening is limited by weaker FX and inflation rebound
Article image
Photo credit: Adobe Stock Photo
Read More

For full report with detailed charts, please download the PDF

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.

To read the full report, click here to Download the PDF

Chua Han Teng, CFA

Economist - Asean
[email protected]

Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.


Explore more

E & S Flash
Disclaimers and Important Notices

GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

This report has been prepared by a personnel of DBS Bank Ltd who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).  This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.