Production line of electronic equipment and lighting equipment for cars and motorbikes at Stanley Vietnam Electric Company Limited (Japanese investment) in Hanoi.
GDP growth moderate
Commenting on Vietnam's economy during the 2024 Article IV consultation, Head of the Vietnam Mission to the International Monetary Fund (IMF), Paulo Medas, said that Vietnam's economic growth is forecast to recover to nearly 6% in 2024, supported by continued strong external demand, stable foreign direct investment and easing policies. Domestic demand growth is expected to remain weak as businesses struggle with high debt levels while the real estate market has not fully recovered. Inflation is expected to fluctuate around the State Bank of Vietnam's (SBV) target of 4-4.5% this year.
However, the IMF statement also said that risks remain. Exports, the main driver of Vietnam's economy, could weaken if global growth falls short of expectations, global geopolitical tensions persist or trade disputes intensify. Domestically, weakening real estate and corporate bond markets could have a stronger-than-expected impact on banks' ability to extend credit, affecting economic growth and undermining financial stability.
In that context, the IMF welcomed Vietnam’s revision of the Land Law and other real estate-related laws to address legal bottlenecks in the sector. Medas said Vietnam needs to continue restructuring weak real estate developers and promote a healthy corporate bond market.
Also with very positive comments on Vietnam's economy, the latest economic update report from Standard Chartered Bank forecasts that Vietnam's Gross Domestic Product (GDP) growth will reach 5.3% in the second quarter of 2024. According to experts, retail sales growth is forecast at 8.2% year-on-year in June (compared to 9.5% in May), and export growth at 14.2% (from 15.8% in May). Electronics exports will continue to improve this year.
Import and industrial production growth are likely to have reached 26.0% and 5.2% respectively in June. Inflation is likely to have risen to 4.5% from 4.4% in May, marking the third consecutive month of inflation above 4%. This is due to rising prices for education services, housing and construction materials, health care and food. This trend is likely to continue in the coming months.
Mr. Tim Leelahaphan, economist for Vietnam and Thailand, Standard Chartered Bank, shared: “Although growth in the second quarter is likely to slow down, we believe that Vietnam still maintains a very positive recovery momentum. The economy may face challenges in the third quarter, in the context of price pressure, exchange rate and declining demand globally.”
Standard Chartered forecasts that the State Bank of Vietnam will likely raise the refinancing rate by another 50 basis points in the fourth quarter amid rising inflation.
FDI attraction continues to be positive
Sharing the same view with Standard Chartered, in the Vietnam macroeconomic update report published on June 19, the World Bank (WB) stated that Vietnam's economy has shown many positive signs. The index of industrial production (IIP) in May increased by 2.6% compared to the previous month, driven mainly by strong growth in the processing and manufacturing sectors such as machinery and equipment, computers and electronic products.
Exports and imports also increased. According to the WB, the significant growth in imports of intermediate inputs indicates increased demand from trading partners and therefore exports are likely to be higher in the coming period.
Meanwhile, foreign direct investment (FDI) attraction continues to be positive. FDI commitments reached 11.07 billion USD by the end of May 2023, up 2% year-on-year. Cumulative FDI disbursement also reached 8.3 billion USD, up 7.8% year-on-year. Of which, the majority of FDI capital continues to focus on processing, manufacturing and real estate industries.
Regarding retail sales, although up from the previous month, they are still weak compared to the same period last year, the WB said that while international demand is recovering, domestic demand, especially consumption, remains weak. According to the WB, the government has implemented a number of measures to support the domestic economy. However, in the context of a stronger USD, reducing interest rates to support investment could increase exchange rate pressure. Therefore, the WB said that Vietnam needs to continue to support aggregate demand through investment.
Bond market gradually recovers
Vietnam’s local currency bond market rebounded with a growth rate of 7.7% in the second quarter of 2024 compared to the previous quarter, thanks to increased government bond issuance and the State Bank of Vietnam’s decision to resume issuance of central bank bills in March, according to the latest report by the Asian Development Bank (ADB). Treasury bonds and other government bonds increased by 3.3% in the second quarter, supporting the government’s funding requirements. Corporate bonds decreased by 0.9% due to a large volume of maturing bonds and low issuance.
The sustainable bond market in Vietnam reached a size of 800 million USD by the end of March. This market includes green bonds and sustainable bond instruments issued by individual enterprises and mostly has short maturities.
Bond yields in emerging East Asia rose as slower-than-expected deflation reinforced the case for higher rates over longer periods. This boosted short- and long-term bond yields in both advanced economies and regional markets. Government bond yields rose by an average of 56 basis points across all tenors as domestic inflation picked up and the US Federal Reserve delayed its policy rate cut, according to the ADB report.
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