Domestic consumption will be the fuel for the service sector's recovery

Vietnam has piloted to welcome foreign tourists under package tours from mid-November 2021, through charter flights to several destinations such as Phu Quoc (Kien Giang), Khanh Hoa... Photo: Nha Trang beach

Vietnam’s service sector was hit the hardest and decreased 9.3% YoY in 3Q21 (vs. a 4.2% growth rate seen in 1H21) amid the temporary shutdown of nonessential services in many provinces. 3Q21 gross retail sales of consumer goods and services slumped 21.4% QoQ to VND915,716bn (-28.3% YoY) as retail and recreation mobility at the national level fell by as much as 60% on average from the pre-pandemic levels. In 9M21, the service sector dropped 0.7% YoY in 9M21 (vs. a 1.4% YoY increase in 9M20).

VNDirect expects the service sector to recover and enjoy a higher growth rate from 2022 onwards, mostly driven by the reopening of non-essential services and the recovery of consumption. Specifically, it expects all service activities, including tourism, transportation, and entertainment, to operate at full capacity since 2Q22 after Vietnam vaccinated over 70% of the population. It also expects consumption to bounce back strongly, with gross retail sales of consumer goods and services expected to increase 10–12% YoY in 2022F thanks to strong catalysts, including:

First, tourism is reviving after international flights were licensed for commercial use beginning in 4Q21F, resulting in a strong rebound in travel, entertainment, lodging, and catering services. Vietnam has piloted to welcome foreign tourists under package tours from mid-November 2021, through charter flights to several destinations such as Phu Quoc (Kien Giang), Khanh Hoa, Quang Nam, Da Nang, and Quang Ninh. This marks the beginning of Vietnam's tourism industry after nearly 2 years of being closed to foreign visitors. It is noted that the tourism sector contributed over 9.5% of Vietnam’s GDP in 2019. Due to the impact of the COVID-19 pandemic, the contribution of this sector has dropped to 2.3% of GDP in 9M21.

Second, VNDirect believed that the government would release more fiscal stimulus packages to support economic recovery, focusing on cash subsidies for people hard-hit by the COVID-19 pandemic, tax reduction (value-added tax, corporate income tax) and an increase in public investment for transport infrastructure and social-housing projects. These policies aim at recuperating domestic demand and consumption.

"The aviation companies, retailers, food producers, and beverage companies would be the main beneficiaries from the recovery of consumption. Besides, Vietnam’s F&B sector would maintain resilient growth in 2021F thanks to higher people’s incomes and rising urbanisation. In addition, a better growth outlook for retailers would be expected in 2022F thanks to a strong recovery in domestic demand, a young population era, and a consumer's lifestyle change in favour of modern retail over traditional. Under this theme, ACV, MWG, VRE, and VNM are our stock picks", VNDirect said.