Headwinds for Vietnamese economy

Similar to its regional peers who are net energy importers, Vietnam has sought to use fiscal relief to ease high oil prices.

Policies on the radar

Similar to its regional peers who are net energy importers, Vietnam has sought to use fiscal relief to ease high oil prices. Initially, Vietnam used the petrol price stabilisation fund to subsidise local petrol prices, then cut the environment tax, the largest of all taxes and fees on fuel, to VND2,000 for gasoline and VND700-1,000 for other fuels since 1 April. Most recently, the National Assembly has just approved a plan to cut environmental taxes on fuel by half for the second time. The extended cut will apply from July 11 to the end of the year.

On the monetary front, the State Bank of Vietnam (SBV) is one of the few central banks in Asia that has not started its monetary tightening. However, Mr. Ngo Dang Khoa, Country Head of Markets and Securities Services, HSBC Vietnam, said rising inflation risks (albeit mostly imported inflation) will increasingly call for monetary tightening. Based on our inflation forecasts, price pressures are likely to be more acute in 4Q22 than in 4Q21, even temporarily overshooting the SBV’s 4% inflation ceiling.

"We believe the timing of monetary normalisation is likely to come sooner given rising price pressures. We maintain our view that the SBV is likely to deliver a 50bp rate hike from 3Q21, and we expect a 50bp rate hike in each quarter from 4Q22 until 3Q23. This should take the policy rate to 6.50% by the end of 3Q23," said Mr. Ngo Dang Khoa.

Wary of risks

A surge in global energy prices remains the biggest risk to Vietnam’s growth. The most obvious impact is Vietnam’s increasing energy bills. Despite strong exports, the trade balance has narrowed to a marginal surplus of only USD 0.6 billion in the first five months of 2022. This will erode Vietnam’s current account advantage, putting downward pressure on the VND. Mr. Ngo Dang Khoa expects Vietnam to run a current account deficit for the second consecutive year, although the magnitude should be smaller than that of 2021.

In addition, Mr. Ngo Dang Khoa noted that stiffening trade headwinds need to be watched closely. A rotation of global demand from goods to services and lingering supply chain disruptions in mainland China will largely determine how long Vietnam’s strong export growth can be sustained. For one, global consumption is shifting from goods to services. In addition, mainland China’s supply chain disruptions make it increasingly difficult for Vietnamese manufacturers to source the materials and inputs that will be used for future exports. This will hold the answer to how long Vietnam’s exports can be sustained at such a strong pace.

Besides, even though the government has issued support packages to help those most affected by the COVID-19 pandemic to ensure social security, rising inflation poses an additional challenge to an inclusive recovery. Low-income households are disproportionately affected, worsening inequality in the near term.