Is an export winter approaching?

Vietnam's exports fell 7.4% year over year, more than HSBC's and the market’s expectations (HSBC: -2.3%; BBG: -2.3%).

>> Vietnam' exports to face headwinds

External woes

For the past two years, Asia’s exporters have significantly benefited from surging demand for various products. While there have been bouts of supply chain disruption, by and large, Vietnam has been an outperformer, extending its impressive export growth since the advent of US-China trade tensions. The momentum lasted until 1H22; however, signs are now suggesting that it may be time for Vietnam’s external sector to brace for a bumpy road ahead.

The November data was quite striking: exports fell 7.4% year over year, more than HSBC's and the market’s expectations (HSBC: -2.3%; BBG: -2.3%). This marked the first significant year-over-year decline in export growth in two years, driven by weakness across the board. As a rising star deeply embedded in the global manufacturing ecosystem, Vietnam is not immune to a notable global trade slowdown—in other words, "payback" time has arrived.

Indeed, the manufacturing PMI has been consistently trending down since last May, ultimately dipping into contractionary territory from September on with falling new orders. Vietnam has been on the front line in terms of feeling the pain. Since September, over 630k workers have been affected by declining foreign orders, with around 90% experiencing a cut to their working hours.

Undoubtedly, the primary drag has come from electronics shipments, which account for around 35% of Vietnam’s total exports. Global new orders for electronics have slipped sharply since 2H22, affecting consumer electronics more than industrial products. "The impact has been broad-based across Vietnam’s three major export destinations—the US, mainland China, and Europe." "That said, Vietnam’s other exports are more susceptible to an economic downturn, specifically in the US," emphasized HSBC.

Since the start of the US-China trade tensions, in HSBC’s view, Vietnam has gained a substantial share of the US market. The gains have not only been evident in its traditional exports to the US, including electronics and textiles and footwear, but have expanded into new categories, including machines and wood products.

For example, Vietnam’s machine shipments doubled their share to 13% of total exports over the last four years, mainly driven by Vietnam’s rising involvement in the tech space, as a large part of Vietnam’s machinery exports are electronics-related. At the same time, the US market has come to dominate, with its share having more than tripled in less than ten years.

HSBC said Vietnam has also been a beneficiary of the booming US property market, leading to surging demand for wooden furniture. As a result, the US has widened its dominance over Vietnam’s wood product exports, now holding a 60% share. However, home sales in the US have been slumping given rising mortgage rates, with a similar downtrend also evident in the European property market. This has led to a notable weakness in Vietnam’s wood product exports.

>> Economists warn of decline in exports

Lastly, Vietnam’s traditional exports, textiles and footwear, have also started to turn south. While they remained a firm support for export growth in 3Q, this was almost entirely due to a low base, the effect of which has now faded away. Given high inflation and a consumption tilt from goods towards services in the West (with services now accounting for around 60%), we expect Vietnam will continue to see weakness here.

Booming local demand

Despite external woes, booming local demand has been supporting growth. Retail sales continued to reflect the continued re-opening effects, rising 17% year over year in November. While initial signs point to some moderation, growth will likely remain firm as the labor market continues to improve. After all, the labor market recovery in the tourism sector is still underway. Vietnam welcomed around 600,000 tourists in November, bringing foreign tourist numbers close to 3 million (16% of 2019’s level).

Despite a lack of mainland Chinese tourists, Vietnam has been actively tapping new markets, such as India. According to the Vietnam National Administration of Tourism (VNAT), Indian tourists have accounted for 4 percent of total tourists YTD. Albeit not on a large scale yet, we think expansion into new markets will at least provide some much-needed support.

In addition to mounting downside risks to growth, HSBC said rising inflation is another concern. As expected, inflation continued to breach the 4% ceiling set by the State Bank of Vietnam (SBV). Headline inflation rose 0.4% m-o-m, translating into 4.4% y-o-y in November. In particular, core inflation reached almost 5% year over year, reflecting an accelerated recovery in domestic demand. That said, unlike its peers, Vietnam has been facing an energy shortage, putting upside pressure on headline inflation. Not only have gasoline prices been adjusted upward, but the rise in input material costs has been broad-based. Coupled with unfavorable base effects, HSBC expects inflation pressures to stay elevated in the coming quarters, prompting the SBV to keep its foot on the monetary brakes.