Prospects for policy rates by year-end

Vietnam’s trade has continued to recover, with exports rising 19.1% y-o-y in July, handily outperforming expectations (HSBC: 11.7%, BBG: 13.5%). In particular, phones and computer electronics continued to lead the way, rising more than 20% y-o-y (Chart 12). Exports of other goods have also picked up, although global developments continue to partially reflect in certain shipments, such as textiles/footwear, which rose 8% y-o-y.

Meanwhile, manufacturing FDI shows no signs of slowing. Newly registered manufacturing FDI has grown 36% y-o-y, year-to-date, already exceeding some preceding years (Chart 13). The province of Northern Bac Ninh, a major electronics hub, drew more than 30% of total registered capital in June and July. This was led by Amkor Group, which boosted its semiconductor project investment in the province by an additional USD1.07bn.

That said, other sectors showed some mixed signals. July saw a notable softening in the monthly momentum of international tourist arrivals, with monthly arrivals falling below 1.2 million. Encouragingly, discussions of visa waivers for additional countries have been stressed.

Consequently, retail sales growth remained broadly unchanged at 8.7% y-o-y, year-to-date. More time is needed for supportive measures to filter through, and so the positive spillover from the trade recovery to the domestic sector can be seen. Remember that the government has implemented measures such as the extension of value-added tax (VAT) cuts till year-end to support domestic households and corporations.

Meanwhile, Vietnam’s consumer price index (CPI) in the first 7 months of 2024 rose by 4.12% from the same time last year, mostly due to increases in tuition fees, healthcare services, housing costs, and prices of power, water, fuel, and building materials, according to the General Statistics Office (GSO).

“Surging petrol prices, high electricity demand, and increased health insurance premiums pushed up the CPI in July to 0.48% as compared to the previous month," said Nguyen Thu Oanh, Director of the GSO’s Price Statistics Department. Accordingly, the CPI in July increased by 1.89% as compared to the figure in December 2023, and rose by 4.36% from one year ago. As a result, the CPI in the January-July period increased by 4.12% from the same time last year.

Inflation continued to hover close to the State Bank of Vietnam’s (SBV) 4.5% ceiling. Headline inflation rose 0.5% m-o-m on the back of still-elevated commodity prices and idiosyncratic factors such as higher health insurance premiums. This has translated into 4.4% y-o-y, broadly in line with market expectations (HSBC: 4.3%, BBG: 4.3%). That said, HSBC expected unfavourable base effects to fade soon, pushing inflation notably lower in 2H24. It expected that inflation will average around 3.6% for the full year 2024.

All in all, with price pressures relatively contained and the domestic sector requiring more time to firm up, HSBC expected the SBV to remain accommodative and keep its policy rate steady through its forecast horizon, at 4.50%. This will likely help Vietnam achieve its growth target for 2024, which it expects to be the fastest within ASEAN, at 6.5%.