Vietnam’s GDP growth could peak in 3Q22F

Vietnam's GDP growth would reach 11.0% yoy (/-0.5%) in 3Q22F. Photo: HCM city

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Public investment to pick up

According to GSO, public investment in July jumped 22.5% yoy (6.3% mom) to VND46.2tr (versus an increase of 10.1% yoy seen in 1H22). For 7M22, disbursed state capital rose 11.9% yoy to VND237.6tr (higher than the 6.3% rate seen in 7M21), equivalent to 43.3% of the full-year target.

The Government determined to complete the target of disbursement of public investment capital in 2022. During the meeting on August 3, Prime Minister Pham Minh Chinh requested the Ministry of Planning and Investment and the Government Office to submit to the Government for promulgation a new Resolution on "Speeding up the disbursement of public investment capital". Previously, on May 2, the Prime Minister signed Decision No.548/QD-TTg, establishing six inspection teams to solve problems related to the disbursement of public investment.

In addition, the implementation of public investment could be supported by the recent decline of some construction materials such as iron and steel. Specifically, after peaking in April, domestic steel prices have decreased by 14.1% from the peak and are 0.1% lower than their level at the beginning of 2022. This factor will help improve profit margins for construction contractors, thereby speeding up the progress of public investment projects.

Mr. Dinh Quang Hinh, analyst at VNDirect, expected the implemented state capital to increase by 20–30% compared to the actual implementation in 2021, as growth in the second half of 2022 could pick up from the low base of the same period in 2021.

Headroom for fiscal policy

State budget revenue rose 18.1% yoy in 7M22 while expenditure grew slowly by 3.7%. Spending disbursement was slower due to a lag in state investment. As a result, Vietnam’s state budget recorded a surplus of more than VND250 trillion in 7M22.

Mr. Dinh Quang Hinh believed the current fiscal surplus would help to contain inflation pressures, thereby providing more headroom for monetary policy to remain in sync with a growth-supportive fiscal policy. Thanks to the abundant fiscal space, the government has decided to reduce the environmental tax and import tax on petrol to curb inflation. Specifically, the government has reduced the environmental protection tax for petrol (except ethanol) by a total of VND3,000/liter and reduced the import tax on petroleum products from 20% to 10%.

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In addition, the higher budget allows the government to accelerate the disbursement of an economic stimulus package in 2H22, including a 2% VAT reduction, an additional interest rate compensation package worth VND40,000bn, and an infrastructure development investment package worth VND113,050bn. These policies will support the recovery of Vietnam’s economy in the second half of 2022 and 2023.

Positive outlook

Mr. Dinh Quang Hinh forecasted that Vietnam's GDP growth would reach 11.0% yoy (/-0.5%) in 3Q22F. This high growth is attributed to the following factors.

First, low base in 3Q21, when Vietnam's GDP dropped 6.0% yoy. Due to the impact of social-distancing measures, the service sector and industry and construction sectors decreased by 8.6% yoy and 5.5% yoy respectively, in the third quarter of 2021.

Second, the service sector would be the main growth driver of the economy thanks to domestic tourism continuing to thrive and domestic demand recovering thanks to higher people's incomes and a 2% reduction in value-added tax (lasting until the end of 2022).

Third, the implementation of growth-supportive fiscal policy, as we discussed above.

"Vietnam's GDP growth could peak in 3Q22F, then cool down in 4Q22F (our GDP growth forecast for 4Q22 is 5-6% yoy). We maintain our GDP growth forecast for Vietnam in 2022 at 7.1% yoy (/- 0.3%). Overall, Vietnam will still be one of the fastest growing countries in the Asia-Pacific region in 2022", said Mr. Dinh Quang Hinh.

Mr. Dinh Quang Hinh also maintains his forecast that Vietnam’s GDP growth could reach 6.9% yoy in 2023F. This lower growth outlook could be attributed to: (1) slowing economic growth of Vietnam's major trading partners such as the US and Europe could dampen export prospects; (2) higher inflation could hurt the recovery of domestic consumption; (3) rising interest rates increase costs and affect business expansion plans. However, there are still supportive factors for Vietnam's growth in 2023 such as abundant disbursement of public investment, sustainable foreign direct investment inflows and a strong recovery in foreign arrivals.