Vietnam’s recovery in the external sector continued

>> Shifts in investment flows for export-oriented industries

Similar to previous months, consumer electronics took the lead, accounting for 60% of growth. The encouraging sales performance and outlook for Samsung’s new flagship, the Galaxy S24 series, are likely providing some uplift.

In addition to electronics, expanding market access is also helping Vietnam buoy certain agricultural shipments. For example, Vietnam’s durian exports to China almost doubled in the first four months of the year, largely eating Thailand’s market share in China.

However, it is not rosy for all agricultural products. Coffee, which Vietnam is famous for, saw a surge in international prices. While coffee exports, on a value basis, continued to expand, the volume fell markedly. Indeed, officials recently noted that crop output this year is expected to be the lowest in four years, a reflection of the increasing relevance of climate trends and the impact of El Niño on ASEAN’s agriculture sector.

In addition, ongoing disruption to trade, such as from the Middle East, is also weighing on certain shipments. Textiles and footwear industry continued to track sideways, likely attributable to its higher export exposure to Europe and its related trade routes. Meanwhile, some port congestion in Asia also warrants close monitoring, as it looks to continue in the near term.

While export growth hit double-digits, so did import growth, and even more so. Imports rose 25.7% y-o-y, well beating consensus (HSBC: 19.3%, Bloomberg: 20.0%). Despite a broad-based pick-up, energy imports rose notably, likely reflecting the government’s efforts to address energy supply amid challenging conditions in hydropower generation due to adverse weather.

Long-term business interest also showed little sign of slowing. FDI remained well on track to sustain the momentum seen in 2023. Newly registered FDI grew double digits YTD, with incremental flows centered on the manufacturing and real estate sectors. As a testament to Vietnam’s attractive investment for a range of manufacturers, Pandora, a jewellery brand, has started construction of a USD150m factory in Binh Duong.

“Despite the positive external recovery, the domestic sector saw some softening signs. Retail sales growth, measured on a monthly seasonally-adjusted basis, moderated in May, and the number of monthly international tourists cooled to c1.4 million. While Vietnam’s annual target of 17-18m tourists for this year looks well within reach, it is facing intensifying competition as regional peers have been racing to introduce more visa-free schemes”, said HSBC.

Lastly, inflation warrants a close watch in the near term. Headline inflation was flat at 4.4% y-o-y in May, hovering close to the State Bank of Vietnam’s (SBV) 4.5% ceiling. The breakdown revealed a rather mixed picture. While rice prices dropped on a m-o-m basis, pork prices pushed up the overall food price momentum. “Although oil price momentum dropped, a hike in electricity prices, which is typically reflected in the CPI with a one-month lag, reminds one that Vietnam is easily exposed to global commodity volatility”, emphasized HSBC.

What is partly driving the rise in import prices is a weaker VND. Currency developments led by a higher-for-longer US interest rate environment have led the SBV to be more proactive in managing FX pressures. The SBV has been implementing a number of measures outside of adjusting its refinancing rate, such as more flexible open market operations (OMOs). While the risk of a near-term hike in the refinancing rate rose, HSBC expects the SBV to hold the policy rate steady as the economic recovery is still in its nascent stages – a delicate balancing act indeed.