Vietnam's economy: Old engine, new vitality

Vietnam's exports rose 13.6% y-o-y in February thanks to broad-based growth across sectors – a reflection of its steaming external sector. 

Despite favourable base effects, energy-induced inflation risks warrant being watched by policymakers.

Take the driving seat

In the new year of the Tiger, Vietnam’s exports point to a steady recovery. Exports rose 13.6% y-o-y in February thanks to broad-based growth across sectors – a reflection of its steaming external sector. That said, the only downside surprise came from electronics, as Samsung’s smartphone release typically provides a significant boost to Vietnam’s exports. Scheduled for late February, Samsung’s flagship Galaxy S22 appears to face a delay in its shipments.

However, HSBC said the impact would be likely to be temporary, and there were good reasons to stay optimistic about Vietnam’s external engine. Thanks to multi-year consistent FDI inflows in tech manufacturing, Vietnam has successfully transformed into a rising global base. While the pandemic partially disrupted the process, interest remains high. For example, Samsung has recently injected USD920m to expand its mobile component production in Thai Nguyen province.

Energy crunch

Given surging global oil prices, the impact on Vietnam’s trade is noticeable. While base effects and import-intensive electronics were the main reasons behind strong import growth, February petroleum imports almost doubled that of the monthly average for 2021.

HSBC said the trend would likely continue as the authorities indicated that Vietnam would import an additional 2.4 million cubic meters of petroleum products in 2Q22. This is because Vietnam has been facing a domestic petroleum supply shortage since its largest refiner, Nghi Son Refinery, reduced its production capacity to 80% and suspended some crude imports since January. In addition to increasing imports, the government also plans to auction 100 million liters of gasoline from its reserves.

Persistent energy inflation

No doubt, the most direct impact of surging energy prices falls on consumer prices. Inflation rose 1.4% y-o-y in February, primarily driven by higher transport costs of over 15% y-o-y, a trend that has been lasting for a while. Indeed, gasoline prices have been raised six consecutive times since early December.

That said, low base effects partly alleviated some acute short-term challenges. Still, inflation risks are worth watching closely by policymakers as the rise in commodity prices is broad-based, not only about energy.