OCTOBER 2023 VIETNAM MACRO MONITORING Photo credit: Minh Nguyen, WB Vietnam WHAT’S NEW? • The industrial production index grew by 2.89 percent m/m (SA) in October, due to the continued recovery of manufacturing exports. However, prospects remain fragile as Vietnam’s PMI remained in contractionary territory in October (49.6), as it was in September (49.7). • Monthly growth of retail sales remained flat (-0.01 percent m/m, SA) in October, compared with 0.55 percent (m/m, SA) growth in September. • Exports and imports of goods continued to recover, increasing by 1.6 percent (m/m, SA) and 1.05 percent (m/m, SA), respectively, as demand from trade partners continued to gradually recover. However, both exports and imports of the first 10 months remained in contractionary territory, decreasing by 6.9 percent (y/y, SA) and 12.4 percent (y/y, SA) respectively. • The Consumer Price Index (CPI) inflation registered 3.6 percent y/y in October, driven by transport costs (+0.06 ppt), while core inflation fell from 3.8 percent y/y in September to 3.4 percent y/y in October, below the 2023 policy rate of 4.5 percent set by the authorities. • Credit growth remained sluggish, registering -0.1 percent (m/m) and 9.3 percent (y/y) in October 2023, well below the pre- covid period and reflecting persistent weak private investment. • The economic slowdown continued to weigh on the government budget. Despite a surge in revenue collection in October, revenue collection during the first 10 months of 2023 was 4.5 percent lower than the same period of the last year. At the same time, public expenditure accelerated by 11.4 percent during the same period (y/y) reflecting the government’s effort to support the slowing economy. Public investment disbursement increased by 35 percent (y/y) for the 10-month period, helping the government achieve 55 percent of the annual planned budget (compared with 46.5 percent during the same period of 2022). This execution rate, however, is still low given that there are only two remaining months for disbursing 2023 budget. TO WATCH • While a gradual recovery of exports is ongoing, domestic consumption remains subdued and slow credit growth continues to reflect weak private domestic investment and investor confidence. The authorities continue providing support to the economy through a 35 percent (y/y) increase in public investment during the first 10 months. However, implementation challenges continue to affect the roll out of the investment budget. Given the slow pace of economic recovery, the authorities may wish to consider extending the economic support program to 2024 to allow investment projects to be fully implemented. Preparing higher quality projects – including through better feasibility studies and the reform of public investment procedures would help to speed up implementation. A strategic and well-prepared investment pipeline with a focus on green, resilient and regional infrastructure will help bolster sustainable economic development. PAGE 1 O C T O B E R 2 0 2 3 • V I E T N AM MAC RO MO NI TO RI N G RECENT ECONOMIC DEVELOPMENTS Industrial production continued to improve but compared with slight expansion of +0.62 percent (m/m, SA) in prospects remained fragile September, due to the fall in sales of tourism services by 11.3 percent (m/m, SA) and hospitality services by 3.42 percent High-frequency data showed continued though small (m/m, SA) in October1. The growth rate of international improvement in economic activities on the supply side. visitors continued to moderate in October as the summer Monthly (SA) Industrial Production Index (IIP) – has been holiday ended, falling from 3.7 percent (y/y) in September to positive since April 2023. In October 2023, the IIP registered 3.2 percent (y/y) in) October. a growth rate of 2.89 percent m/m (SA) and 5.83 percent y/y (SA), compared with 0.03 percent (m/m, SA) and 5.51 percent Figure 2: Retail Sales (y/y, SA) respectively in September (Figure 1). The Percent (m/m and y/y, SA) improvement is due to the continued expansion of industrial production of key manufacturing export products such as footwear and leather products (3.3 percent m/m SA), Month-on-month Year-on-year electronic, computer, cell phones (including parts) (6.6 percent m/m SA), motor vehicles (1.6 percent m/m SA) and 60 transportation equipment (11.2 percent m/m SA) – reflecting 40 continued recovery in external demand (Figure 3). While the IIP data suggests that the contraction in industrial 20 production has bottomed out (Figure 1), prospects for a 0 strong recovery remain uncertain. Vietnam’s PMI remained in contractionary territory in October (49.6), compared with -20 49.7 in September. S&P Global PMI indicated that new orders -40 picked up only slightly in October 2023, and were not sufficient to encourage business to expand their production. Figure 1: Industrial Production Index Percent (SA) International merchandise trade continued to recover Exports and imports of goods continued to improve in Month-on-month Year-on-year October in response to recovering external demand, 30 increasing by 1.6 percent (m/m, SA) and 6.01 percent (y/y, SA); 20 1.05 percent (m/m, SA) and 6.28 percent (y/y, SA), respectively (Figure 3). The increase in exports in October was due to key 10 products such as electronics (17.1 percent y/y), machinery 0 (16.7 percent y/y). The growth of imports is closely linked to -10 the recovery of exports, given that imported inputs for production of exports account for 94 percent of total imports. -20 However, the 10-month cumulative exports and imports fell by 6.9 percent (y/y, SA) and 12.4 percent (y/y, SA) respectively, compared with 8.3 percent (y/y, SA) and 14.2 percent (y/y, SA) registered during the first nine months of the year. Retail sales growth continued to be subdued Figure 3: Merchandise Trade On the demand side, monthly growth of retail sales (a proxy Percent (NSA) for domestic consumption) contracted slightly by -0.01 Balance (US$ billion) Imports (cif) percent (m/m, SA) in October 2023, following the 0.55 Exports (fob) percent expansion (m/m, SA) registered in September. After 6 8% bottoming out at 5.0 percent y/y (SA) in July, retails sales 4 6% growth has plateaued at about 7 percent y/y (SA) in August, 4% 2 September and October, respectively, well below the pre- 2% pandemic growth rates of about 13 percent y/y (SA) (Figure 0 0% 2). Accounting for almost 80 percent of total retail sales, the -2 -2% sales of goods contracted by 1.54 percent (m/m, SA) in -4 -4% October 2023 compared with 0.88 percent (m/m, SA) Oct-19 Oct-20 Oct-21 Oct-22 Oct-23 expansion in September. Meanwhile, sales of services contracted by 2.74 percent (m/m, SA) in October 2023, 1 The SA series of total retail sales and individual components of retail sales (i.e., goods and services) do not add up for both levels and growth rates as they are seasonally adjusted separately. PAGE 2 O C T O B E R 2 0 2 3 • V I E T N AM MAC RO MO NI TO RI N G FDI performance remained steady amid global Credit growth remained sluggish uncertainties Credit growth remained sluggish, with credit growth in Cumulative FDI commitment for the first 10 months of 2023 October registering only 9.3 percent (y/y), compared with 9.9 reached US$25.7 billion, 14.7 percent higher than the same percent in September. These are well below the credit growth period in 2022, despite global uncertainties, thanks to target set by the SBV (14 percent) and pre-covid levels (12-15 continued confidence in Vietnam’s stability and openness. precent). Persistent weakness in private investment and Cumulative FDI disbursement was 18 US$ billion, 3.2 investors’ confidence continued to be the key driver for slow percent higher than a year ago. Manufacturing continues to credit growth. the main area attracting FDIs into Vietnam. Figure 6: Credit growth Figure 43: Foreign Direct Investment Percent (NSA) US$ billion (NSA) Month-on-month Year-on-year (LHS) 18.0 4 Total commitment Disbursement 16.0 7 14.0 6 12.0 5 10.0 2 4 8.0 3 6.0 4.0 2 2.0 1 0.0 0 0 Oct-19 Oct-20 Oct-21 Oct-22 Oct-23 The economic slowdown continued to weigh on the government budget Headline inflation and core inflation are well below policy target Revenue collection of the first 10 months of 2023 fell by 4.5 percent compared with same period of 2022, due to the The Consumer Price Index (CPI) inflation was 3.6 percent slowdown in domestic and external economic activities. (y/y) in October 2023, compared to 3.7 percent (y/y) in According to the Ministry of Finance, ten-month cumulative September, well below the policy target set for 2023 (4.5 collection from domestic sources (largely VAT) decreased by percent). The main drivers of CPI inflation remain food and 5.9 percent (y/y) while revenue from imports-exports tariffs housing, with a recent resurgence of transport costs – which fell by 21.9 percent in October 2023. Public expenditure, on has been affected by the new tick up of domestic oil and the other hand, accelerated by 11.4 percent (y/y) in October, gas prices. In the meantime, core inflation continued to reflecting the government’s effort to support the slowing decelerate, registering 3.4 percent (y/y) in October 2023, economy. Public investment during the first 10 months compared with 3.8 percent (y/y) September, as the second- increased by 35 percent (y/y), however, total disbursement round effects of the March 2022 oil price shock continued only constituted 55.3 percent of the annual capital budget to fade. allocation approved by the National Assembly for 2023. Figure 54: Contribution to CPI Inflation Figure 7: Fiscal account Percent & percentage point (y/y) US$ billion (NSA) Food Housing Transport Balance Revenues Expenditures Others Headline Core 30 8 20 6 4 10 2 0 0 -10 -2 -20 Oct-18 Oct-19 Oct-20 Oct-21 Oct-22 Oct-23 Oct-19 Oct-20 Oct-21 Oct-22 Oct-23 PAGE 3 O C T O B E R 2 0 2 3 • V I E T N AM MAC RO MO NI TO RI N G By the end of October, the State Treasury had issued about VND 264.3 trillion worth of government bonds, equivalent to 66.1 percent of total planned borrowing for 2023. The average tenure of the issuance was 12.32 years, and the average interest rate was 3.30 percent per annum. To watch: While a gradual recovery of exports is ongoing, domestic consumption remains subdued and slow credit growth continues to reflect weak private domestic investment and investor confidence. The authorities continue providing support to the economy through a 35 percent (y/y) increase in public investment during the first 10 months. However, implementation challenges continue to affect the roll out of the investment budget. Given the slow pace of economic recovery, the authorities may wish to consider extending the economic support program to 2024 to allow investment projects to be fully implemented. Preparing higher quality projects – including through better feasibility studies and the reform of public investment procedures would help to speed up implementation. A strategic and well-prepared investment pipeline with a focus on green, resilient and regional infrastructure will help bolster sustainable economic development. Sources and notes: All data are from Haver and sourced from the Government Statistics Office (GSO) of Vietnam, except: Government budget revenues and expenditures (Ministry of Finance), FDI (MPI); PMI and producer price inflation (survey by S&P Global, Nikkei and IHS Markit; Purchasing Managers' Index is derived from a survey of 400 manufacturing companies and is based on five individual indexes on new orders, output, employment, suppliers’ delivery times (and stock of items purchased). It is seasonally adjusted. A reading above 50 indicates an expansion of the manufacturing sector compared to the previous month; below 50 represents a contraction; while 50 indicates no change); financial sector data, including credit information (State Bank of Vietnam); credit growth in July - October 2023 (calculated by World Bank staff based on data from local news). SA=Seasonally Adjusted; NSA=Not Seasonally Adjusted; LHS = Left-hand Scale; FOB = Free on Board; CIF = Cost, Insurance, and Freight PAGE 4