SEPTEMBER 2023 VIETNAM MACRO MONITORING Photo credit: VN Express WHAT’S NEW? • Vietnam’s economy registered 5.3 percent (y/y) growth in Q3-2023 compared with 4.1 percent (y/y) in Q2-2023, due to a gradual recovery of industrial production, reflecting improvement in exports. Quarterly growth, however, moderated slightly to 2.95 percent (q/q, SA) in Q3, from 3.08 percent (q/q, SA) in Q2. • The service sector remained the main contributor to growth (contributing 2.7 percentage points) in Q3-2023. Although the growth of retail sales of goods is still about 50 percent (6.6 percent y/y in Q3-2023) of pre-covid period levels (13-14 percent y/y), services sales have remained resilient (9.5 percent y/y in Q3-2023) thanks to return of international tourists. Contribution to GDP growth by industry accelerated to 1.9 percentage point in Q3, compared with 0.8 and -0.1 percentage point in Q2 and Q1, respectively. • Exports and imports continued to contract by 1.2 percent (y/y) and 5.0 percent (y/y), respectively, in Q3-2023. However, the contractions are much shallower than in the previous two quarters, due to continuous improvement in monthly performance – including in exports of agriculture products, textile, electronics, smartphone, and construction materials. • Headline inflation continued the sharp upward increase that started in June, surging by 1.13 precent (m/m, SA) and reaching 3.7 percent (y/y) in September – an increase of 0.7 percentage point from August. Inflation continued to be driven by prices of food and foodstuffs and housing, with added inflationary pressure from increased prices in energy and education. Core inflation softened from 4.0 percent (y/y) in August to 3.8 percent (y/y) in September. • Both FDI commitments and disbursement remained robust, reaching US$20.2 billion and US$15.9 billion respectively during the first nine months of 2023. These represent an increase of 31 percent and 3 percent compared with the same period of 2022. New FDI commitments reflect continued confidence by foreign investors in Vietnam’s potential despite global uncertainties. • Credit growth decelerated from 9.4 percent (y/y) in August 2023 to 8.7 percent (y/y) in September reflecting the continued slowdown in private investment (including in the real estate sector). • The budget was in deficit during the first nine months of 2023. Revenue collection decreased by 7.8 percent (y/y) while budget execution increased by 14.1 percent (y/y), resulting in a small deficit of US$0.7 billion (0.3 percent of GDP). Public investment disbursement during this period increased by 45.3 percent (y/y) but still reached only 48 percent of the planned capital budget approved by the National Assembly for 2023. TO WATCH • While economic growth picked up in Q3-2023 thanks to a gradual recovery of the exports, domestic consumption remained subdued and credit growth continued to be slow reflecting weak private domestic investment and investors’ confidence. A sharp upward trend in headline inflation continues to warrant close watch. Continued efforts to implement public investment could support aggregate demand and economic growth in the short run. A strategic and well-prepared investment pipeline for 2024 and the next Medium-Term Investment Plan (MTIP) with a focus on green, resilient, and regional infrastructure will help bolster long term economic development. Further improving the business environment and stepping up investment in human capital would help the country: attract high-tech and high-value-addition FDI and boost productivity in the long run. PAGE 1 S E P T E M B E R 2 0 2 3 • RE C E N T E C O N O M I C D E V E L O P M E N T S RECENT ECONOMIC DEVELOPMENTS GDP growth firmed up in Q3-2023 due to a Figure 2: Industrial Production Index recovering industrial sector. Percent (NSA) Vietnam’s quarterly GDP grew by 5.3 percent (y/y) in Q3-2023, Month-on-month Year-on-year picking up from 4.1 percent (y/y) and 3.3 percent (y/y) in Q2 and Q1 respectively (Figure 1). Quarterly growth, however, 30 30 moderated slightly to 2.95 percent (q/q, SA) in Q3, from 3.08 20 20 percent (q/q, SA) in Q2. Growth in Q3-2023 was due to the 10 10 gradual recovery of industrial sector (Figure 2), which contributed 1.9 percentage point to GDP (compared with 0.8 0 0 percentage point and -0.1 percentage point in Q2 and Q1 -10 -10 respectively). The recovery in industrial production mirrors the continued improvement in merchandise exports (Figure 5). In -20 -20 Q3-2023, services and agriculture sectors grew by 6.2 percent -30 -30 (y/y) and 3.7 percent (y/y) respectively. They respectively Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 Mar-23 Sep-23 contributed 2.7 and 0.4 percentage point to GDP growth in Q3- 2023. These growth rates and contribution are comparable to Figure 3: Purchasing Managers' Index the previous two quarters. 50+= Expansion (SA) 60 Figure 1: GDP growth Percent (y/y, NSA) 50 Agriculture Industry Services Net Taxes GDP 40 15 10 30 Sep-21 Mar-22 Sep-22 Mar-23 Sep-23 5 0 Retail sales of goods remained subdued. -5 Retail sales of goods and services (NSA) increased by 2.4 percent (m/m) and 9.4 percent (y/y) in September 2023, -10 well below the pre-pandemic level (11 – 12 percent), Q3-19 Q3-20 Q3-21 Q3-22 Q3-23 reflecting subdued domestic demand (Figure 4). Accounting for 78 percent of retail sales, sales of goods increased by 2.1 percent (m/m) and 7.4 percent (y/y) in September – about Industrial production continued to improve in Q3- 54 percent of the pre-pandemic level (13-14 precent). Meanwhile, sales of hospitality and travel services expanded 2023. by 3.6 percent (m/m) and 15.2 percent (y/y), thanks to The industrial production index (IIP) registered a fifth positive strong demand for services due to the continued return of monthly growth in September (0.1 percent m/m) since May international tourists to Vietnam (1.05 million visitors in 2023 (Figure 2). The IIP grew by 3.5 percent (y/y) in Q3- September 2023 which registered 244.1 percent growth, 2023, compared to -0.2 percent (y/y) in Q2-2023 and -2.6 y/y). percent (y/y) in Q1-2023, supported by growth in domestic Figure 4: Retail Sales and export oriented sectors such as food processing (9.0 Percent (NSA) percent, y/y), textiles (14.4 percent, y/y), furniture products (17.8 percent, y/y), metal (steel and aluminum) (16.9 percent, Month-on-month Year-on-year y/y), LNG and fertilizer (12.6 percent, y/y). However, the 70 Purchasing Managers’ Index (PMI) fell back into contractionary territory (49.7) in September after the brief 50 rally in August to above the 50 mark (50.5), suggesting 30 continued uncertainty about the path to recovery (Figure 3). 10 -10 -30 -50 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 Mar-23 Sep-23 PAGE 2 S E P T E M B E R 2 0 2 3 • RE C E N T E C O N O M I C D E V E L O P M E N T S Monthly exports and imports resumed growth for Figure 6: Trade in Services US$ billion (NSA) the first time since November 2022. Exports Imports Balance Exports and imports grew 5.3 percent (y/y) and 2.6 percent (y/y), respectively, in September 2023, following ten 14 12 months of contraction (Figure 5). This reflects an 10 improvement in external demand, suggesting the 8 contraction in merchandize trade has bottomed out. It 6 helped narrow the contractions in exports and imports in 4 Q3-2023 to -1.2 percent (y/y) and -5.0 percent (y/y), 2 respectively, compared with -12.2 percent, y/y, and -20.6, 0 y/y, respectively in Q2-2023). The improvement was -2 evident in exports of agricultural products such as rice (156 -4 percent, y/y), textile weaving (121.7 percent, y/y), -6 Q3-19 Q3-20 Q3-21 Q3-22 Q3-23 electronics and computers (110.7 percent, y/y). The overall merchandise trade balance registered a surplus of US$2.3 billion in September 2023 and US$21.4 billion for the first Both FDI commitments and disbursement nine months of the year as exports have been contracting remained steady. less than imports (Figure 5). Also, imports are recovering faster than exports, signaling businesses are expecting further expansion of production. Between April and Cumulative FDI commitment for the first nine months of 2023 September 2023, monthly growth rates for exports amounted to US$20.2 billion, increasing by 31 percent (y/y). improved from -16.2 percent (y/y) to +5.3 precent (y/y), Cumulative FDI disbursement reached US$15.9 billion, an while those for imports improved from -23.1 percent (y/y) increase of 3 percent compared with a year earlier. to +2.6 precent (y/y). According to S&P Global PMI survey Manufacturing remained the major sector attracting FDI for Vietnam, the number of exports orders picked up in both commitments to Vietnam (Figure 7). In addition to investors’ August and September, especially from Asian markets. continued confidence in Vietnam’s long-term development potentials (despite short-term global uncertainty), Vietnam Figure 5: Merchandise Trade seems to also benefit from the “China+1” investme nt Percent (y/y, NSA) strategy. Balance (US$ billion) Exports (fob) (LHS) Imports (cif) (LHS) Figure 7: Foreign Direct Investment by sectors 60 6 $US billion (NSA) 40 4 Manufacturing Wholesales & retail 20 2 Real estate Electricity, gas & water Others Disbursement 0 0 7 -20 -2 5 -40 -4 3 1 -1 The deficit in the services trade balance continued to widen in Q3-2023 compared with the last two quarters. Headline inflation continued to pick up while core inflation softened further in September. Service trade balance posted a relatively large deficit (US $2.6 billion) in Q3-2023 compared with the previous quarters (Figure 6). This is largely due to the moderation in services Consumer Price Index (CPI) inflation surged by 1.13 percent exports while the recovery in services imports has continued (m/m, SA) in September, therefore increasing from 3.0 to pick up. The growth of international visitors to Vietnam percent (y/y) in August to 3.7 percent (y/y) in September decelerated from 280 percent (y/y) in Q2-2023 to 125 2023, and continuing a sharp upward trend that started in percent (y/y) in Q3-2023. At the same time, imports of June. Inflation was due to higher prices of food and foodstuffs transport services increased by 5.1 percent (y/y) in Q3-2023 as well as housing and construction materials. In addition, the due to the gradual recovery of trade activities. price of transportation services contributed 0.3 percentage point to CPI inflation due to the new round of oil price increases registered during July-September 2023. The price of education services also increased by 7.6 percent (y/y) in September, following the implementation of government Decree No. 81/2021/ND-CP on adjustments to tuition fees of public higher education institutions. In contrast to CPI inflation, core inflation (which excludes food, fuels and government administered prices) continued to soften from 4.0 percent (y/y) in August 2023 to 3.8 percent (y/y) in PAGE 3 S E P T E M B E R 2 0 2 3 • RE C E N T E C O N O M I C D E V E L O P M E N T S September (Figure 8), reflecting the dissipating pass- quarters of 2023 was 45.3 percent higher compared to the same through impact of the initial international oil price shock period in 2022. However, it still reached only 48% of the planned in 2022, related to the beginning of the war in Ukraine. budget approved by the National Assembly for 2023, as chronic issues continue to impede timely implementation of public Figure 8: Contribution to CPI Inflation investment. These include lengthy approval and procurement Percent & percentage point (y/y) procedures, slowness and risk-aversion in decision making, bottlenecks in land acquisition and resettlement, and shortage of Food Housing Transport key construction materials such as rocks and sand. Others Headline Core 8 Figure 10: Fiscal balance US$ billion 6 Balance Revenues Expenditures 4 30 2 20 0 10 -2 0 Sep-18 Sep-19 Sep-20 Sep-21 Sep-22 Sep-23 -10 Credit growth remained low. -20 Sep-19 Sep-20 Sep-21 Sep-22 Sep-23 Credit growth continued the downward trend since February 2023, decelerating from 9.4 percent (y/y) in August to 8.7 percent (y/y) in September – falling further below the pre- covid level (Figure 9). The deceleration, amid ample market liquidity and a lower interest rate environment, reflects the To watch: While economic growth picked up in Q3-2023 continued slump in demand for consumer credit, housing, thanks to a gradual recovery of the exports, domestic and investment activities by the private sector (especially in consumption remained subdued and credit growth continued the real estate sector). to be slow reflecting weak private domestic investment and investors’ confidence. A sharp upward trend in headline inflation continues to warrant close watch. Continued efforts Figure 9: Credit growth to implement public investment could support aggregate Percent (NSA) demand and economic growth in the short run. A strategic and well-prepared investment pipeline for 2024 and the next Month-on-month Year-on-year (LHS) Medium Term Investment Plan (MTIP) with a focus on green, 18.0 4 resilient, and regional infrastructure will help bolster long 16.0 term economic development. Further improving the business 14.0 environment and stepping up investment in human capital 12.0 could help the country attract high-tech and high-value- 10.0 addition FDI and boost productivity in the long run. 2 8.0 6.0 Sources and notes: 4.0 All data are from Haver and sourced from the Government 2.0 Statistics Office (GSO) of Vietnam, except: Government 0.0 0 budget revenues and expenditures (Ministry of Finance), FDI Sep-19 Sep-20 Sep-21 Sep-22 Sep-23 (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 Amid weakening revenue collection, public and is based on five individual indexes on new orders, investment continued to increase. output, employment, suppliers’ delivery times and stock of items purchased). It is seasonally adjusted. A reading above The state budget recorded a deficit of US $5.9 billion in Q3- 50 indicates an expansion of the manufacturing sector 2023, compared to a deficit of US $4.6 billion in Q2 (Figure compared to the previous month; below 50 represents a 10). Over the first three quarters of 2023, the state budget contraction; while 50 indicates no change); financial sector balance registered a small deficit of US $0.7 billion (roughly data, including credit information (State Bank of Vietnam); 0.3 percent of GDP). The slowdown in economic activities credit growth during July-September 2023 (calculated by continued to weight on the fiscal revenue. During the first World Bank staff based on data from local news). three quarters of 2023, total revenue collection reached US $50.9 billion, which was 75.5 percent of the planned budget SA=Seasonally Adjusted; NSA=Not Seasonally Adjusted; and 7.8 percent lower than the same period of 2022. LHS = Left-hand Scale; RHS = Right-hand Scale; FOB = Free Reflecting the government’s efforts to support the economy, on Board; CIF = Cost, Insurance, and Freight; MTIP = the budget execution during the first three quarters reached Medium Term Investment Plan. US $51.6 billion, achieving 59.7 percent of the planned budget for 2023, 14.1 percent higher than the level of budget execution during the same period of last year. Of this, disbursement of public investment in the first three PAGE 4