NOVEMBER 2022 VIETNAM MACRO MONITORING Photo: VNEXPRESS WHAT'S NEWS? Industrial production and retail sales moderated in October as both domestic and external demand slowed. Exports growth slowed to a 12-month low of 4.8 percent (y/y) as external demand weakened amid high inflation, tightening global financial conditions, and heightened global uncertainties. FDI commitment bounced back strongly thanks to a jump in greenfield investment in electricity, gas, and water supply while FDI disbursement maintained a robust growth. Despite falling fuel prices, CPI inflation increased from 3.9 percent (y/y) in September to 4.3 percent (y/y) in October, driven by faster rise in food prices, which account for 21.3 percent of the CPI basket. Credit growth moderated to an estimated 16.5 percent (y/y) in October amid tightening domestic financial conditions. Average overnight interbank interest rate rose from 4.9 percent in September 2022 to a new record high of 5.8 percent in October. The rate also became more volatile in October. To lessen depreciation pressure on the Vietnamese dong, the State Bank of Vietnam increased exchange rate flexibility by widening the VND/USD trading band, from +/- 3 percent to +/- 5 percent and raised key interest rates by another 100 basis points in October 2022. As of end October, the national budget registered a US$10.7 billion surplus. With this budget surplus and amid rising borrowing costs in the domestic market, the government bond issuance in the first 10 months of 2022 equals to only 34.9 percent of the plan, compared to 72.5 percent a year earlier. The economy faces strong headwinds. Slowing external demand and tightening global financial conditions are affecting the exchange rate. Rising inflation and tightening domestic financial conditions could affect domestic demand in the coming months. As US Fed is expected to continue raising interest rates, Vietnamese monetary authorities could consider allowing further flexibility in the exchange rate, including through a quicker pace of depreciation of the reference rate. This could be complemented with continued use of reference interest rates, especially if faster depreciation leads to higher inflation and inflation expectations rise. Given the persistence of exchange rate pressures, direct FX sales should be used judiciously to preserve the FX reserves. Fiscal and monetary policy coordination will be critical to ensure price stability in light of accelerating domestic core inflation. Moreover, recent banking sector volatility calls for increased vigilance and intensified supervision efforts. PAG PNE 01 NOV 2022 • VIETNAM MACRO MONITORING RECENT ECONOMIC DEVELOPMENTS Industrial production growth moderated due to than in October 2019. weak external demand After a strong recovery between March and August The industrial production index increased by 6.3 2022, international tourism plateaued in September percent (y/y) in October, compared to 10.3 and October. The country received 484,400 percent rate a month earlier (Figure 1). Part of the international visitors in October, 12.2 percent deceleration can be attributed to the dissipating higher than in September, yet only 30 percent of low-base effects. However, weaker external the level in October 2019. demand is likely to be another important factor, as growth in the EU, US and China is slowing. The Figure 2: Retail Sales manufacturing PMI fell from 52.5 in September to (Percent, NSA) 50.6 in October 2022, staying just above the 50 benchmark but reaching the lowest reading since October 2021, corroborating the deceleration in manufacturing growth. Figure 1: Industrial Production Index (Percent, NSA) The merchandise trade balance registered a surplus in October, but export growth slowed. While the trade balance registered a US$2.3 billion surplus in October - the fifth month in a row- export growth slowed from 10.3 percent (y/y) in Retail sales continued to grow, but at a slower September to 4.8 percent (y/y) in October, the pace lowest rate since October 2021 (Figure 3). This slowdown in exports growth was driven partly by Retail sales increased by 17.1 percent (y/y) in waning low-base effects and partly by weak October, compared to the 32.3 percent (y/y) rate a external demand. month earlier (Figure 2). On the one hand, as with industrial production, this sharp slowdown is partly Merchandise imports ticked up slightly from 6.5 due to waning low-base effects. On the other percent (y/y) in September to 7.1 percent (y/y) in hand, it also reflects weakening domestic demand October while the composition of imports varied. as the consumption rebound experienced in the This increase is driven a rebound of imports in first three quarters of the year appears to be electronics (from -4.6 percent (y/y) in September to fading amid rising inflation. Sales of goods 0.8 percent (y/y) in October) and machinery (from increased by 9.6 percent (y/y), which was lower 1.5 percent (y/y) to 4.0 percent (y/y) during the than pre-pandemic growth rates of around 12 same period). However, imports of fabrics and percent (y/y). Sales of accommodation and inputs for textiles, garment and footwear catering and travelling services, which had manufacturing slowed from 22.1 percent (y/y) to exceeded the pre-pandemic level as of August 7.8 percent (y/y). Imports of fuels (coal, crude oil, 2022, grew by 12.2 percent (y/y), which is lower petrol, and liquefied petroleum gas) also slowed abcd abcd PAGE 02 NOV 2022 • VIETNAM MACRO MONITORING from 109 percent (y/y) to 57.6 percent (y/y) during Headline and core inflation accelerated the same period, thanks to both slower volume growth (from 31.2 percent (y/y) to 11.4 percent The Consumer Price Index (CPI) inflation (y/y)) and lower prices. accelerated from 3.9 percent in September to 4.3 percent in October, exceeding the 4 percent target Figure 3: Merchandise Trade of the State Bank of Vietnam for the first time since (Percent, y/y, NSA) April 2020 (Figure 5). The contribution of transport continued to diminish significantly as prices of gasoline and diesel fell by 6.0 percent (m/m) and 0.6 percent (m/m) in October, respectively, and were 2.1 percent lower than a year earlier. Instead, accelerating inflation was driven by a faster rise in food prices from 2.8 percent (y/y) in September to 5.0 percent (y/y) in October 2022, the highest rate since December 2020. This group accounted for 21.3 percent of the CPI basket. Core inflation, which excludes food, energy, and price-controlled items (education and health services) continued to accelerate from 3.8 percent (y/y) in September to 4.5 percent in October, a new record high. Figure 5: Contribution to CPI Inflation (Percent & percentage point, y/y) FDI commitment rebounded Total investment commitment jumped to US$3.7 billion in October, up 133 percent (y/y) and the second highest level in 2022. This improvement was driven by a lump sum greenfield investment (US$2.0 billion) in electricity, gas, and water supply. On the other hand, investment in manufacturing remained 13.1 percent lower than a year earlier (Figure 4). Over the first 10 months of 2022, FDI commitments reached US$22.5 billion, down 5.4 percent compared to a year earlier. FDI disbursement remained strong, growing by 8.1 percent (y/y) in October and by 15.2 percent (y/y) over the first 10 months. Major imported input prices continued to ease Figure 4: Foreign Direct Investment ($US billion, NSA) Figure 6: Imported Input Prices (Oct 2019 = 100) PAGE 03 NOV 2022 • VIETNAM MACRO MONITORING Average petrol import price dropped for the fourth depreciation was lower than other currencies month in a row (down 9.0 percent (m/m)) and is (Figure 8). Given strong pressure on the local expected to help ease inflationary pressure in the currency, on October 17, the SBV increased domestic market. Price of imported fertilizers also exchange rate flexibility by widening the VND/USD fell by 15.0 percent (m/m), almost to the level trading band for the first time since August 2015, observed a year ago. Price of steel also fell for a from +/- 3 percent to +/- 5 percent. The central third month of decline (down 8.5 percent (m/m)) bank also raised two key policy interest rates by and 20.3 percent lower than the level a year earlier. another 100 basis points on 25th of October : the Although price of imported coals increased by 18.7 discount rate from 3.5 percent to 4.5 percent percent (m/m) after three months of decline, it was (exceeding its pre-pandemic rate of 4.0 percent) only 3.3 percent higher than a year earlier. and the refinancing rate from 5.0 percent to 6.0 percent (equal to its pre-pandemic rate). Credit growth moderated but remained high Additionally, the cap on short-term interest rate on deposits denominated in local currency (one month After recording 16.9 percent (y/y) in September, to less than six months) was increased from 5.0 credit growth moderated to 16.5 percent (y/y) in percent to 6.0 percent. October (Figure 7). This slowdown reflected the impact of the State Bank of Vietnam tightening Figure 8: Rate of Currency Depreciation against domestic financial conditions by raising key interest the U.S dollar (percent) rates by a total of 200 basis points in September and October. Average overnight interbank interest rate reached a new record high of 5.8 percent in October from 4.9 percent in September 2022, and substantially higher than the 0.65 percent rate recorded a year earlier. The rate also became more volatile, varying from 3.1 percent to 8.4 percent in October. Figure 7: Credit growth (Percent, NSA) Note: Comparison between 31-Dec-21 and 03-Nov-22. Positive value indicates a depreciation against the U.S. dollar. The fiscal balance registered a small surplus The monthly budget balance registered a US$0.2 billion surplus in October after a brief fall into deficit in September. The surplus was achieved despite a 6.7 percent (y/y) decrease in total revenue, the first drop in 2022. Total expenditure increased by 11.8 percent (y/y), mostly reflecting low-base effects. As of end October 2022, the government collected 3.7 percent more than the The Vietnamese dong depreciated against the U.S. planned total revenue for the year, but spent 68.3 dollar percent of planned total expenditure, resulting in a US$10.7 billion budget surplus. Public investment Amid tightening of global financial conditions and disbursement reached 56.6 percent of the plan the strengthening of the U.S. dollar, the official approved by the National Assembly, more than two VND/USD exchange rate continued to depreciate percentage points higher than a year ago (53.9 in October 2022. As of 3 November 2022, the percent) while 75.7 percent of planned current Vietnamese dong had lost 9.1 percent of its value expenditures were spent, lower than to the 77 against the U.S. dollar since the beginning of this percent rate achieved a year earlier. year. However, this pace of local currency abcderasudg PAGE 04 NOV 2022 • VIETNAM MACRO MONITORING With the budget balance in surplus in October, the Sources and notes: State Treasury issued only US$1.0 billion worth of government bonds denominated in local currency, All data are from Haver and sourced from the all of which had long maturities (ten years or Government Statistics Office (GSO) of Vietnam, except: longer). Over the first 10 months of 2022, total Government budget revenues and expenditures bond issuance reached 34.9 percent of annual plan, (Ministry of Finance), FDI (MPI); PMI and producer price much less than in the same period of 2021 (72.5 inflation (survey by Nikkei and IHS Markit; Purchasing percent of planned). Managers' Index is derived from a survey of 400 manufacturing companies and is based on five The cost of borrowing continued to rise, with the individual indexes on new orders, output, employment, yield on 10-year government bonds increasing from suppliers’ delivery times (and stock of items purchased). 3.0 percent to 4.0 percent in the primary market It is seasonally adjusted. A reading above 50 indicates (the sharpest increase since the pandemic), an expansion of the manufacturing sector compared to narrowing the gap with the secondary market, the previous month; below 50 represents a contraction; where the rate reached 5.2 percent in October. while 50 indicates no change); financial sector data, Rising borrowing costs reflected the tightening including credit information (State Bank of Vietnam); domestic financial conditions as the SBV raised credit and deposit growth in January and February interest rates to stabilize the domestic currency 2022 (calculated by World Bank staff based on data amid slowing external demand, accelerating from local news); number of confirmed COVID-19 domestic inflation, and the strengthening U.S. cases, deaths and COVID-19 vaccine doses dollar. administered (Our World in Data), community mobility (the baseline is the median value, for the corresponding To watch: day of the week, during the 5-week period Jan 3–Feb 6, 2020, and changes for each day are compared to a The economy faces strong headwinds. Slowing baseline value for that day of the week) (Google); external demand and tightening global financial Treasury bonds (Hanoi Stock Exchange and Vietnam conditions are affecting the exchange rate. Rising Bond Market Association); real effective exchange rate inflation and tightening domestic financial (World Bank Global Economic Monitor Database), daily conditions could affect domestic demand during the market exchange rate from Financial Times. next months. SA=Seasonally Adjusted; NSA=Not Seasonally As the US Fed is expected to continue raising Adjusted; LHS = Left-hand Scale; FOB = Free on Board; interest rates, Vietnamese monetary authorities CIF = Cost, Insurance, and Freight could consider allowing further flexibility in the exchange rate, including through a quicker pace of depreciation of the reference rate. This could be complemented with continued use of reference interest rates, especially if faster depreciation leads to higher inflation and inflation expectations rise. Given the persistence of exchange rate pressures, direct FX sales should be used judiciously to preserve the FX reserves. Fiscal and monetary policy coordination will be critical to ensure price stability in light of accelerating domestic core inflation. PAGE 05