OCTOBER 2 0 2 4 VIETNAM MACRO MONITORING Photo credit: Dorsati Madani – World Bank WHAT’S NEW? • GDP growth registered 7.4 percent (y/y) in Q3-2024, its highest in two years, driven by non-tech exports and the ongoing domestic demand recovery. • Typhoon Yagi hit northern Vietnam in September, leading to significant economic damages of US 3.2 billion (0.7 percent of GDP). Agricultural production was the hardest-hit sector, accounting for 38 percent of the total economic losses. • FDI investments expanded robustly, totaling US$ 24.6 billion in the last 12 months, an 8.3 percent increase compared to a year earlier. • Inflation continued to moderate, registering 2.6 percent (y/y) in September 2024, from 3.5 percent in August 2024, as transport prices declined, food inflation remained stable and core inflation decelerated to 2.5 percent (y/y). • Slow budget disbursement continues to remain a concern, with 59.3 percent of the public expenditure plan disbursed in the first nine months of 2024 (slightly below the disbursement rate of 59.7 percent at the same period last year), including 47.3 percent of public investments executed. TO WATCH • A low stock of inputs and reduced new manufacturing orders could signal near-term growth easing in Q4-2024 although medium-term prospects remain positive. • While exports have registered robust growth, domestic demand, especially private consumption, appears less dynamic. • Further extension of forbearance measures following typhoon Yagi – estimated to affect 1.1 percent of total outstanding loans – could delay recognition of NPLs. • Chronic under-disbursement in public investment remains a concern and could undermine infrastructure development for sustained growth in the medium-term. 1 RECENT ECONOMIC DEVELOPMENTS GDP growth surged to 7.4 percent in Q3-2024, driven Typhoon Yagi hit northern Vietnam in September, by exports. leading to significant economic damages of US 3.2 billion (0.7 percent of GDP). Viet Nam’s GDP grew by 7.4 percent (y/y) in the third quarter of 2024, its highest level in two years, up from 7.1 Typhoon Yagi, one of the most violent storms ever to strike percent (y/y) in Q2-2024 and 5.9 percent (y/y) in Q1-2024 Vietnam, affecting agriculture, manufacturing, and tourism. (Figure 1). This is the highest growth registered in ASEAN The storm hit 26 northern provinces including key countries. This higher-than-expected growth was driven economic zones where 111 industrial parks and 4,760 FDI by exports which increased 15.4 percent (y) in Q3-2024, firms operate, together accounting for close to 26 percent while the trade balance increased to 6.6US$ billion (+13 of GDP and 17 percent of Viet Nam’s export value percent compared to the previous quarter). The drivers (Fiingroup 2024). Early estimates of economic damages, of exports shifted significantly in Q3, as tech exports including flooding, power outage, destruction of decelerated (-0.6 percent 3m/3m, SA) and were replaced infrastructure, reduced agricultural and manufacturing by non-tech (11.2 percent 3m/3m, SA) and especially production, disruption of supply chains and reduced textiles (Figure 2). Exports to the US increased the most, tourism, were estimated to exceed VN81.5 trillion (US$ 3.2 while those to China weakened (11.7 percent 3m/3m, SA billion, about 0.7 percent of GDP). Agricultural production and 2.5 percent 3m/3m, SA respectively). On the import was the hardest-hit sector, accounting for 38 percent of the side, most imports continue to be used as inputs for total economic losses and with a lowered contribution to production (93.8 percent of total imports) while the stock GDP in Q3-2024 (Figure 3). The estimated impact on GDP of inputs declined rapidly in September because of growth for 2024 ranges from 0.15 – 0.38 percentage point disruptions from Typhoon Yagi, as recorded by the PMI. reduction. Figure 1: GDP growth by demand Figure 2: GDP growth by supply Percent and Percentage points (y/y) Percent and Percentage points (y/y) Final consumption Investment Net exports Statistical discrepancy Agriculture Industry Services Net Taxes GDP 9 8 6 4 4 2 -1 2022 2023 Q1-24 Q2-24 Q3-24 0 Notes: Statistical discrepancy is not available for quarterly data. 2022 2023 Q1-24 Q2-24 Q3-24 Figure 2: Merchandise exports growth Industrial production continued to improve in Q3-2024 Percent (3m/3m, SA) Industrial production (IP) remained robust in Q3 (Figure Non-tech exports Total exports 4), with the IP index growing by 10.8 percent (y/y) despite Tech exports reduced production in northern provinces due to 20% Typhoon Yagi. Food processing (10.5 percent, y/y), textiles 10% (18.2 percent, y/y), furniture products (34.3 percent, y/y), metal (steel no aluminum) (11.4 percent y/y), electronic & 0% computers (7 percent, y/y) registered the largest growth. -10% Industry contributed 3.4 pp of GDP in Q3, higher than services (3.2 pp). -20% -30% Nov-22 Nov-23 Jul-23 Jul-24 Sep-22 Sep-23 Sep-24 Mar-23 May-23 Mar-24 May-24 Jan-23 Jan-24 2 Near-term manufacturing outlook remains Figure 6: Foreign Direct Investment uncertain due to production disruptions in $US billion September. Manufacturing Wholesales & retail Real estate Electricity, gas & water The Purchasing Managers’ Index (PMI) fell back into Others Disbursement contractionary territory (47.3) in September 2024 after 8 eight months of expansion (above the 50 mark) (Figure 6 5). The dip was due to temporary business closures and delays in both production and supply chains, resulting 4 in a record-low stock of inputs (likely associated with 2 the slowing of imports observed in Q3), less outputs, fewer new orders, and fewer purchases. However, the 0 surveyed purchasing managers remained confident about the outlook, as shown by a slight increase in the -2 Sep-22 Mar-23 Sep-23 Mar-24 Sep-24 PMI employment index in September. Domestic consumption remains lackluster, as retail Figure 4: Industrial Production Index Percent sales moderated to 8.4 percent in Q3-24. Month-on-month (SA) Year-on-year (NSA) Retail sales growth – a proxy for domestic consumption – moderated to 8.4 percent y/y in Q3, its lowest growth rate 20 in a year (Figure 7) affected by continued lower confidence and a stable nominal income growth of 7.3 percent y/y in 10 Q3-2024 (compared to 11.9 percent on average in 2018- 0 19). -10 Figure 7: Retail Sales Percent -20 Sep-22 Mar-23 Sep-23 Mar-24 Sep-24 q/q, SA y/y, NSA Figure 5: Manufacturing PMI 50 41.2 50+ = Expansion (SA) 40 Vietnam Global ASEAN 30 17.1 55 20 13.2 8.8 7.3 9.3 8.4 9.1 8.4 10 3.2 6.8 2.8 2.0 8.8 3.4 1.4 0 50 -4.2 -5.0 -10 Q3-22 Q4-22 Q1-23 Q2-23 Q3-23 Q4-23 Q1-24 Q2-24 Q3-24 45 Sep-22 Mar-23 Sep-23 Mar-24 Sep-24 The exchange rate pressure gradually eased in Q3-24, Sources: S&P Global. Notes: PMI stands for Purchasing Managers’ Index. helped by the US policy rate drop in September. Data was collected over 12-20 September 2024. The SBV maintained a stable central rate of 24,170 FDI commitments and disbursement surged in VND/USD in September 2024. Meanwhile, depreciation September 2024. pressures on market rates eased aided by recent Fed rate cuts (Figure 8). The SBV has also recently taken measures Foreign investments continue to remain strong, to ease pressures on the market exchange rate, including registering a strong increase to US 3.185 billion by selling foreign currency (reserves are estimated at 2.9 disbursements in September (Figure 6). This corresponds months of imports in June 2024, from 3.3 in March), flexibly to US 24.6 billion FDI disbursements on a 12-month basis managing OMO operations, and intervening in the (+8.3 percent compared to the previous 12 months), as interbank market. Taken together, this narrowed the Viet Nam continues to be an attractive investment interest rate gap between central and market rates, which destination, in particular or manufacturing of (65 percent remained firmly within the exchange rate band of 5 percent of FDI commitments in the first 9 months of 204) despite set by the SBV. temporary disruptions due to Typhoon Yagi. 3 Figure 8: Exchange rate outside of special-controlled bank (under SBV supervision) VND/USD appeared more limited, at 2.2 percent of all loans in Q2- Central rate Market rate 2024. 26000 Figure 10: Credit growth 25000 Percent (NSA) 24000 Month-on-month Year-on-year (LHS) 23000 18.0 16.0 SBV's target 22000 14.0 4 Sep-22 Mar-23 Sep-23 Mar-24 Sep-24 12.0 Note: Shaded area represents the two-way 5% band around the 10.0 central rate set by the SBV. 8.0 2 6.0 Headline inflation softened while core inflation 4.0 2.0 remained steady in September. 0.0 0 CPI inflation decelerated from 3.5 percent (y/y) in Sep-22 Mar-23 Sep-23 Mar-24 Sep-24 August to 2.6 percent (y/y) in September 2024, driven by the reduction of transport costs (-0.5 pp in The fiscal balance registered a surplus due to the slow September) due to lower gasoline and oil prices. Food disbursement of public investment prices inflation remains stable at 1.4 percent. Core inflation (excluding food and energy prices) stabilized Total revenue collection in the first nine months of 2024 at 2.5 percent in September (Figure 9). was 1 448 trillion VND, equivalent to 85.1 percent of the plan (compared to 75.5 percent of the plan in the same Figure 9: Contribution to CPI Inflation period of 2023) and 17.9 percent higher than the same Percent & percentage point (y/y) period of 2023 (Figure 11). However, public expenditure Food Housing Transport registered 1 256 trillion VND, only 1.4 percent higher than last year and equivalent to 59.3 percent of the plan Others Headline Core 6 (compared to 59.7 percent of the plan in 2023). Disbursement of public investment in the first nine-month 4 of 2024 was 320 trillion VND, equivalent to 47.3 percent 2 of the plan assigned by the Prime Minister, less than 51.4 percent of the same period in 2023. As a result, the fiscal 0 balance registered a surplus in the first 9 months of the -2 year compared to a small deficit in the same period of last Sep-22 Mar-23 Sep-23 Mar-24 Sep-24 year. Credit growth improved but asset quality remains a Figure 11: Fiscal balance Percent of GDP concern for the banking sector. Taxes revenues Non-taxes revenues As end of September 2024, credit growth registered Public investment Recurrent expenditures 15.4 percent (y/y) growth, higher than the State Bank Fiscal balance of Viet Nam target of 15 percent (Figure 10), driven by 20 a large surge in loans to real estate developers in the first half of the year (30.2 percent growth y/y) while 10 loans to homebuyers remains more modest (4.6 percent growth y/y). However, asset quality has 0 2.38 remained a concern since 2023, amid increasing NPLs. 0.7 -0.21 -2.4 System-wide on balance sheet NPLs have grown -10 significantly, from 1.9 percent in 2022 to 4.6 percent of total loans in the first half of 2024, while total adjusted -20 2022 2023 9M-23 9M-24 NPL (including restructured loans and debt from the Viet Nam Asset Management Company) reached 6.9 percent as of June 2024, the latest data available. NPLs 4 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); Credit growth (staff calculations based on local official media reporting on SBV’s estimates). Bren t crude oil obtained from https://www.hl.co.uk/shares/trading- commodities/brent-crude-oil. The seasonally adjusted 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. SA=Seasonally Adjusted; NSA=Not Seasonally Adjusted; LHS = Left-hand Scale; FOB = Free on Board; CIF = Cost, Insurance, and Freight; m/m = month-on-month; y/y = year-on-year 5