AUGUST 2023 VIETNAM MACRO MONITORING Photo credit: VNexpress WHAT’S NEW? • The industrial production index increased marginally by 2.6 percent (y/y) in August, due to continued expansion of industrial production for domestic consumption and a slight pickup in monthly export performances during May-August 2023. • Retail sales grew by 7.6 percent (y/y) in August, compared to 5.1 percent (y/y) in July, but still lower than pre- covid levels (11 – 12 percent). While sales of goods increased marginally, sales of services continued to register robust growth, largely due to the expansion of tourism and hospitality services. • Exports and imports of goods continued to contract by 7.3 percent (y/y) and 8.1 percent (y/y) respectively in August 2023. However, monthly performances of exports and imports have been improving sequentially since May, suggesting that the slump in exports may have bottomed out. • The CPI inflation ticked up from 2.1 percent (y/y) in July to 3.0 percent (y/y) in August 2023 reversing the preceding 6 months downtrend, with food and housing continuing to be the two major contributors. • Credit growth rose slightly to 9.4 percent (y/y) in August 2023 from 9.0 percent (y/y) in July, still well below the levels seen in recent years, reflecting continued weak investor confidence and private sector investment. • The monthly budget balance registered a deficit of US $2.1 billion in August, while the cumulative budget deficit to August 2023 was estimated at US $2.3 billion. As end of August, revenue collection decreased by 9.1 percent (y/y) due to slowing economic activities and public expenditure increased by 15.2 percent (y/y) – largely due to an increase of 40.3 percent (y/y) in public investment disbursement. TO WATCH While the export slump may have bottomed out, and domestic consumption remained resilient, credit growth continued to be slow, reflecting weak private domestic investment and investors’ confidence. Recent upward movements in global energy prices warrants close monitoring of CPI inflation. This may also prevent SBV from loosening monetary policy further. The continuation of tight global financial conditions warrants flexible FX management to accommodate external conditions. Further acceleration of public investment disbursement could support aggregate demand and economic growth in the short run while focusing on priority green and resilient infrastructure and human capital investments will help bolster long term economic development. PA G E 0 1 AUGUST 2023 • RECENT ECONOMIC DEVELOPMENTS RECENT ECONOMIC DEVELOPMENTS Industrial production improved slightly but remained of services continued to grow by 11.4 percent (y/y) in weak August 2023, largely due to the expansion of tourism services (21.3 percent, (y/y)) and accommodation and The industrial production index increased marginally restaurants services (10.8 percent, (y/y)). Vietnam by 2.6 percent (y/y) in August 2023, in line with received around 1.2 million international visitors in modest month-on-month improvements registered August, a 17 percent increase from July – reflecting since May 2023 (Figure 1). The improvement is due the high travel season of the year. The number of to a continued expansion of industrial production for international visitors in the first eight months of domestic consumption, including food and beverage 2023 reached 7.8 million - an increase of 4.4 percent as well as gasoline, partly mirroring the resilience in compared with the same period in 2022 but is still domestic demand in August 2023 (proxied by retail 30% below the pre-pandemic level (2019). sales – Figure 2). Production of furniture and textile, also improved in July and August 2023 compared to a year earlier. This reflects an expectation of improved external demand ahead of the Christmas season and Figure 2: Retail Sales given upward revisions of growth in the US and Japan Percent (NSA) for 2023. On the other hand, production of key exports, Month-on-month Year-on-year including footwear and leather products, electronic, 80 computer, cell phones (including parts), motor 60 vehicles and transportation equipment continued to 40 contract in August compared with the same period 20 of 2022. Vietnam Manufacturing PMI rose to 50.5 in 0 August 2023, following five consecutive months in -20 contractionary territory (March – July 2023), indicating -40 the slight improvement in business conditions. 19 20 20 21 21 22 22 23 23 g- b- g- b- g- b- g- b- g- Au Au Au Au Au Fe Fe Fe Figure 1: Industrial Production Index Fe Percent (NSA) International merchandise trade continued to contract, but there are some signs of improvement Month-on-month Year-on-year 30 Exports and imports of goods continued to be in 20 contractionary territory in August 2023, decreasing 10 by 7.3 percent (y/y) and 8.1 percent (y/y), respectively 0 (Figure 3). The contraction in exports was due to -10 a fall in exports of key manufacturing products, -20 including smart phones (-14.6 percent), machinery -30 (-17.9 percent), textile (-17.8 percent) and footwear (-19.3 percent). Reflecting the contraction in exports, 19 0 20 1 21 2 22 3 23 -2 -2 -2 -2 g- g- g- g- g- b b b b imports of intermediate inputs (which account for Au Au Au Au Au Fe Fe Fe Fe about 94 percent of total imports) declined sharply in Retail sales improved slightly but remained well as well, including textile (-17.2 percent, y/y), electric below pre-covid levels appliances (-16.9 percent, y/y), smart phones (-55.3 precent, y/y), machinery (-11.8 percent, y/y). The Retail sales grew by 7.6 percent (y/y) in August, slightly contractions in merchandise trade reflect continued improved from 5.1 percent (y/y) in July 2023 (Figure weak demand from key exports markets, including the 2). This is, however, still much lower than pre-covid US and EU, to which exports fell by 19.1 percent and levels (11 – 12 percent). Accounting for almost 80 8.3 percent (y/y) respectively in the first eight months percent of total retail sales, the growth of sales of of 2023. goods improved marginally from 7.0 percent (y/y) in July to 7.5 percent (y/y) in August. Meanwhile, sales PA G E 0 2 AUGUST 2023 • RECENT ECONOMIC DEVELOPMENTS Figure 3: Merchandise Trade Headline inflation picked up while core inflation Percent (y/y, NSA) continued to soften slightly The Consumer Price Index (CPI) inflation ticked Balance (US$ billion) Exports (fob) (LHS) Imports (cif) (LHS) up from 2.1 percent (y/y) in July to 3.0 percent in 60 6 August 2023 (Figure 5), reversing the downtrend 40 4 of the preceding 6 months. Food and foodstuff, as 20 2 well as housing and construction materials were the 0 0 major contributors to CPI inflation, increasing by -20 -2 2.3 percent (y/y) and 7.1 percent (y/y) respectively -40 -4 in August 2023. Education services also increased by 5.1 percent (y/y) in August ahead of the new 9 Au 0 20 21 21 22 22 23 23 -1 2 b- g- b- g- b- g- b- g- g Au Au Au Au Fe Fe Fe Fe academic year in September. On the other hand, the deflationary effects of falling transport costs have However, overall exports and imports trends show faded. Core inflation, which excludes food, energy, monthly improvements since May, registering and price-controlled items (education and health gradually smaller/shallower contractions of both services), moderated slightly from 4.1 percent (y/y) in exports and imports, suggesting that the slump in July to 4.0 percent (y/y) in August. exports may have bottomed out. FDI performance remained steady amid global uncertainties Figure 5: Contribution to CPI Inflation Percent (y/y) & percentage point FDI commitment reached US$1.9 billion in August Food Housing Transport 2023, a decrease of 32 percent compared with Others Headline Core 8 July. However, cumulative FDI commitment for the first eight months of 2023 amounted to US$18.1 6 billion, 8.2 percent higher than the same period in 4 2022. FDI disbursement remained steady, reaching 2 US$1.5 billion in August 2023, an increase of 23.6 percent compared with a year earlier. Cumulative 0 FDI disbursement to August 2023 reached US$13.1 -2 billion, comparable to the same period of 2022 (Figure 18 19 20 21 22 23 4). Steady FDI commitment and disbursement reflect g- g- g- g- g- g- Au Au Au Au Au Au continued foreign investors’ interest in business opportunities in Vietnam despite global uncertainties. Credit growth picked up slightly Credit growth rose from 9.0 percent (y/y) in July to Figure 4: Foreign Direct Investment 9.4 percent (y/y) in August 2023, but remained well $US billion (NSA) below rates seen since before the pandemic and below the annual indicative credit headroom set by the Manufacturing Wholesales & retail State Bank of Vietnam for 2023 (14 percent) (Figure Real estate Electricity, gas & water Others Disbursement 6). Low credit growth - despite SBV’s four policy and 7 deposit/lending rate cuts in between March and June 5 and ample market liquidity - reflects continued weak 3 private sector investment, including in the real estate 1 sector, and weak investor confidence. -1 19 0 20 1 21 2 22 3 23 -2 -2 -2 -2 g- g- g- g- g- b b b b Au Au Au Au Au Fe Fe Fe Fe PA G E 0 3 AUGUST 2023 • RECENT ECONOMIC DEVELOPMENTS Figure 6: Credit growth increasing by 15.2 percent compared to same period of Percent (NSA) 2022. Cumulative disbursement of public investment in the first eight months reached 39.6 percent of the Month-on-month Year-on-year (LHS) annual fiscal plan – registering an increase of 40.3 20,0 4 percent compared to the same period of 2022. 15,0 By the end of August, the State Treasury had issued 10,0 2 about VND 230.5 trillion worth of government bonds, equivalent to 57.6 percent of total planned borrowing 5,0 for 2023. About 83 percent of the bond issuances had 0,0 0 long maturities of 10 years and 15 years, with coupon rates of 2.36 percent and 2.59 percent, respectively. 9 0 1 2 3 -1 -2 -2 -2 -2 g g g g g Au Au Au Au Au To watch: While the export slump may have bottomed out, and domestic consumption remained resilient, credit The government budget continued to be in deficit. growth continued to be slow, reflecting weak private The monthly budget balance registered a deficit of US domestic investment and investors’ confidence. Recent $2.1 billion in August, while the year-to-date budget upward movements in global energy prices warrants deficit reached US $2.3 billion. As the economy close monitoring of CPI inflation. This may also slowed, revenue collection decreased by 23.2 percent prevent SBV from loosening monetary policy further. (y/y) in August 2023, following year-on-year decreases The continuation of tight global financial conditions of 17-36 percent registered during April to July warrants flexible FX management to accommodate 2023. Meanwhile, public expenditure continued to external conditions. Further acceleration of public accelerate, increasing by 22.1 percent (y/y) in August, investment disbursement could support aggregate comparable to the months of May, June, and July, due demand and economic growth in the short run while to increases in public investment disbursement. focusing on priority green and resilient infrastructure and human capital investments will help bolster long term economic development. Figure 7: Fiscal account Sources and notes: All data are from Haver and US$ billion (NSA) sourced from the Government Statistics Office (GSO) of Vietnam, except: Government budget revenues and Balance Revenues Expenditures expenditures (Ministry of Finance), FDI (MPI); PMI and 30 producer price inflation (survey by Nikkei and IHS Markit; 20 Purchasing Managers’ Index is derived from a survey of 400 manufacturing companies and is based on five 10 individual indexes on new orders, output, employment, 0 suppliers’ delivery times (and stock of items purchased). It is seasonally adjusted. A reading above 50 indicates an -10 expansion of the manufacturing sector compared to the -20 previous month; below 50 represents a contraction; while 50 indicates no change); financial sector data, including 19 20 21 22 23 g- g- g- g- g- credit information (State Bank of Vietnam); credit growth Au Au Au Au Au in July and August 2023 (calculated by World Bank staff based on data from local news). As of end of August 2023, cumulative revenue collection reached US $44.5 billion (70 percent of SA=Seasonally Adjusted; NSA=Not Seasonally Adjusted; the annual fiscal plan) – registering a decrease of LHS = Left-hand Scale; FOB = Free on Board; CIF = Cost, 9.1 percent compared to end August 2022. In the Insurance, and Freight meantime, cumulative budget execution reached US $46.8 billion (52.1 percent of the planned budget), PA G E 0 4