DECEMBER 2022 VIETNAM MACRO MONITORING Photo: Dorsati Madani/World Bank WHAT'S NEWS? The two drivers of economic growth, exports and domestic demand, are moderating. Softer external demand has weighed on Vietnam’s exports. The post-covid consumption rebound also appears to be fading and tighter domestic financial conditions and rising inflation could affect domestic demand going forward. Reflecting weaker external demand, growth of industrial production moderated to 5.3 percent (y/y) in November, the lowest rate since February 2022. The manufacturing PMI also slipped into the contractionary territory (below the 50 benchmark) for the first time since October 2021. Retail sales registered a high but decreasing growth rate (17.5 percent (y/y) compared to 20.7 percent (y/y) in October 2022). Merchandise exports contracted by 8.4 percent (y/y) - the first contraction since October 2021 due to weakening external demand and high base effects associated with the rebound in Q4 2021. While total FDI commitment moderated (-1.9 percent (y/y)), FDI disbursement maintained a robust growth (+14.4 percent y/y). CPI inflation reached 4.4 percent (y/y) in November, compared to 4.3 percent recorded a month earlier, with food and housing being two major contributors. Core inflation increased from 4.5 percent (y/y) in October to 4.8 percent (y/y) in November 2022. Credit growth fell from 16.5 percent (y/y) in October to 15.0 percent (y/y) in November as domestic financial conditions tightened after the State Bank of Vietnam raised key policy interest rates in September and October. Average overnight interbank interest rate remained high at 5.7 percent in November. In early December, the SBV announced a 1.5-2 percent increase of the credit growth cap. The Vietnamese dong gained slightly in value in November 2022 although the dong’s appreciation is one of the smallest compared to major currencies and currencies of its neighbors. As of end November, the national budget registered a US$12.1 billion surplus (about 3 percent of GDP). With this sizable budget surplus and amid rising borrowing costs in the domestic capital market, the government bond issuance in the first 11 months of 2022 equals to only 45.6 percent of the annual issuance plan, compared to the 82.3 percent execution rate in the same period of last year. With global financing conditions expected to remain tight and weakening external demand, Vietnamese monetary authorities could consider allowing further flexibility in the exchange rate to absorb changes in the external environment. Fiscal and monetary policy coordination will be critical to ensure price stability in light of accelerating domestic core inflation. A more prudent and prioritized expenditure strategy could focus on ensuring investments in human capital and resilient and green infrastructure to help bolster economic potential and resilience. PAG PNE 01 DEC 2022 • VIETNAM MACRO MONITORING RECENT ECONOMIC DEVELOPMENTS Growth of industrial production moderated As did retail sales The industrial production index increased by 5.3 Retail sales’ growth slowed from 20.7 percent (y/y) percent (y/y) in November, compared to 6.3 in October to 17.5 percent (y/y) in November, a percent (y/y) in October, the lowest rate since third month of moderation (Figure 2). On the one February 2022 (Figure 1). Part of the deceleration hand, this moderation is partly attributed to the is attributed to the high-base effects. Indeed, fading low-base effects related to the COVID-19 industrial production index rebounded from -1.8 lockdowns in Q3-2021. On the other hand, the percent (y/y) in October 2021 to 8.2 percent (y/y) consumption rebound experienced in the first three in November 2021 as the country reopened quarters of the year appears to be fading. Sales of following an extended COVID-19 lockdown. In goods increased by 10.7 percent (y/y), compared to addition, weak external demand could be another pre-pandemic growth rates of around 12 percent important contributor, as demand by major exports (y/y). The sales of catering and accommodation markets has been slowing down. Continuing the exceeded the pre-pandemic level by 5.3 percent in downward trend since September 2022, the November 2022, However, travelling services manufacturing PMI slipped into contractionary remained 37 percent lower than in November 2019. territory (below the 50 benchmark) for the first time since October 2021, dropping from 50.6 in While foreign tourism continues to recover, the October 2022 to 47.4 in November. This indicates number of tourist arrivals is still well below those a deterioration of business conditions in seen before the -COVID crisis. The country hosted November compared to previous months. nearly 600,000 international visitors in November, a 23.2 percent increase from October, yet equal to The moderation of overall industrial production only one-third of the level recorded in November growth masks a varied sub-sectoral performance. 2019. This is partly due to the slow return of For instance, manufacturing of computers, Chinese visitors. On average, they made up 32 electronics and optical products rebounded, percent of total international visitors in 2019, increasing from 2.6 percent (y/y) in October to 5.6 compared to 7.2 percent in 11M-2022, and 2.6 percent (y/y) in November. Manufacturing of percent in Nov 2022. machinery also recovered from 9.8 percent to 17.2 percent between the same period. On the other Figure 2: Retail Sales hand, manufacturing of apparel moderated from (Percent, NSA) 5.5 percent (y/y) in October to 2.2 percent (y/y) in November. Figure 1: Industrial Production Index (Percent, NSA) Both exports and imports of goods contracted for the first time since November 2021 Merchandise exports and imports contracted by 8.4 percent (y/y) and 7.2 percent (y/y) respectively in abcdesdf PAGE 02 DEC 2022 • VIETNAM MACRO MONITORING November 2022 (Figure 3). The fall in exports was Over the first 11 months of 2022, the total FDI broad based. It was partly due to weakening commitment reached US$25.1 billion, down by 5.0 external demand but also reflects high-base effects percent compared to a year earlier. FDI as both registered exceptional growth rates in disbursement remained strong, growing by 14.4 November 2021 due to the reopening of the percent (y/y) in November and by 15.1 percent economy after months of lockdown (up by 26.3 (y/y) for the first 11 months of 2022. percent (y/y) and 24.1 percent (y/y), respectively in November 2021). Given the high dependence of Headline and core inflation continued to increase exports on imported inputs, all major import products experienced sharp declines compared to a The Consumer Price Index (CPI) inflation ticked up year earlier, except for imports of fuel, which slightly from 4.3 percent in October to 4.4 percent increased by 61.7 percent (y/y) in November 2022. in November (Figure 5). Food and foodstuff and housing and construction materials were the major Figure 3: Merchandise Trade contributors to CPI, increasing by 5.2 percent (y/y) (Percent, y/y, NSA) and 6.0 percent (y/y) in November, respectively. The contribution of transport to CPI continued to shrink as prices of gasolines and diesel softened. Although they increased by 5.8 percent (m/m) and 5.3 percent (m/m) in November 2022, respectively, they were 4.1 percent lower than a year earlier. Core inflation, which excludes food, energy, and price-controlled items (education and health services) continued to accelerate from 4.5 percent in October to 4.8 percent in November, a new record high. Figure 5: Contribution to CPI Inflation (Percent & percentage point, y/y) FDI commitment continued to moderate Figure 4: Foreign Direct Investment ($US billion, NSA) Credit growth decelerated but remained high Credit growth fell from 16.5 percent (y/y) in October to 15.0 percent (y/y) in November, the After a big jump in October, total FDI commitment sharpest fall in recent months (Figure 6). This moderated to US$2.7 billion in November, down by slowdown reflected the impact of tightening 27.9 percent (m/m) and 1.9 percent (y/y). domestic financial conditions after the State Bank Notwithstanding this decline, commitment in of Vietnam raised key interest rates by a total of manufacturing rebounded sharply, increasing by 200 basis points in September and October. 158 percent (m/m) and 50 percent (y/y) (Figure 4). Average overnight interbank interest rate remained Over abc acderg adcsdvbcd PAGE 03 DEC 2022 • VIETNAM MACRO MONITORING high at 5.7 percent in November 2022. It also Fiscal balance registered a large surplus in reflected the cap on credit growth imposed by the November SBV, which this latter loosened in early December by raising the credit cap by 1.5-2 percent. The monthly budget balance registered a US$1.4 billion surplus in November after a brief fall into Figure 6: Credit growth deficit in September and a small US$0.2 billion (Percent, NSA) surplus in October. Total revenue increased by 5.9 percent (y/y), compared to a 6.7 percent (y/y) decrease in October. Total expenditure accelerated, increasing by 17.0 percent (y/y) in November compared to 11.8 percent (y/y) a month earlier. As of the end of November 2022, total revenue collected was already 16.1 percent higher than the planned total revenue while total expenditure amounted to 76.2 percent of planned total expenditure (one percentage point higher than during the same period last year), resulting in a US$12.1 billion budget surplus for the first 11 months of 2022. With the budget balance in surplus and amid rapidly Pressure on the Vietnamese dong eased rising domestic borrowing costs, the State Treasury issued only US$1.7 billion worth of government The Vietnamese dong appreciated slightly in bonds denominated in local currency in November, November (0.8 percent), compared to the 9.1 all of which had long maturities (ten years or percent accumulated depreciation since the end of longer). Over the first 11 months of 2022, total 2021. This appreciation was mainly attributed to a bond issuance only reached 45.6 percent of the general weakening of the U.S. dollar in international annual issuance plan, much less than in the same markets. In fact, all major currencies and currencies period of 2021 (82.3 percent of planned). The cost of Vietnam’s neighbor countries appreciated against of borrowing continued to rise, with the yield on the U.S. dollar in November 2022 (Figure 7). SBV’s 10-year government bonds increasing from 4.0 increase of key policy interest rates by 200 basis percent to 4.8 percent in the primary market (the point in September and October 2022 also sharpest increase since the pandemic). Compared to contributed to easing depreciation pressure on the a year ago, the rate has increased by 270 basis dong. points. The yield gap between the primary and secondary market narrowed as the rate in the latter Figure 7: Rate of Currency Depreciation against levelled off at 5.2 percent in November. Rising the U.S dollar (percent) borrowing costs reflected the tightening domestic financial conditions as the SBV had raised interest rates to stabilize the domestic currency against the US dollars in September and October. To watch: The two drivers of economic growth, exports and domestic demand, are moderating. External demand is softening, weighing on exports. The post covid consumption rebound appears to be fading and tighter domestic financial conditions and rising inflation could affect domestic demand going forward. The weakening of the US dollar in November has Note: Positive value indicates a depreciation against the U.S. dollar. helped alleviate some of the pressure on the aádsdjng abcderg PAGE 04 DEC 2022 • VIETNAM MACRO MONITORING exchange rage. Given tight global financial on five individual indexes on new orders, output, conditions and weakening external demand, employment, suppliers’ delivery times (and stock of Vietnamese monetary authorities could consider items purchased). It is seasonally adjusted. A allowing further flexibility in the exchange rate to readingabove 50 indicates an expansion of the accommodate external shocks. This could be manufacturing sector compared to the previous month; complemented with judicious use of reference below 50 represents a contraction; while 50 indicates interest rates and prudent use of direct FX no change); financial sector data, including credit interventions to ensure FX reserves are protected. information (State Bank of Vietnam); credit and deposit Fiscal and monetary policy coordination will be growth in January and February 2022 (calculated by critical to ensure price stability in light of World Bank staff based on data from local news); accelerating domestic core inflation. A more number of confirmed COVID-19 cases, deaths and prudent and prioritized expenditure strategy should COVID-19 vaccine doses administered (Our World in focus on ensuring investments in human capital and Data), community mobility (the baseline is the median resilient and green infrastructure to help bolster value, for the corresponding day of the week, during the economic potential and resilience. 5-week period Jan 3–Feb 6, 2020, and changes for each day are compared to a baseline value for that day Sources and notes: of the week) (Google); Treasury bonds (Hanoi Stock Exchange and Vietnam Bond Market Association); real All data are from Haver and sourced from the effective exchange rate (World Bank Global Economic Government Statistics Office (GSO) of Vietnam, Monitor Database), daily market exchange rate from except: Government budget revenues and Financial Times. expenditures (Ministry of Finance), FDI (MPI); PMI and producer price inflation (survey by Nikkei and IHS SA=Seasonally Adjusted; NSA=Not Seasonally Markit; Purchasing Managers' Index is derived from a Adjusted; LHS = Left-hand Scale; FOB = Free on Board; survey of 400 manufacturing companies and is based CIF = Cost, Insurance, and Freight on five individual abcd PAGE 05