Economy on course to be stronger than projected

Michael Kokalari - Chief economist, VinaCapital

The ongoing reopening boom in Vietnam’s domestic economy will be the biggest driver of economic growth this year. Consumption accounts for about one-third of Vietnam’s economy and was severely depressed last year. In addition, the stimulus package includes a cut in the VAT rate from 10 to 8 per cent, which should also boost consumption.

Given the above, we expect Vietnam’s household consumption to rebound from an estimated -6 per cent drop in 2021 to +5 per cent growth in 2022, which is still well below the 8-9 per cent annual growth rates typical pre-pandemic. Furthermore, consumption will also be supported by a rebound in foreign tourism, which pre-pandemic accounted for about 8 per cent of GDP. Recent surveys in the United States and elsewhere indicate that the demand for travel to Vietnam is very strong, and we expect a partial resumption of foreign tourism to boost Vietnam’s GDP growth by at least 3 percentage points this year, with a further boost in 2023 when Chinese tourists are expected to return.

Next, over one-third of the spending in the stimulus package is earmarked for infrastructure development, and the government appears to have put aside over $20 billion in December 2021 as carry-forward infrastructure spending to be spent this year. Consequently, we expect the growth of Vietnam’s construction activity (which accounts for about 6 per cent of the country’s GDP) to surge from 0.6 per cent in 2021 to 10 per cent in 2022, which is in line with the pre-pandemic average.

Vietnam’s manufacturing sector, which accounts for over 20 per cent of the country’s economy, and which helped support it throughout the pandemic, is likely to make less of a contribution this year. The demand for stay-at-home goods such as TVs and furniture is now falling in the US and elsewhere. Vietnam’s exports to the US, its largest export market, grew by 25 per cent compounded annual growth rate over 2020-21, driven by the demand for such goods.

That said, Vietnam’s Purchasing Managers Index surged in January, driven by the largest increase in orders from foreign customers in over four years. Imports by foreign-invested companies were also quite strong, suggesting that they are importing the materials needed to fulfil orders, so it is possible the sector could be stronger than we expect this year.

The longer-term outlook for Vietnam’s manufacturing sector remains very strong and should continue to be supported by foreign direct investment (FDI), which remained very resilient over the last two years. Vietnam’s FDI fell by 3 per cent over the last two years, while globally, in 2020 alone, it fell by over 40 per cent.

Going forward, the US Treasury Department and the State Bank of Vietnam reached an agreement that essentially removes the risk that the US will put onerous tariffs on Vietnam’s exports to the US. This will likely encourage more investment inflows, as will the speed of Vietnam’s COVID-19 vaccination campaign.

With all of this good news on the economy, we are not worried about inflation. While it is soaring in many countries around the world, including the US where it was recently above 7 per cent, it is largely absent in most developing Asia countries, including Vietnam. The Chinese government just announced that the ongoing drop in food prices accelerated from -1 per cent on-year in December to near -4 per cent in January. Food prices in Vietnam fell slightly in January, despite the lead-up to Lunar New Year.

We are also positive about the stock market for 2022, although investors need to be more selective because the market will experience more volatility and a greater dispersion of winners and losers. Most retail investors would be well-served to invest with professional investors rather than trying to pick the winners and losers themselves – but the biggest companies will not necessarily be a recipe for success this year.