External headwinds continue to hurt Vietnam's economy: World Bank

Industrial production improved slightly but remained weak. Source: WB

Specifically, the WB reported industrial production improved slightly but remained weak. The industrial production index increased marginally by 0.5 per cent on-year in April, an improvement from the 2 per cent on-year contraction in March.

Production of textile, footwear, and leather products, electronics, computers, cell phones (including parts), motor vehicles and transportation equipment continued contracting in April as well as in the first four months of the year compared to the same period of 2022, reflecting weaker than expected exports. Continued expansion of industrial production for domestic consumption, including food and beverage as well as petrol, partly mirrors growth in domestic demand in April.

Vietnam Manufacturing Purchasing Managers' Index (PMI) fell to 46.7 in April 2023 from 47.7 in March, indicating continued pessimistic business conditions.

Retail sales growth moderated as 2022 as the post-COVID low base effect faded. Retail sales registered a growth rate of 11.5 per cent on-year in April, comparable to March 2023 (11.5 per cent on-year) and to pre-pandemic growth rates. Sales of goods slowed from 11.3 per cent on-year in March to 9.7 per cent on-year in April.

Meanwhile, sales of services continued to register a strong growth rate of 19.2 per cent on-year in April (a growth of 5.6 per cent on-month), largely driven by the expansion of tourism services (86 per cent on-year) and accommodation and restaurant services (21.1 per cent on-year).

Vietnam received around one million international visitors in April, a 10 per cent increase from March. The number of international visitors in the first four months of 2023 reached 3.7 million, which is 40 per cent below the pre-pandemic levels

International merchandise trade continued to contract, WB said. Exports and imports of goods contracted by 17.1 per cent on-year and 20.5 per cent on-year, respectively, in April 2023.

The contraction in exports was due to sizable decreases in exports of key manufacturing products in April, including smartphones (-31 per cent on-year), computers (-8 per cent on-year) machinery (-14 per cent on-year), textile (-24 per cent on-year) and footwear (-10 per cent on-year).

Reflecting the contraction in exports, imports of production inputs declined sharply in April compared to a year earlier, including electronics and computer parts (-19.6 per cent), smartphones (-64.4 per cent on-year) and machinery (-15.3 per cent on-year). This was reflecting weakened final demand from the US and EU, to which exports fell by 22.1 per cent and 14.1 per cent on-year respectively in the first four months of 2023.

Retail sales growth moderated as 2022 post-COVID low base effect faded. Source: WB

While foreign direct investment (FDI) performance was solid, global uncertainties continued to weigh on investor confidence, according to the report. FDI commitment reached $3.4 billion in April 2023, an increase of 46 per cent compared to March.

However, cumulative FDI commitment for the first four months of 2023 only reached $8.8 billion, 17.9 per cent lower than the same period in 2022.

FDI disbursement amounted to $1.5 billion in April 2023, similar to a year earlier. Meanwhile, cumulative FDI disbursement reached $5.8 billion for the Jan-Apr of 2023, similar to the same period in 2022. Slowdown in FDI commitment and disbursement during the first four months of 2023 likely reflects investor caution caused by global uncertainties.

Headline and core inflation continued to soften. The Consumer Price Index (CPI) inflation declined from 3.4 per cent in March to 2.8 per cent in April. Food as well as housing and construction materials were the major contributors to CPI inflation, increasing by 3.6 per cent and 5.2 per cent on-year respectively in April.

Core inflation, which excludes food, energy, and price-controlled items (education and health services) moderated from 4.9 per cent in March to 4.6 per cent in April, still above the policy rate of 4 per cent set by the State Bank of Vietnam.

While inflation continues to trend down in April, the recent 3 per cent increase in electricity tariff and planned public salary increase may impact inflation during the second half of the year.

Credit growth also decelerated indicating weak demand. Credit growth fell to 9.2 per cent on-year in April 2023 from 9.9 per cent on-year in March and 12.2 per cent on-year in February, the lowest level in recent years.

The fact that credit slowed despite SBV’s policy and lending rate cuts in March and ample market liquidity, reflects the weak absorption capacity of the economy.

The WB's report asserted that the economy is facing external headwinds as weakening external demand weighs on exports, translating into weak industrial production. While domestic consumption remains robust, credit growth slowed, reflecting weak credit demand. Potential further tightening of global financial conditions warrants flexible FX management to accommodate external conditions.

"Acceleration of public investment disbursement could support aggregate demand and economic growth in the short run, while ensuring investments in human capital and resilient and green infrastructure will bolster long term economic development," the WB report said.

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