Vietnamese economy fared well in Q1 despite external risks

May 29, 2024 | 19:33
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The global economy is facing several headwinds, including the slowdown in China and the Eurozone as well as the US Fed's possible delay of interest rate cuts. In this context, ASEAN may be a global safe haven for economic growth. Abel Lim, head of Wealth Management Advisory and Strategy at UOB, discussed with VIR's Thanh Van the outlook of the global economic condition and its impact on Vietnam.

What is your opinion on the global economic situation in the remaining months of 2024?

Many investors are concerned about the slowdown in China’s economy. This is compounded by the slowdown in Eurozone economy as the conflict in Ukraine continues for the third year. Another factor that dampens the global economic outlook is the possibility of the US Federal Reserve delaying interest rate cuts.

Vietnamese economy fared well in Q1 despite external risks

Despite these economic challenges, the International Monetary Fund increased its global growth estimate for this year by 0.2 per cent point to 3.1 per cent in its latest quarterly World Economic Outlook update and stated reassuringly that the risks to global growth are broadly balanced and a soft landing is a possibility.

One of the regions that remains a global safe haven for economic growth is ASEAN. We expect that growth for the ASEAN-6 countries will rise strongly from 3.7 per cent last year to 4.6 per cent this year. The region is set to sustain its steady and consistent growth path, backed by a recovering tourism sector, strong domestic spending, an improving external trade sector and solid foreign investment inflows into the region.

What seems to be the US Fed's roadmap for cutting interest rates this year?

At the most recent May Federal Open Market Committee, the Fed acknowledged that there has not been much progress towards their 2 per cent inflation target. However, its chairman calmed the markets as he emphasised that policy is still tight, and the Fed is not looking at hiking rates.

He also reiterated that there are other paths to achieve their inflation target and that the Fed will remain data driven and independent above all.

UOB’s view is for the Fed funds rate will stay at 5.5 per cent until the easing cycle begins in Q3 of 2024 and rate cuts are forecast to continue into 2026.

We keep to the expectations of two 25 basis points cuts across 2024, in September and December, although the risk leans towards the Fed delaying cuts even further.

Is the recovery of major trading partners still slow, or will the risk of disruption to the supply chain and global value chain be stronger in the near future?

The World Trade Organisation forecasted that global trade will gradually recover this year, before rising further in 2025, as the impacts of higher inflation fade away.

The trade recovery is expected to be broad-based, including Europe, which saw some of the sharpest drops in trade volumes last year due to geopolitical conflicts and the energy crisis.

However, the road to recovery will not be smooth. High interest rates, slowing developed economies’ demand, and uncertainties in China economy continue to pose downside risks to this outlook. As these risks mount, the global trade outlook may become more complex.

How will the above external factors impact the Vietnamese economy, especially import and export businesses?

Vietnam’s real GDP increased 5.66 per cent on-year in Q1, significantly higher than the 3.41 per cent rise in the same quarter in 2023, making it the best Q1 performance since 2020-2023. The strong result in early 2024 sets a positive tone for the rest of this year.

A key factor for the strong growth result in Q1 was external trade, with both exports and imports growing at the fastest rate since 2021, supported by high demand for products such as electronics and phones. The surge in semiconductor sales since mid-2023 suggests that the momentum is likely to continue into the coming quarters.

The downside risks remain, including conflicts between Russia and Ukraine and between Israel and Hamas, which could disrupt global trade and energy/commodity markets.

How will foreign direct investment (FDI) into Vietnam change in the months to come?

The momentum of FDI inflows continued to stay strong so far this year. Vietnam recorded $6.2 billion of registered FDI inflows, a 13.4 per cent on-year increase from $5.4 billion in the first quarter of last year. This suggests that Vietnam remains a key investment destination for businesses in the medium to long term, as global supply chains continue to shift.

The rise in both realised and registered FDI inflows will further stimulate domestic activities in the coming quarters, such as construction and employment. It is also an affirmation of foreign enterprises’ confidence and commitment to the country.

Under the current exchange rate pressures, can foreign capital flow backwards and reduce the attraction of foreign capital into Vietnam?

UOB expects Asian currencies to remain weak in this quarter, as the Fed is likely to delay cutting rates until after then. However, we may still see an eventual rebound in Asian currency, though it will in Q3.

USD/VND is likely to stay high for some time longer, as the Fed is less likely to cut rates soon. The State Bank of Vietnam said it had intervened in the FX markets in April and this may help to keep volatility in check.

Apart from near-term external challenges, we think the VND will benefit from strong fundamentals and a subsequent recovery in the CNY. Therefore, we expect capital inflow to Vietnam to remain intact.

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By Thanh Van

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