Vietnamese economy facing strong headwinds ahead, says WB

The Vietnam Macro Monitoring report shows the industrial production index increased by 6.3% in October compared to 10.3% a month earlier, and the fall is largely attributed to weaker external demand in the United States, the European Union and China. The manufacturing PMI also fell from 52.5 in September to 50.6 in October, staying just above the 50 benchmark but reaching the lowest reading since October 2021, corroborating the deceleration in manufacturing growth.

Despite enjoying a trade surplus of US$2.3 billion in October, export growth slowed to a 12-month low of 4.8% in the month, the lowest since October 2021, as external demand weakened amid high inflation, tightening global financial conditions, and heightened global uncertainties.

However, FDI commitment bounced back strongly thanks to a jump in greenfield investment in electricity, gas, and water supply while FDI disbursement maintained a robust growth. Total investment commitment jumped to US$3.7 billion in October, up 133% year on year and the second highest level in 2022. FDI disbursement remained strong, growing by 8.1% in October and by 15.2% over the first 10 months.

Though fuel prices fell in October, the Consumer Price Index (CPI) accelerated from 3.9% in September to 4.3% in October, exceeding the 4% target set by the State Bank of Vietnam for the first time since April 2020. Notably, the price of food that accounts for 21.3% of the CPI basket rose 5% in October, the highest rate since December 2020.

After recording 16.9% in September, credit growth moderated to 16.5% in October due to the central bank’s tightened financial conditions. Average overnight interbank interest rate reached a new record high of 5.8% in October from 4.9% in September, and substantially higher than the 0.65% rate recorded a year earlier.

To ease pressure on the local currency amid the rising of the US dollar, the State Bank of Vietnam increased exchange rate flexibility by widening the VND/USD trading band for the first time since August 2015, from +/- 3 to +/- 5%, and at the same time raised two key policy interest rates by another 100 basis points.

The report also points out that as of end October 2022, the Government collected 3.7% more than the planned total revenue for the year, but spent 68.3% of planned total expenditure, resulting in a US$10.7 billion budget surplus. The State Treasury issued only US$1 billion worth of government bonds denominated in local currency in October, and over the first 10 months of the year, total bond issuance reached 34.9% of annual plan, much less than in the same period of 2021 (72.5% of planned).

According to the WB, the local economy will continue to face strong headwinds in the coming months. Slowing external demand and tightening global financial conditions are affecting the exchange rate, while rising inflation and tightening domestic financial conditions could affect domestic demand.

As US Fed is expected to continue raising interest rates, WB experts recommended Vietnamese monetary authorities consider allowing further flexibility in the exchange rate, including through a quicker pace of depreciation of the reference rate. This could be complemented with continued use of reference interest rates, especially if faster depreciation leads to higher inflation and inflation expectations rise.

Given the persistence of exchange rate pressures, they said direct foreign exchange sales should be used judiciously to preserve the foreign exchange reserves. Fiscal and monetary policy coordination will be critical to ensure price stability in light of accelerating domestic core inflation. Moreover, recent banking sector volatility calls for increased vigilance and intensified supervision efforts.