Vietnam’s inflation to moderate to 2.7 percent in 2019: HSBC

After recording its slowest pace in more than three year last month, Vietnam’s inflation is forecast to hit only 2.7 percent in 2019 after standing at 3.5 percent last year.

HSBC analysts made the forecast in the 'Vietnam at a glance' report released this week.

Vietnam’s headline inflation last month moderated to 2.2 percent year-on-year, from 2.9 percent in May. This marks not only the lowest year-on-year inflation growth since 2019, but the slowest pace in more than three years.

Prices fell 0.1 percent month-on-month, reversing the incremental increases over the past two consecutive months. The main drag came from lower transport prices, falling 1.7 percent month-on-month, primarily due to declining global oil prices. 

Meanwhile, housing and construction materials prices fell 0.2 percent month-on-month and food costs remained steady at 0.1 percent. In addition, healthcare prices were unchanged over the past half a year.

Typically, the Government adjusts healthcare costs every six months, which means an upward adjustment to healthcare costs could happen in July or August. In addition, given how well inflation has been contained, there could be more room for the Government to continue healthcare reforms. 

Overall, Vietnam’s inflation has remained subdued with inflation growing at 2.6 percent year-on-year on average in the first six-month period. Although higher global food prices stemming from El Nino and recent retail electricity price hikes could pose upside risks, they are unlikely to pose imminent threats to the State Bank of Vietnam (SBV)’s inflation target of below 4 percent.

Given benign inflationary pressures and solid economic growth, HSBC predicted the SBV will keep monetary policy on hold in 2019. 

HSBC also noted during what has been a bumpy 2019, Vietnam has managed to weather risks to grow relatively well.

At first glance, some headline numbers may not look rosy compared to previous quarters, HSBC said, citing Vietnam’s GDP in the second quarter gradually slowed to 6.6 percent year-on-year, due to slower growth in the manufacturing sector of 9.4 percent, while manufacturing's contribution to GDP fell below 2 percentage points for the first time in two years, dragging down economic growth slightly.

However, they said, Vietnam’s performance is not as bad as it looks in the broader context of a cooling tech cycle and subdued global demand. 

Exports rebounded strongly to 9.5 percent year-on-year from the 13-quarter low of 5.1 percent in the first quarter.

The Purchasing Manufacturing Index (PMI) accelerated to 52.5 in June, ending the second quarter with a stronger reading than the first quarter.

But it’s not only manufacturing. Services, another pillar of growth, continued to expand steadily, at 6.9 percent year-on-year in the second quarter, thanks in part to flourishing tourism.

Unsurprisingly tourism-related industries, such as retail sales, transportation and accommodation services, continued to grow steadily, contributing to a more diversified growth outlook. Viet Nam welcomed a record high 15.6 million tourists in 2018, and by mid-2019, tourist arrivals are growing 7.5 percent year-on-year. 

The trend is likely to continue in the second half of 2019, especially as the northern hemisphere enters winter season.