Vietnam's Economy Shows Signs of Recovery Amidst Global Challenges

The "Vietnam Macro Monitoring" report by the World Bank highlights Vietnam's economic recovery, with significant improvements in industrial production, trade, and FDI. However, challenges remain in consumer demand and inflation. Government measures aim to support continued growth amidst global economic pressures.

Industrial Production Rebounds

In a recent report published by the World Bank, Vietnam's industrial sector has shown significant signs of recovery. The "Vietnam Macro Monitoring" report, released in May 2024, highlights a 2.6 percent month-on-month increase in industrial production for May, seasonally adjusted. This marks a notable improvement from previous months, driven primarily by robust growth in manufacturing sectors such as machinery, equipment, and computer and electrical products.

Year-on-year, the industrial production index surged by 8.9 percent, a stark contrast to the 0.5 percent growth seen in May 2023. This impressive year-on-year increase is largely attributed to stronger exports and a low base effect from last year. The report notes that the manufacturing PMI remained steady at 50.3 in May, with new orders indicating potential for further production expansion in the coming months.

Mixed Signals in Retail Sales

Retail sales in Vietnam have presented a mixed picture. In May 2024, retail sales saw a modest increase of 1.2 percent month-on-month, seasonally adjusted, following a contraction of 0.3 percent in April. This growth was mainly driven by an uptick in goods sales, which constitute about 80 percent of total retail sales.

However, on a year-on-year basis, retail sales growth slowed to 3.3 percent in May 2024, down from 8.1 percent in May 2023. This deceleration highlights the ongoing weakness in consumer demand, reflecting broader economic uncertainties.

Surge in Trade Activity

Both exports and imports experienced substantial growth in May 2024. Exports increased by 6.5 percent month-on-month, seasonally adjusted, while imports grew by 9.5 percent month-on-month. Compared to the same period in 2023, exports surged by 15.8 percent and imports by 29.9 percent, partly due to the low base effect from the previous year.

The significant rise in imports, particularly of intermediate inputs, suggests increased demand from trade partners and points to higher exports shortly. This robust trade activity, however, resulted in a smaller trade surplus for May, highlighting the dynamic interplay between domestic production and international demand.

Solid Foreign Direct Investment

Foreign Direct Investment (FDI) remained a bright spot in Vietnam's economic landscape. By the end of May 2024, FDI commitments reached USD 11.07 billion, a 2 percent increase compared to the same period in 2023. FDI disbursement also showed a positive trend, totaling USD 8.3 billion, up 7.8 percent year-on-year.

The manufacturing and real estate sectors continued to attract the majority of FDI, underscoring investors' confidence in these key areas of Vietnam's economy.

Inflation and Currency Pressures

Inflation remained a concern, with the Consumer Price Index (CPI) inflation holding steady at 4.4 percent year-on-year in May 2024. Core inflation showed a slight moderation, decreasing from 2.8 percent in April to 2.7 percent in May. Key contributors to CPI inflation included food and housing, with transportation costs also playing a significant role.

The Vietnamese dong (VND) faced depreciation pressures, with the VND/USD market rate declining by 8 percent year-on-year by the end of May 2024. Concurrently, the average overnight interbank interest rate edged up to 4.3 percent in May, reflecting the State Bank of Vietnam's continued efforts to tighten liquidity.

Public Finance and Policy Measures

On the fiscal front, Vietnam's revenue collection saw improvements, reaching VND 898.4 trillion, or 52.8 percent of planned revenues, by May 2024. This represented a 14.8 percent increase in the first five months of 2024 compared to the same period in 2023. However, public expenditures showed only a marginal rise, totaling VND 656.7 trillion, a mere 0.5 percent higher year-on-year.

To bolster the economy, the Vietnamese government has proposed several measures. These include extending the VAT reduction, reducing lending interest rates, and accelerating the implementation of revised real estate laws to July 1, 2024.

Outlook and Recommendations

While external demand appears to be recovering, domestic consumption remains sluggish. The World Bank report emphasizes the need for continued support of aggregate demand through capital expenditures. It also warns that reducing interest rates to stimulate investment could further pressure the exchange rate, given the strong US dollar.

As Vietnam navigates these economic challenges, the government's proactive measures and the resilience of key sectors like manufacturing and real estate will be crucial in sustaining growth.