Growth momentum temporarily interrupted by storm, long-term fundamentals remain strong

Typhoon Yagi has had a severe impact on the northern economic region of Vietnam, with estimated losses of up to VND40 trillion (US$1.63 billion).

The Ministry of Planning and Investment forecasts that GDP growth for the whole year of 2024 may decrease by 0.15% compared to the proposed scenario of 6.8-7%. Analysts also said that Vietnam's economic growth momentum may be temporarily interrupted in the last two quarters of the year, but the long-term growth outlook remains very solid.

Growth momentum temporarily interrupted

In the latest report of UOB Bank (Singapore) on the economic situation in the third quarter of 2024, it was stated that Vietnam's growth momentum was affected by severe natural disasters.

According to UOB analysis, before the storm, Vietnam’s data up to August still showed strong growth momentum. Specifically, Vietnam’s Purchasing Managers’ Index (PMI) has outperformed its ASEAN neighbors since June 2024. Manufacturing output recorded four consecutive months of double-digit growth (year-on-year) from May to August 2024.

Exports recorded double-digit growth (y/y) in 7/8 months of 2024, with a trade surplus of US$18.5 billion through August. Retail sales also maintained an average monthly growth rate of 8.8% y/y, despite a high base in 2023.

Meanwhile, foreign direct investment (FDI) data continues to reflect foreign investors’ optimism about Vietnam, with FDI inflows likely to reach over $20 billion for the third consecutive year (2023 was $23.2 billion).

Against this backdrop, the impact of Typhoon Yagi on the 2024 growth outlook will be felt more clearly in late 3Q24 and early 4Q24. UOB experts believe that this impact will be reflected in reduced output and damaged facilities across many sectors such as manufacturing, agriculture and services in the northern provinces. However, beyond these temporary disruptions, long-term fundamentals remain quite solid.

“While Vietnam grew at an impressive 6.93% in 2Q24, its fastest pace in almost two years, this strong growth momentum is unlikely to continue in 2H24. Taking into account the impact of Typhoon Yagi, reconstruction efforts and a higher base in 2H23, UOB slightly revises down its growth forecast for Vietnam,” UOB said.

For Q3/2024, UOB forecasts growth to slow to 5.7% (down from 6.0% previously) and for Q4/2024 to 5.2% (down from 5.4%). As a result, the full-year growth forecast for 2024 is lowered to 5.9% (down about 0.1% from the previous forecast of 6%).

This is still a positive recovery from the 5% growth in 2023. Notably, UOB forecasts GDP growth for 2025 to increase by about 0.2% percentage points to 6.6%, reflecting an expected increase to offset earlier declines.

Maintain stable monetary policy to support the economy

Despite the impact of the recent Typhoon Yagi and the significant recovery of the VND exchange rate since July, UOB expects the State Bank of Vietnam to maintain its policy rate for the rest of 2024, while paying attention to inflation risks.

The headline CPI rose 4% year-on-year in August, just short of the 4.5% target. Price pressures are likely to intensify following disruptions in agricultural output, as food accounts for 34% of the CPI.

According to Mr. Suan Teck Kin, Head of Global Economics and Market Research, UOB (Singapore), the State Bank of Vietnam is likely to adopt a more targeted approach to support individuals and businesses affected by Typhoon Yagi, instead of deploying a broad tool such as cutting interest rates across the country. Therefore, UOB expects the State Bank of Vietnam to maintain the refinancing rate at the current level of 4.5%, while focusing on facilitating credit growth and other support measures.

However, the UOB expert also noted that the FED's recent 0.5% rate cut could increase the likelihood (and pressure) on the State Bank to consider a similar policy easing.

At present, in line with the regional currencies, the VND has recorded its largest quarterly gain since 1993, recovering 3.2% to 24,630 VND/USD. External pressure from the strength of the USD is starting to ease as the FED begins its expected easing cycle, while internal factors point to further stability of the VND.

VinaCapital experts also commented that with the FED's actions and the recent developments in the VND/USD exchange rate, it is unlikely that the State Bank will raise interest rates. However, the recovery prospect also faces many challenges.

According to VinaCapital, the Fed’s higher-than-expected interest rate cut this time also implies concerns about a slowing US economy, thereby reducing US consumer demand for “made in Vietnam” products such as laptops, mobile phones and other goods. Meanwhile, exports in general and exports to the US in particular (up nearly 30% in the first 8 months of 2024) are the most important factor driving Vietnam’s GDP growth this year.

Experts suggest that Vietnam could increase spending on infrastructure and accelerate the recovery of the real estate market. This would help avoid the negative impacts from the decline in export growth.

“Focusing on these two sectors will directly boost the economy, and a more vibrant real estate market will certainly improve consumer sentiment and spending, which has been somewhat sluggish in 2024,” VinaCapital commented.

Currently, the State Bank is actively implementing many solutions to support people and businesses affected by Typhoon Yagi, including lowering lending interest rates and implementing preferential credit packages. Specifically, people and businesses will have their debt repayment terms restructured, interest rates will be considered for exemption and reduction, as well as new loans to restore production and business.

In addition, relevant ministries and branches are also urgently implementing policies to exempt, reduce and extend taxes, fees, charges, land rents and water surface rents for those affected by storms, floods and landslides, according to the law. Increasing spending and implementing some tax and fee support packages may be accelerated in the coming time to create momentum for economic recovery.

According to VNA

Source: https://doanhnghiepvn.vn/kinh-te/da-tang-truong-bi-gian-doan-tam-thoi-sau-bao-yeu-to-co-ban-dai-han-van-vung-chac/20240925083737117