[HO CHI MINH CITY] Vietnam’s consumer price index (CPI) for May rose 4.44 per cent year on year to a 16-month high, going by data from the government’s statistics body on Wednesday (May 29).
The figure, higher than the 4.4 per cent recorded in April, was driven primarily by the rising costs of food, education and healthcare services.
For the January-to-May period, average consumer prices rose 4.03 per cent on year, to their highest levels since 2020. However, this is still within the country’s full-year target inflation of 4 to 4.5 per cent.
Core inflation – which strips out the volatile items – edged down to 2.68 per cent year on year in May, bringing the average figure for the first five months to 2.78 per cent.
The country’s exports surged by 15.8 per cent in May from the year before, to US$32.81 billion. Imports jumped by 29.9 per cent from the year before to a record high of US$33.81 billion.
This created a trade deficit on goods for the first time in two years, at US$1.07 billion for the month, following a 15-month-low surplus last month. As a result, the export-driven country’s trade surplus narrowed to US$ 8.01 billion for the first five months, creating a year-on-year decline of 21.5 per cent.
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Overseas shipments of electronics and smartphones, Vietnam’s key export sectors, continued to thrive in May. There was a 31.5 per cent year-on-year rise in value to US$5.9 billion for electronics, and a 50 per cent year-on-year rise to US$4.4 billion for smartphones.
Overall, exports and imports from January to May grew by double digits –15.2 per cent and 18.2 per cent, respectively – from the same period last year.
Industrial production jumped an annual 8.9 per cent from 6.3 per cent in April, with manufacturing picking up to 10.6 per cent.
The rise in industrial output aligns with the April PMI survey findings, which noted that manufacturing production rebounds on the back of higher orders – although at a marginal expansion rate.
Adam Ahmad Samdin, assistant economist at Oxford Economics, said: “We continue to expect exports to grow solidly, but the boost to GDP is likely to be limited.”
The economic advisory firm predicted Vietnam’s gross domestic product to expand 5.6 per cent year on year in 2024, below the pre-pandemic trend of 7 per cent and Vietnam’s official target of 6 to 6.5 per cent.
This forecast aligns with the level estimated by the World Bank, at 5.5 per cent, and the International Monetary Fund, at 5.8 per cent.
“Interest rates in Vietnam’s largest importer, the US, are likely to stay higher for longer and the overall global external outlook is soft,” Samdin added.
Domestic consumption also remains muted, with year-to-date retail sales growth yet to match last year’s. It came in at 8.7 per cent, versus 12.3 per cent for the first five months of 2023.
Dong under intense stress
The uncertainty about the timing and magnitude of the upcoming US rate cuts, combined with Vietnam’s recent political developments, the ongoing pronounced VND-USD interest rate differential and Vietnam’s accommodative monetary policy, continue to weigh on the domestic currency.
The dong traded at a record-low 25,470 per dollar last Friday (May 24); it has lost nearly 5 per cent against the greenback since the start of the year, according to prices from banks compiled by Bloomberg. This puts the dong among the worst-performing currencies in Asean.
Nguyen Duc Hung Linh, co-founder and chief advisor at Think Future Consultancy & Investment, noted: “In the context of a shrinking trade surplus and the low interest-rate environment in Vietnam, foreign currency supply-demand pressures will likely persist.”
Concerns have also been raised about the extended devaluation of the dong – that it could increase import costs and feed inflation, which has exceeded 4 per cent for a second straight month.
Bets on policy rate hike
To defend the dong, the State Bank of Vietnam (SBV) has intervened by selling USD from the country’s foreign-exchange reserves; it has also increased interbank interest rates through open-market operations.
Linh said: “The central bank’s previous means of liquidity controls and USD sales are insufficient to stabilise the exchange rate in the long term. Against this backdrop, the interest-rate tool will be the most efficient in managing the dong.”
When many economies tightened their monetary policies last year, Vietnam bucked the trend with its accommodative measures, and made four cuts to its policy rates.
However, the decline in lending rates in commercial banks since early 2023 has not been commensurate with the reductions in deposit rates. The servicing cost for existing loans remains high.
Linh believes it is still feasible to keep lending rates low and to lift deposit rates moderately to support the economy.
“Amid a policy rate hike, lending rates may be kept low through preferential rates for priority sectors,” said Maybank analysts. They expect the SBV to raise policy rates by 50 basis points in the upcoming weeks to stabilise the sliding dong.
They do not rule out the possibility that SBV might take a wait-and-see approach, because a rate hike would exact a toll on domestic demand amid the ongoing challenging economic conditions.
Maybank added that fiscal policy measures may also be used to cushion the blow. These include tax deferments and an extension of the 2 percentage point cut to the value-added tax till December.
