Economic update – 2023 could be a year with two halves

• Vietnam’s GDP growth decelerated to 5.9% yoy in 4Q22 as exports slumped and reopening boost faded, bringing 2022 pace to 8.0% yoy.
• We downgrade our GDP growth forecast for 2023 to 6.2% (+/- 0.3% pts) from a previous forecast of 6.7%.

GDP growth decelerated in 4Q22
According to the General Statistics Office (GSO), Vietnam’s GDP rose 5.9% yoy in 4Q22, largely driven by robust service (+8.1% yoy). 4Q22 growth rate slowed down significantly from the peak of 13.7% yoy in 3Q22, reflecting the weakening in exports and industrial production, while the impact of reopening faded. For entire-2022, Vietnam’s economy expanded 8.0% yoy (vs. our forecast of 7.9% yoy), the strongest annual growth rate since 2011.

Weakness in 4Q22 exports and industrial production is a major concern
We saw a slowdown of Vietnam’s industrial sector in 4Q22 amid sluggish global economic growth. To be specific, the general IIP rose 3.0% yoy, slowing down significantly compared to the previous quarter (+10.9% yoy in 3Q22). Moreover, the Dec IIP declined 1.0% mom and inched up only by 0.2% yoy, the lowest year-on-year level since Nov 2021. Besides, the continuous decline in external orders for the manufacturing sector in the past few months has caused the value of Vietnam’s exports to decline since Nov 2022 with export value in Nov-Dec 2022 period dropping to US$58.1bn (-12.4% yoy).

Vietnam economy strong growth upturn will fade into 2023
We downgrade our GDP growth forecast for 2023 to 6.2% (+/- 0.3% pts) from a previous forecast of 6.7%. This is due to the stronger-than-expected impact of the global economic slowdown on Vietnam’s manufacturing and exports. Besides, Vietnam still faces challenges from high interest rates, declining but uncomfortable level of global inflations, tight liquidity, likely rising debt distress in residential property area. Macro tailwinds will be few, perhaps in the form of infrastructure development as a part of public investment and robust energy transition. We see the China ‘s reopening and growing FDI competition among regional peers are likely variable factors to Vietnam‘s growth outlook. Average inflation is expected to increase by 3.8% yoy in 2023 (vs. 3.2% yoy in 2022).

Pressure on interest rates and currency will ease considerably in 2H23
In our view, a combination of improving FX reserves together with FED‘s less hawkish stance sometime in mid-2023, would mark an end to the sharp VND drop against US$. We expect Vietnam’s FX reserve to recover to US$102bn at end-2023 from an expected US$90bn in 2022. Increasing probability of global tightening liquidity backstop provides headroom for SBV to keep the policy rates unchanged from now on. Then, deposit rates will stay flat in 1H23 and gradually cool down since 3Q23.

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