Economic update – Lower 2023F GDP forecast following the weak 1Q performance

• Vietnam’s 1Q23 GDP rose 3.3% yoy, the second lowest first-quarter growth since 2011 due to contraction in manufacturing activity.
• The State bank of Vietnam (SBV) cut its policy rates twice in Mar-23.
• We revise down our 2023F GDP growth forecast to 5.5% in our baseline scenario (from 6.2% previously).

1Q23 GDP missed our expectations due to growing external headwinds
According to General Statistics Office (GSO), GDP rose 3.3% yoy in 1Q23 (vs. our forecast of 5.6%), the second slowest 1Q growth rate since 2011, largely driven by strong service growth (+6.8% yoy). Actual growth was lower than 4Q22 growth rate of 5.9% and our 1Q23 forecast of 5.6%, reflecting the weakening in exports and industrial production in the context of the global economic downturn. Specifically, industry and construction sector was hit hard in 1Q23 and contracted 0.4% yoy.

Inflation fell for a second month in a row
Vietnam’s inflation dropped down to 3.4% yoy in Mar 23 from 4.3% yoy in Feb 23. On mom basis, CPI slid 0.2%, mainly supported by the decline of Food & Foodstuff (-0.6% mom) and Education items (-1.7% mom) sub-indexes. We forecast average CPI of 2.9-3.3% for 2Q23F and 3.6-4.0% for 2023F.

We saw a reversal in SBV’s monetary policy.
In the context of less pressure on the VND exchange, the SBV had two reductions in its policy interest rates in Mar-23, whereby the rediscount rate was cut by 1 % pts to 3.5%/year; the refinancing interest rate was reduced by 0.5% pts to 5.5%, the overnight lending rate of the SBV for credit institutions was also lowered to 6%/year from 7%/year. The SBV also lowered the ceiling interest rate for short-term loans in VND of credit institutions for some priority sectors by 1% pts to 4.5%/year. They also reduced the maximum interest rate for deposits in VND with terms of less than 1 month and terms from 1 month to less than 6 months by 0.5% pts.

We revise down our 2023F GDP growth to 5.5% in baseline scenario
The rising possibility of an economic downturn in developed countries could damage Vietnam’s manufacturing and export sectors in the remaining of 2023. Due to the gloomy outlook in major export markets including the US and Europe, we lower our forecast for Vietnam’s export growth in 2023 to -2%, from the previous forecast of 5%. We also downgrade the manufacturing sector’s growth forecast in 2023F to 5% from the previous forecast of 7%. In addition, private investment and foreign direct investment (FDI) could remain weak due to increasingly uncertain global economic outlook, tight global financial condition and recession in domestic real estate market. As a result, we lower our GDP growth forecast for Vietnam in 2023 to 5.5% (+/- 0.3% pts) from a previous forecast of 6.2%. For 2Q23F, we expect Vietnam’s economy to grow 4.5-5% yoy, improving from a 3.3% growth in 1Q23.

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