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| The potential of a consumer market in a developing country remains, despite the pressures on personal consumption over the past year. (Source: VNE) |
January starts off smoothly.
Closing out the first month of 2024, exports increased at an astonishing rate of 42.0% year-on-year, thanks to a steady recovery in electronics exports. In a recent report, HSBC's Global Research Department suggested that the January data should be interpreted cautiously due to this year's Lunar New Year falling in mid-February, later than usual. Despite being affected by the base effect, it is clear that Vietnam's trade continues to be firmly on a recovery trajectory.
The high number of pre-orders for the new Samsung Galaxy S24 series also contributed to the optimistic outlook. However, this optimism is not limited to the electronics industry, as exports are recording high growth across the board. Industries that suffered from stagnation in 2023, such as textiles, machinery, and wood products, have begun to experience significant growth again.
According to HBSC's assessment, the January PMI showed a certain degree of cautious optimism. The main PMI index returned above 50, for the first time in five months. New orders and new export orders continued to increase strongly, but this was still not enough to stimulate businesses to increase hiring. Delayed deliveries further increased cost pressures for manufacturers, a factor that highlights the lingering risks from the Red Sea disruption.
Furthermore, although inflation remains under control, with the CPI in January slightly decreasing to 3.4% year-on-year, there are still significant inflationary risks that cannot be ignored.
One reason is that Vietnam is particularly vulnerable to fluctuations in global commodity markets. While transportation inflation has stabilized in recent months, "housing and construction materials" inflation, including factors from electricity prices, has risen sharply and is likely to increase further. Domestic energy supply tensions and rising input costs have forced the Ministry of Industry and Trade to propose an electricity price increase, following two previous increases in November 2023 and May 2023, to alleviate the financial difficulties of Vietnam Electricity Corporation (EVN).
Besides energy, Vietnam's domestic rice prices have risen in line with world rice prices, pushing up rice inflation. Although rice accounts for only a small proportion of Vietnam's CPI basket (less than 3.7%) and pork prices continue to help control food inflation, essential food items are also a key factor in inflation forecasting.
Overall, January was considered "a really promising start" for Vietnam's economic recovery, although caution is needed regarding the associated risks.
Vietnam remains a rising star.
In 2023, personal consumption increased by only about 3%, half the previous average. While the overall unemployment rate remained low, job market growth slowed, and news of mass layoffs in the manufacturing sector reflected that the labor market had not yet fully returned to pre-pandemic levels.
Part of the reason for the negative impact on personal consumption growth is due to the effect of asset value volatility caused by the cyclical weakening of the real estate sector, and another part is due to major changes in consumer behavior since the pandemic.
Consumers tend to be wary of economic fluctuations, thus increasing their tendency to save. Although 2023 data has not yet been released, the 40% increase in savings rates, significantly higher than in 2022, partly illustrates this trend.
Looking at the Vietnamese labor market, the unemployment rate remains low at 2.3%, but job growth slowed in 2023 and is still on track, not yet fully recovered. HSBC's Global Research department also notes that a significant portion of Vietnam's labor market is concentrated in the informal sector, a trend that is not entirely new in ASEAN. This proportion is nearly half in the textile and garment manufacturing sector and even reaches 60% in some tourism-related service industries.
According to HSBC's Global Research Department, Vietnam is eagerly awaiting a cyclical recovery in global trade, which is a key hope for the job market. Fortunately, the electronics sector has recently seen some positive signs, suggesting that the darkest period for trade has passed.
However, each sector is different because the recovery is not entirely uniform. Industries that traditionally provide large jobs, such as textiles and footwear, have not yet fully emerged from their difficulties. Asia is still in the early stages of its trade recovery, as we need more evidence to see a stable and sustainable recovery supported by strong backing from major global economies.
Meanwhile, the full recovery in the tourism sector is also crucial for the labor market, supporting workers in the service industry. Thanks to favorable policies extending visa-free stays for foreign tourists from some countries and issuing e-visas to citizens of all countries from mid-August, Vietnam welcomed approximately 12.6 million foreign visitors (70% of the 2019 level), significantly exceeding the government's initial target of 8 million.
The favorable outlook has even prompted the Vietnam National Administration of Tourism to set an ambitious target for this year of 17-18 million foreign visitors, nearly reaching the record high of 2019, aiming for total revenue of 840 trillion VND (8% of GDP), surpassing the 2019 figure. Nevertheless, competition in the tourism sector in the region is becoming increasingly intense.
While the recovery in Chinese tourist numbers has been slower than expected, a significant number of Chinese tourists, the largest source of tourism, are needed for ASEAN tourism to fully recover. Countries in the region, including Thailand, Malaysia, and Singapore, have all introduced visa-free programs for Chinese tourists, increasing the appeal of an "spontaneous trip" for travelers.
“While expected to offset the slowdown in the external sector, domestic demand is also under increasing pressure but is projected to improve, with early signs being a recovery in some consumer sector stocks,” HSBC Global Research noted. Despite short-term cyclical challenges, HSBC Global Research believes structural trends remain promising for Vietnam.
With impressive growth over the past 20 years, the overall increase in wealth has fueled stronger consumer spending, stimulating a shift toward non-essential goods and services. A clear indicator of this increased consumer purchasing power is the divergence in buying trends between SUVs and sedans, with SUVs generally being more expensive than sedans – a phenomenon that is not new. In fact, average income has risen faster than spending in recent years, further supporting increased consumption.
Be cautious about the risks associated with household debt.
The rise of the emerging middle class has attracted the attention of international businesses seeking lucrative opportunities driven by the increasing spending power of Vietnamese consumers. The significant increase in FDI from Japan into the retail and financial services sectors is a notable example. Despite the growing wealth of the population, nearly 80% remain unbanked or have inadequate access to banking services. The latest data from the World Bank's Financial Inclusion report also supports this, demonstrating Vietnam's considerable potential for developing formal lending channels, which are still in their early stages of development.
Despite the promising prospects, the associated risks remain. The main concern is rising household debt. While there is no data to measure this in Vietnam, research from HSBC estimated, through analysis of the financial statements of four major banks, which may include loans to small businesses, that household debt increased sharply between 2013 and 2022, from 28% of GDP to 50% of GDP. This unsustainable increase in consumer leverage could create significant risks for the Vietnamese banking sector, as well as impact future consumer spending due to further income cuts to repay debt.
Fortunately, the government implemented a series of support measures for both businesses and households in 2023, such as extending tax breaks, cutting interest rates, and extending debt repayment periods. While financial stresses are likely to persist and will need to be monitored in the short term, there are some signs that the worst is over.
"The cautious but improving sentiment towards the property sector will boost overall consumer sentiment. Meanwhile, the improving outlook for the labor market will support wage growth, thereby improving household debt repayment capacity," HSBC's Global Research Department emphasized.
(according to Investment Newspaper)
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