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

Typhoon Yagi has severely impacted the northern economic region of Vietnam. It is estimated that the storm caused damage totaling 40 trillion VND (1.63 billion USD).

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

The growth momentum has been temporarily disrupted.

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

According to UOB's analysis, prior to the storm, Vietnam's data up to August still showed strong growth momentum. Specifically, Vietnam's Purchasing Managers' Index (PMI) has outperformed neighboring ASEAN countries 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 (year-on-year) in seven out of eight months of 2024, with a trade surplus reaching $18.5 billion by the end of August. Retail sales also maintained an average monthly growth rate of 8.8% year-on-year, despite a high base in 2023.

Meanwhile, foreign direct investment (FDI) data continues to reflect the optimism of foreign investors towards Vietnam. FDI inflows are likely to exceed $20 billion for the third consecutive year (compared to $23.2 billion in 2023).

Against this backdrop, the impact of Typhoon Yagi on growth prospects in 2024 will be more clearly felt towards the end of Q3 and the beginning of Q4 2024. UOB experts believe this impact will manifest as reduced output and damaged infrastructure across various sectors such as manufacturing, agriculture , and services in northern provinces and cities. However, aside from these temporary disruptions, the long-term fundamentals remain quite strong.

“Although Vietnam experienced outstanding growth of 6.93% in Q2 2024, the fastest pace in nearly two years, this strong growth momentum is unlikely to continue in the second half of 2024. After accounting for the impact of Typhoon Yagi, reconstruction efforts, and a stronger base in the second half of 2023, UOB has slightly revised down its growth forecast for Vietnam,” UOB stated.

For Q3 2024, UOB forecasts slower growth at 5.7% (down from the previous 6.0%) and for Q4 2024 at 5.2% (down from 5.4%). Therefore, the full-year growth forecast for 2024 has been lowered to 5.9% (a decrease of approximately 0.1 percentage points from the previous forecast of 6%).

This still represents a positive recovery compared to the 5% growth in 2023. Notably, UOB forecasts GDP growth for 2025 to increase by approximately 0.2 percentage points to 6.6%, reflecting the expected increase to offset previous declines.

Maintain a 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 interest rate for the remainder of 2024, while paying attention to inflation risks.

From the beginning of the year to the end of August, the overall CPI increased by 4% year-on-year, only slightly below the target of 4.5%. Upward price pressures are likely to increase following disruptions in agricultural production, as food accounts for 34% of the CPI weighting.

According to Suan Teck Kin, Head of Global Market and Economic Research at UOB Bank (Singapore), the State Bank of Vietnam may adopt a more targeted approach to support individuals and businesses affected by Typhoon Yagi, rather than deploying a broad nationwide tool such as interest rate cuts. Therefore, UOB predicts the State Bank will maintain the refinancing rate at its current 4.5%, while focusing on facilitating credit growth and other support measures.

However, the UOB expert also noted that the recent 0.5 percentage point interest rate cut by the Fed could increase the likelihood (and pressure) on the State Bank of Vietnam to consider a similar easing of policy.

Currently, in line with other currencies in the region, the VND has recorded its largest quarterly increase since 1993, recovering 3.2% to reach 24,630 VND/USD. External pressure from the strength of the USD is beginning to ease as the Fed begins its expected easing cycle, while internal factors suggest further stability for the VND.

VinaCapital experts also believe that, given the Fed's actions and the recent developments in the VND/USD exchange rate, the State Bank of Vietnam is unlikely to raise interest rates. However, the recovery outlook also faces numerous challenges.

According to VinaCapital, the Fed's higher-than-expected interest rate cut also implies concerns about a slowdown in the 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 eight 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 of declining export growth.

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

Currently, the State Bank of Vietnam is actively implementing various 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 loan repayment terms restructured, interest rates considered for reduction or waiver, and will continue to receive new loans to restore production and business activities.

Furthermore, relevant ministries and agencies are also urgently implementing policies to exempt, reduce, and extend taxes, fees, land rent, and water surface rent for those affected by storms, floods, and landslides, in accordance with the law. Increased spending and the implementation of several tax and fee support packages may be accelerated in the near future 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