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Economic update – Indirect risks are broad

Economics Note 15/03/2022    377


  • We see minimal direct impact from Russia-Ukraine crisis on Vietnam’s economy but indirect risks are increasing.
  • We keep our 1Q22F and 2022F GDP growth forecast at 5.5% and 7.5%, respectively, fueled by recovery of domestic demand and FDI inflows.

Vietnam’s economy saw a stronger recovery in Feb

Vietnam’s Index of Industrial Production (IIP) rose 8.5% yoy in Feb 2022, which was higher than the growth rate of 2.8% yoy in the previous month. The Feb PMI of Vietnam climbed to a 10-month high of 54.3pts (vs 53.7pts in Jan 2022), indicating that the operating conditions of the manufacturing sector continued to improve significantly. Meanwhile, gross retail sales of consumer goods and services in Feb 2022 reached VND421.8tr (+3.1% yoy), of which revenue of hospitality and travel rose significantly by 12.6% yoy and 39.4% yoy respectively thanks to the reopening of aviation and tourism.

Minimal direct impacts but indirect risks are broad

Because Vietnam’s export to Russia and Ukraine accounts for only 1.1% of Vietnam’s total export, and Russia as well as Ukraine are also not major export markets for any Vietnam’s products, we consider that the Russia-Ukraine crisis has a small direct impact on Vietnam’s export. However, if the Russia-Ukraine conflict persists, the indirect impacts on Vietnam’s economy will be greater due to slowing demand from the EU and the US. Besides, the Russia-Ukraine crisis may cause further delay of Russian energy projects in Vietnam.

Inflationary pressure heat up but could be controlled

We see inflation risks on the upside due to the impact of Russia-Ukraine crisis. The increase in prices of input materials such as coal, steel, copper, aluminum could impact on production costs in Vietnam while the increase in prices of fertilizers and agricultural commodities (wheat, corn, barley) can also increase pressure on domestic food and foodstuff prices. However, we still believe that the Government could control the inflation in 2022 through reducing taxes to halt the increase of gasoline price. In addition, the government is able to reduce the prices of essential goods and services, such as electricity, tuition fees, or medical service fees to reduce inflationary pressure. Overall, we maintain our 2022 average CPI forecast at 3.45% yoy. Although inflationary pressures are expected to increase in the coming months, we still keep our expectation that the State Bank of Vietnam (SBV) will maintain its accommodative monetary policy until at least the end-2Q22 to support economic recovery.

We expect Vietnam’s GDP to grow 5.5% in 1Q22F

We maintain our 1Q22F GDP growth forecast unchanged at 5.5% yoy (+/- 0.3% pts). For entire 2022, we keep our GDP growth forecast for Vietnam’s economy unchanged at 7.5%.

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