Table shows a few likely inflation scenarios that VinaCapital has outlined. — Source VinaCapital

HCM CITY — The Vietnamese economy grew by 7.7 per cent in the second quarter, one of the fastest rates in a decade, and is expected to expand even faster this quarter, driven by an ongoing burst of consumption.

“Việt Nam’s stellar Q2 GDP growth has prompted us to lift our 2022 GDP growth forecast from 6.5 per cent to 7.5 per cent, although we believe it is very possible [it] will grow by more than 7.5 per cent this year,” Michael Kokalari, chief economist at VinaCapital, said.

“Furthermore, GDP growth in Q3 is likely to exceed 10 per cent year-on-year because the COVID-19 lockdowns [last year] resulted in a low base.

“We believe that a 10 per cent [rate] would be a major catalyst for investors to pour money into Việt Nam’s stock market, with the only caveat to the very bright outlook for Việt Nam’s GDP growth being the ongoing slowdown in US GDP growth.”

This slowdown in the US economy is weighing on demand for “made in Việt Nam” products such as TVs, furniture and smartphones in the country’s largest export market.

Export growth to the US slowed from nearly 50 per cent year-on-year in in the first half of 2021 to a still very respectable 23 per cent year-on-year in the first half of this year.

“We expect Việt Nam’s export growth to the US to fall to circa 10 per cent by the end of the year as the US economy continues to slow, and we have already been factoring it into our forecasts for Việt Nam’s 2022 GDP growth since the beginning of the year.”

Việt Nam’s GDP growth accelerated from 5.6 per cent in H1 last year to 6.4 per cent in H1 this year despite the fact that the Government budget surplus more than doubled in the period from 2.2 per cent of GDP to an estimated 5 per cent.

Though this was a major drag on economic growth, it was more than offset by a surge in real retail sales (adjusted for inflation), whose growth increased from 1.9 per cent to 7.9 per cent in the period.  

Modest inflation outlook

Kokalari said: “Investors are focused on the inflation wave currently sweeping across the globe, but inflation in Việt Nam is still very modest at just 3.4 per cent.” 

The country’s low inflation rate stems in part from the fact that Việt Nam produces more than enough food to feed its citizens. 

The recent drop in oil prices should put investors’ minds at ease about the likely trajectory of inflation in Việt Nam for the rest of 2022. 

The Government cut the environment tax on fuel twice in April and July, reducing pump prices by a total of around 10 per cent though they are still up 40 per cent year-on-year.

Critically, the Government has the room to reduce prices by a further 26 per cent, which would shave off around 1.5 percentage points from Việt Nam’s headline inflation, Kokalari said. 

Thus, the inflation rate is likely to remain well within the 4 per cent range targeted by the State Bank of Việt Nam for this year, making it very unlikely it will hike policy rates in contrast to all of its regional emerging market peers that are currently hiking rates. 

Furthermore, the country’s modest inflation has also lent some support to the value of the đồng, which has depreciated by only 3 per cent this year despite a 13 per cent increase in the value of the US Dollar/DXY Index.

The surge in domestic consumption propelled the earnings growth of consumer discretionary companies listed on the stock exchange, such as Digiworld (DGW), the consumer electronics/mobile phone retailer, and jewellery retailer PNJ, both of which saw their H1 earnings increase by 50-60 per cent.

With the COVID-19 pandemic essentially over, domestic tourism has surged past pre-COVID levels, and so the earnings of the country’s airport operator, Airports Corporation of Việt Nam (ACV), have more than doubled. 

Kokalari said: “Unfortunately, Việt Nam’s stock market has not benefitted meaningfully from the country’s impressive GDP growth this year, partly because of turmoil in global markets, and there is a risk that global stock market volatility will continue to impact Việt Nam’s stock market in the months ahead. 

“That said, the consensus expects the market’s earnings to grow by 16 per cent this year, driven by strong economic growth.

“Consequently, we expect a strong rebound in both the VN-Index and our funds by the end of 2022.” — VNS