Michael Kokalari, chief economist at VinaCapital, is confident economic growth will rebound in the second half of the year. — Photo courtesy of the company

HCM CITY — With the Government’s initiatives to address disappointing GDP growth in the first quarter and the fact that foreign companies’ orders are likely to increase in the second half of the year, the economy is expected to rebound then, Michael Kokalari, chief economist at investment fund VinaCapital, has said.

In his latest report, he said GDP growth in Việt Nam slowed precipitously in Q1 as consumers in the US and other developed markets cut purchases.

Manufacturing accounted for a quarter of Việt Nam’s GDP, and output contracted slightly in Q1 as against 9 per cent growth a year earlier since most products made in the country were exported to the US and other developed countries.

Việt Nam’s international trade accounted for a higher percentage of its GDP than in any other nation in modern history (excluding city-states like Hong Kong and Singapore), and so weaker demand in the rest of the world weighed fairly heavily on its economy.

“Việt Nam’s exports fell 12 per cent year-on-year in Q1, driven by a 20 per cent drop in exports to the US. Meanwhile, inventories at US retailers and other consumer-facing firms such as Nike and Lululemon are now contracting, which is why we expect FDI factories’ order books to start recovering later this year (inventories’ year-on-year growth looks likely to fall to 0 per cent in H2, which should prompt a resumption of order growth for Việt Nam).

“Finally, domestic consumption continues to grow at a healthy pace and consumer confidence has remained remarkably resilient despite the sharp slowdown in GDP growth. 

“In addition, foreign tourist arrivals skyrocketed to over 60 per cent of pre-COVID levels in Q1 despite the fact that Chinese tourists have not yet returned to the country en masse - which is another reason we expect Việt Nam’s economic growth to recover in H2.”

GDP growth slowed from 8 per cent in 2022 to just 3.3 per cent in Q1, prompting the Government to launch several initiatives to boost growth.

The Ministry of Finance has finalized plans to cut the VAT rate from 10 per cent to 8 per cent in H2, equating to a stimulus of around US$1.5 billion for Việt Nam’s $450 billion economy.

The Government will also allow companies and individuals to defer payment of various taxes by three to six months. 

Last month the State Bank of Vietnam cut policy rates by 50-100bps, including a 50bp reduction in the refinancing rate to 5.5 per cent, and a 50bp reduction in the maximum interest rates banks are allowed to pay savings deposits of up to 6 months to 5.5 per cent. 

The Government also walked back some stricter conditions it introduced in late 2022 on the issuance of corporate bonds, Kokalari said.

It had directed ministries to address various administrative bottlenecks impeding real estate and infrastructure development.

“The Government has taken a series of initiatives to address the country’s slowing growth, the most concrete of which are tax cuts and interest rate cuts, but administrative measures intended to ease bottlenecks impeding real estate development and infrastructure projects could have an even bigger impact on growth in 2023 and beyond.

“The fact that stock markets tend to start climbing in advance of economic rebounds, coupled with the fact that the VN-Index is trading at around a 10-year low valuation, leads us to believe that now could be an ideal time for investors to selectively purchase Vietnamese stocks.”

Interest rates on short-term deposits in Việt Nam had peaked in late-2022, and the policy rate cut last month would create additional downward pressure on those rates. 

“Consequently, there will be many bank deposits maturing in Q2 and Q3 and savers will essentially face a choice of rolling over their deposits at lower interest rates or plowing that money into the stock market (the vast majority of time deposits in Việt Nam are 3-month and 6-month deposits).” — VNS