Inflation Trends in Vietnam: A Close Observation
By Quang Minh
Fri, June 14, 2024 | 8:01 am GMT+7
Inflation in Vietnam has become a focal point of economic discussions, as the latest data approaches the government’s regulatory ceiling. According to a note from HSBC, the central bank is likely to maintain a steady policy rate in light of these developments.
Current Inflation Landscape
The consumer price index (CPI) remained unchanged at 4.4% year-on-year in May, inching close to the government’s threshold of 4.5%. This static figure indicates a delicate balancing act within the economy, necessitating careful observation by policymakers and analysts alike.
The General Statistics Office of Vietnam highlighted that the CPI rose by 4.03% in the first five months of the year, propelled by increases in sectors such as education, health, and entertainment. Meanwhile, core inflation recorded a more subdued rate of 2.78%.
Mixed Signals in Food Prices
A closer look at the food market reveals contrasting trends. While rice prices experienced a month-on-month decline, pork prices escalated, thereby exerting upward pressure on overall food inflation. The interplay between these commodities reflects the complexities of supply and demand within the agricultural sector.
Despite a reduction in oil prices, the anticipated hike in electricity tariffs—typically reflected in the CPI after a one-month delay—serves as a reminder of Vietnam’s vulnerability to global commodity fluctuations. Additionally, a weak Vietnamese dong is contributing to rising import costs, with currency fluctuations being largely influenced by persistent U.S. interest rate hikes.
Central Bank’s Strategy
In response to these inflationary pressures, the State Bank of Vietnam (SBV) has been proactively managing foreign exchange pressures without altering its refinancing rate. Measures such as flexible open market operations (OMOs) have become crucial tools in the central bank’s arsenal.
With the risk of a near-term refinancing rate increase in the air, HSBC analysts predict that the SBV will likely keep the policy rate steady. This approach reflects an understanding that the economic recovery is still in its early stages.
External Sector Recovery
On a positive note, Vietnam’s external sector is showing encouraging signs of recovery. In May, export growth surged by an impressive 13.9% year-on-year, surpassing market forecasts. Notably, consumer electronics continue to lead this growth, accounting for 60% of the increase. Anticipated sales from tech giants like Samsung, especially concerning their new flagship Galaxy S24 series, are buoying this sector.
Moreover, Vietnam’s agricultural exports are also benefiting from improved market access. The notable doubling of durian exports to China over the first four months of the year exemplifies this trend, significantly capturing market share from Thailand.
Challenges in Agriculture
However, not all agricultural products are faring well. Vietnam’s renowned coffee sector has experienced a surge in international prices, yet actual coffee export volumes have decreased significantly. This contraction underscores the significant impact of climate variability and the ongoing effects of El Niño on agricultural productivity in the region, with crop output expected to hit a four-year low.
Trade disruptions, particularly from regions such as the Middle East, are also continuing to affect certain agricultural shipments. Textiles and footwear have shown stagnant growth, largely affected by their heightened exposure to European markets and the resulting trade dynamics.
Import Growth and Investment Landscape
Import growth for Vietnam has hit notable double digits, with imports rising by 25.7% year-on-year, greatly exceeding consensus expectations. This uptick is indicative of a broad-based recovery, particularly in energy imports, driven by the government’s strategies to ensure energy supply amidst challenges in hydropower generation due to adverse weather conditions.
Foreign direct investment (FDI) continues to thrive, maintaining the momentum observed in 2023. Newly registered FDI has exhibited double-digit growth over the last five months, particularly in the manufacturing and real estate sectors.
In a testament to Vietnam’s allure for manufacturers, Danish jeweler Pandora has commenced construction on a new $150 million factory in Binh Duong province, highlighting the country’s potential as a key player in global manufacturing.
Navigating through the intricate dynamics of inflation, trade, and investment, Vietnam illustrates a landscape of both challenges and opportunities as it works towards a sustainable economic recovery.