Research Center

The ongoing Delta outbreak makes Vietnam's economic picture more gloomy, as both domestic and export demand are under its severe impact. The retailing sector is partly disrupted due to current strict social-distancing curbs, while trade recovery is facing more uncertainties with several export markets also being hit by the Delta variant. From our view, economic conditions will become more and more worsening if the economy keeps staying in lockdown.

The current domestic economic outlook becomes gloomy when the government applies stricter measures to deal with the current outbreak. Domestic consumption retreated further under a short-term disruption in the services sector, and CPI became more volatile due to the temporary shortage of essential goods. Export demand is among a few drivers for economic growth in this quarter with our expectation of successful re-opening the economies from our major trading partners. The industrial sector is also in expansion territory thanks to strong growths in export demand-driven industries.

Fast-increasing demand for government bonds took the spotlight in the fixed-income markets in June with medium-term and long-term yields again testing their record lows. However, July would bring a new story to the FI markets. A new wave of huge VND inflows back into the banking system, via USD-purchasing forwards and incoming support envelope, would likely change the current interest-rate environment to be lower. Short-term interest rates and bond yields are expected to see the very first changes.

Economic growth in the second quarter, thanks to a low-base effect from last year, is considered a key driver for an ambitious growth target in 2021. However, a scenario of a 2Q21’s high-growth performance has been cast aside with the COVID-19 resurgence. The services area is getting the hardest hit this time with strictly social-distancing measures, while the industrial sector faces short-term disruptions in some key industries. Besides, an external driver like export is also slowing down in 2Q21. Looking ahead, a rough start for the rest of 2021 is just beginning.

In May, improved credit activity helped create tightening pressure on the banking system's liquidity, resulted in higher short-term interest-rate conditions in the interbank and G-bond markets. Looking forward to June, under uncertain business conditions unfavorable for credit growth, we expect the pressure on the banking liquidity to be loosened in June. Furthermore, State Treasury short-term deposits, which have launched in early June, would also enhance the liquidity conditions and lower short-term interest rates and yields.

COVID-19 will be a great challenge for Vietnam's economic activity in the near term. IIP and retail sales would be the first to see pandemic-caused disruption, while the mobility restrictions also placed a burden on FDI activity. However, we expect export demand to continue to be life-saving for economic growth in 2Q21, as the U.S. and European consumer confidence remain positive thanks to the accelerating vaccination rollouts.

The macroeconomic conditions in May become less favorable than in April due to the ongoing outbreak and a global shock of surging commodity prices. Stricter mobility restrictions put heavy pressure on FDI and retail sales performance this month. On the other side, surging global commodity prices are considered the main factor in lifting inflation in May. Furthermore, the trade balance recorded the second consecutive deficit, attributable to the rising import price. However, a modest recovery in the industrial sector somewhat lightens the macroeconomic picture under many internal and external uncertainties.

A shortage in banking liquidity caused interbank rates and short-term yields to increase markedly in April. However, this seasonal liquidity shortage during a long holiday combining with SBV signaling control to banking credit activities would make recent increases in short-term rates end soon. Besides, we expect long-term yields to remain around the current levels under a gloomy outlook for CPI.

April provides more evidence for the economic recovery in recent months as major economic indicators improve further. However, we predict the economy to face more challenges in the coming months stemming from an uneven global economic recovery and the new COVID19 resurgence within the country. More prominently, the inflationary pressure is piling up when the upward momentums of construction materials and petroleum products prices see no sign of reverse.