Vietnam economy faces strong headwinds: World Bank

Export growth slowed to a 12-month low of 4.8% year-on-year as external demand weakened amid high inflation, tightening global financial conditions, and heightened global uncertainties, the bank reported.

Industrial production and retail sales moderated in October as both domestic and external demand slowed.

The industrial production index increased by 6.3% year-on-year in October, compared to 10.3% a month earlier, with weaker external demand likely an important factor, as growth in the EU, U.S. and China is slowing.

The Purchasing Managers’ Index, which measures manufacturing activity, fell from 52.5 in September to 50.6 in October 2022, the lowest reading since October 2021.

Retail sales increased by 17.1% year-on-year in October, compared to the 32.3% a month earlier.

“[This] reflects weakening domestic demand as the consumption rebound experienced in the first three quarters of the year appears to be fading amid rising inflation.”

The Consumer Price Index (CPI), which measures inflation, rose from 3.9% in September to 4.3% in October, driven by a faster rise in food prices, which account for one-fifth of the CPI basket.

This is the first time since April 2020 the CPI exceeded the central bank’s target of 4%.

Credit growth moderated to an estimated 16.5% year-on-year in October amid tightening domestic financial conditions.

FDI disbursement rose 8.1% year-on-year thanks to a jump in investment in electricity, gas, and water supply.

Although the Vietnamese dong has lost 9.1% of its value against the U.S. dollar since the beginning of the year, this depreciation was lower than other countries.

“The economy faces strong headwinds. Slowing external demand and tightening global financial conditions are affecting the exchange rate. Rising inflation and tightening domestic financial conditions could affect domestic demand during the next months,” the World Bank said.

As the U.S. Fed is expected to continue raising interest rates, Vietnamese monetary authorities could consider allowing further flexibility in the exchange rate, including through a quicker pace of depreciation of the reference rate, the bank said.

This could be complemented with continued use of reference interest rates, especially if faster depreciation leads to higher inflation and inflation expectations rise, it added.

The bank had earlier pegged Vietnam’s GDP growth at 7.2% this year, the highest among major economies in the Asia Pacific.

The government has forecast growth of 8%.