Headline inflation in July slightly edged up to 2.4% y-o-y from 2.2% in June. This marks the second slowest inflation growth so far in 2019, starting 2H19 with the subdued trend as expected.

Ongoing Drought Holds Risks to Disrupt Agricultural Production in Many Provinces
Photo Credit: Reuters
Food costs moderated to 2.3% y-o-y, the lowest rate in a year, contributing 30% to the overall inflation. As the breakdown data of food is not available, it’s difficult to see the main driver behind the moderation in food costs, especially in the context of rising pork prices as a result of the swine fever frequently reported. 
But a plausible explanation could be that the decline of other components has offset the impact of the increasing cost of pork. Still, there are upside risks to food prices, as the ongoing drought has disrupted agricultural production in many provinces (Vietnam News, 25 July).
Meanwhile, healthcare was the second largest contributor (c20%) to the y-o-y inflation growth with the biggest contribution (0.5ppt) seen in a year. This was explained by a low base, not rising healthcare costs in July, as the m-o-m change still remained constant at 0%. 
That said, even accounting for potential higher healthcare costs should the government continue its healthcare reform, this year’s inflationary trajectory would not pose threats to the SBV’s “below 4%” target. The July CPI print strengthens our view that the central bank will put its monetary policy on hold for 2019, as inflation pressures continued to be muted.
Exports continued the strong rebound, growing at 9.3% y-o-y in July, up from a downwardly revised print of 7.7% (previously 8.5%) in June. Surprisingly, other goods, such as agricultural products, contributed half of overall export growth. Textiles and footwear continued to hold up, driving 25% of export growth. Meanwhile, the electronics story was mixed. 
Exports of phones and spare parts fell (-1.9% y-o-y) for the first time so far in 2019, in part due to a high base from last July; however, shipments of computer and electronic components continued to expand, rising 19% y-o-y. Moreover, the exports performance to the US was especially notable. 
Overall exports to the US rose 29% y-o-y in 1H19, with electronics shipments up by 80%. But the impressive growth continued to catch the eye of the US. After being criticised by President Trump, the US Trade Representative Robert Lighthizer recently warned on Vietnam’s rising trade surplus with the US (Bloomberg, 30 July), suggesting growing direct tariff risks. 
Still, HSBC believes that production should continue to hold firm, as large tech firms continue to shift their supply chains. For example, Apple is reported to start its trial production of AirPods, Apple’s fastest-growing product, to northern Vietnam (Nikkei Asian Review, 17 July). PMI in July jumped to 52.6, starting 3Q19 with the highest point so far in 2019 (Chart 7). 
Almost all sub-indices continued their expansion. New orders, in particular, expanded at a faster pace for the third straight months, contributing to the fastest expansion of output since last November. 
Strong business confidence in manufacturing expansion persisted, with most surveyed respondents indicated their optimism in the sector’s near-term outlook (IHS Markit, 1 August). As such, ongoing strong PMI readings point to a likely rosy picture of manufacturing performance in 3Q19.