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Despite external resilience, the recovery in domestic demand has stalled, given prolonged reimposition of strict social distancing measures. Indeed, Vietnam’s mobility indicators have been dropping, leading to dampened growth in services.

HSBC’s Sudden Change in Vietnam’s GDP Growth Forecasts Explained
Today HSBC released the new report in which HSBC gave out some latest predictions on some big Asean economies. Vietnam’s GDP growth’s forecats for 2021 is lowered but the GDP growth rate for 2022 is heightened. 
Vietnam has proven its economic resilience during the pandemic. With GDP growth of 2.9%, it was one of the few economies that saw positive growth in 2020, thanks to its quick and successful containment of COVID-19. While there was a third wave of cases leading up to Tết in February, it was largely brought under control within a month, allowing Vietnam to start 2021 on a steady footing.
Vietnam’s GDP rose 4.5% y-o-y in 1Q21, largely thanks to a shining external sector. Exports rose over 20% y-o-y in 1Q21, driven by burgeoning demand for electronics and machine equipment. In particular, it has benefited from an extended strong global tech cycle and unwavering FDI interests.
Meanwhile, high frequency indicators also point to nascent signs of recovery in traditional manufacturing. The encouraging trend should continue in tandem with improving global demand.
Despite external resilience, the recovery in domestic demand has stalled, given prolonged reimposition of strict social distancing measures. Indeed, Vietnam’s mobility indicators have been dropping, leading to dampened growth in services. 
Coupled with ongoing concerns over a weak labour market, incoming data is likely to point to slowing consumption. Still, as the third wave has been brought under control, domestic demand is likely to revive in due course.
Overall, HSBC revises down Vietnam’s 2021 growth to 6.6%, accounting for a weaker-than-expected 1Q21 recovery. That said, given an upswing in the tech cycle, consistent FDI inflows, and multiple Free Trade Agreements (FTAs), Vietnam still boasts one of the brightest growth prospects in Asia.
Meanwhile, inflationary pressures continue to ease, only rising 0.3% y-o-y on average in 1Q21, in part due to base effects. Food prices are moderating as pork prices normalise, likely more than offsetting the impact of higher oil prices. In addition, a stable currency should alleviate concerns about high FX pass-through to CPI. All things considered, HSBC expects Vietnam’s inflation to average around 3% in 2021, well below the State Bank of Vietnam’s (SBV) 4% ceiling. 
With inflation being less of a concern, the central bank has more flexibility to keep its monetary policy unchanged in 2021.
Policy issues
Given Vietnam’s limited fiscal space, monetary policy did most of the heavy-lifting to support the economic recovery in 2020. The SBV cut its annual refinancing interest rate from 6% to 4%. As Vietnam’s robust momentum is likely to continue after its effective containment of COVID-19, we expect real GDP growth to rise 6.6%, in line with the government’s 6.5% target. 
Coupled with benign inflation pressure, we expect the SBV to keep its policy rate on hold until 2Q22, before possibly delivering a 25bp rate hike in 3Q22. This would bring the refinancing rate to 4.25% by end-2022.
While Vietnam’s fiscal space is constrained by its elevated public debt, some targeted and short-term assistance is still needed for struggling sectors and individuals to broaden out the recovery. Indeed, the Ministry of Finance has proposed another extension of taxes and landcrental payments with a total package worth VND115trn (1.7% of GDP). 
This includes a 5-month extension of the value-added tax (VAT) and a 3-month deferral of corporate income tax (CIT) (Hanoi Times, 18 February 2021). After a brief pause in 2020, HSBC expects Vietnam to resume its fiscal consolidation efforts in 2021. 
HSBC forecasts the fiscal deficit to shrink from 5.2% of GDP in 2020 to 4.7% in 2021, bringing down its public debt back to below 60% of GDP.
Lastly, politics. Vietnam’s 13th National Party Congress concluded on 1 February. Mr. Nguyen Phu Trong was re-elected for a third term as the Party General Secretary. This points to a continuation of Vietnam’s economic policy and reform priorities.

DIEP NGUYEN