With its deft handling of COVID-19, HSBC thinks Vietnam is likely to be one of the few economies that will come out of this crisis ahead of others.

Vietnam Will Come Out of Current Crisis Better Than Others, Experts Say
Photo Credit: Financial Times
Recently, HSBC released a report titled “Vietnam – Singing in the Rain” in which HSBC gave out some relatively rosy predictions of Vietnam’s economic prospects. 
Exports fell 9.4% y-o-y in 2Q, the largest quarterly decline in 11 years (Chart 6), but the COVID-19 impact is uneven. For one, traditional manufacturing, such as textiles and footwear, saw a significant fall of 25% y-o-y in its shipments in the second quarter. This indicates declining demand from the West, since the US and the EU are the dominant buyers. 
However, the impact on electronics exports was more muted. While smartphone shipments declined at a similar pace as garments, computer-related and electronics components exports helped to support overall strong growth in tech shipments (+20% y-o-y), putting a floor on exports.
Outside of growth, Vietnam’s price pressures have gradually subsided due to the disinflationary forces of COVID-19. Headline inflation halved from 5.6% in 1Q to 2.8% in 2Q, thanks to much lower oil prices. That said, one thing we need to be mindful of from June’s CPI print is the still-elevated food prices. 
Food inflation grew 12% y-o-y in 2Q, even faster than in 1Q (+10%). Thus, taking into account high food inflation throughout the year, HSBC raises Vietnam’s 2020 inflation forecast to 3.3% from 2.7% previously. That said, HSBC expects inflation pressures to be relatively subdued this year, below the SBV’s 4% inflation ceiling.
In short, despite Vietnam’s 1H20 growth moderating significantly to 1.8% y-o-y from 7% in 2019, its economy is showing resilience. Thanks to its handling of the pandemic, the country is now on a steady recovery path quicker than HSBC previously anticipated. Its external exposure to tech supply chains has offset some weakness in traditional manufacturing sectors, while domestic demand is rebounding faster than expected as the successful containment of the pandemic has so far been sustained well since the re-opening of the economy. 
Overall, HSBC is positive on Vietnam’s recovery story, as we have also previously flagged (Vietnam Economics Comment: In a league of its own, 12 June 2020). As a result, we raise our 2020 growth forecast to 3.0% from 1.6% previously, reflecting our renewed assumptions of Vietnam’s speedier economic rebound. Given the stronger growth recovery and moderate inflation, HSBC no longer expect a 50bp cut by the SBV in 3Q.
With its deft handling of COVID-19, HSBC thinks Vietnam is likely to be one of the few economies that will come out of this crisis ahead of others. That said, HSBC sees reasons to remain cautious, as uncertainties remain elsewhere. In particular, the flare-up in COVID-19 cases in the US,
Vietnam’s largest export market, could affect Vietnam’s export prospects.
Apart from external headwinds, there are also domestic risks, which mainly lie in the labour market. Unemployment rose sharply from 2.2% in 1Q to 2.7% in 2Q, leading to an unemployed population of 1.4m. However, the impact goes beyond what the unemployment data suggests. According to the Ministry of Labour, the pandemic has impacted the jobs of 7.8m people (VNExpress, 30 June 2020), implying 6.4m are underemployed (e.g. workers with fewer working hours). If the deterioration in the labour market continues, this would depress private consumption, in particular the nascent recovery of domestic demand. With rising consumer leverage in recent years (see: ASEAN Perspective: Banking on banks, 2 June 2020), it remains to be seen how far domestic consumption can be sustained.