BETTER DAYS BECKON

After a challenging 2023, all indications are that 2024 will be a stronger year for Vietnam’s economy, driven by a rebound in the manufacturing sector and improvements in consumer sentiment.

GDP GROWTH TO ACCELERATE

We expect Vietnam’s GDP growth to reach 6.5 per cent in 2024 due to several factors. First, manufacturing output growth is likely to recover from less than 4 per cent in 2023 to 8-9 per cent in 2024, which is still below pre-Covid growth levels because of the weakening US and global economies and the fact that most products manufactured in Vietnam are exported, especially to the US. Second, interest rates in Vietnam will likely remain lower and less volatile than over the last two years, which will support the economy in a number of ways, including encouraging consumption and credit growth. Third, consumption is likely to see a modest acceleration, supported by the first and second points above, though real retail sales growth is only likely to accelerate slightly in 2024 and most likely later in the year.

Further to that last point, Vietnam’s GDP growth fell from 8 per cent during its post-Covid reopening boom in 2022 to 5.1 per cent last year, a fall that was equally attributable to plunges in industrial production / manufacturing and in the services sector / domestic consumption. While we expect a healthy rebound in manufacturing activity, we do not expect a large increase in the growth of consumption. That is because a surge in foreign tourist arrivals last year boosted consumption last year, which will not be repeated this year.

The number of tourists visiting Vietnam from countries other than China (which previously accounted for about one-third of total tourist arrivals) has almost fully recovered to pre-Covid levels. There is a possibility that Chinese tourist arrivals (which reached only 30 per cent of preCovid levels last year) will continue to recover in 2024, but consumer sentiment in China currently languishes at similar levels as during the country’s Covid lockdowns as it deals with a wide range of structural economic issues.

The main risk to our moderately positive outlook is the possibility of a “hard landing” in the US economy, causing demand for “Made in Vietnam” products to plunge. The value of the US dollar would likely soar in such a scenario (as it typically does) driven by “safe haven” buying, which would limit the ability of Vietnamese policymakers to respond to a slowing Vietnamese economy by slashing VND interest rates (Vietnamese policy makers have repeatedly shown their resolve to defend the value of the VND in recent years).

That said, the Vietnamese Government would have ample ability to respond to such a crisis with massive fiscal stimulus, including a surge in infrastructure spending. In early 2023, the government guided its intention to increase infrastructure spending by about 50 per cent to about $30 billion, or 7 per cent of GDP last year, up from 4 per cent of GDP in 2022. It is very likely that part of the reason the government intended to ramp up infrastructure was to offset the predictable hit to the economy from slowing global demand for “Made in Vietnam” products. Early indications are that infrastructure spending increased to around $25 billion (or 6 per cent of 2023 GDP), and that the government plans a similar level of spending this year. Critically, the government’s past prudence permits it to significantly ramp up spending if it wanted to. The State Treasury of Vietnam reportedly has over $30 billion of undisbursed funds deposited in the country’s banks, most of which was earmarked for infrastructure projects in past years but did not get spent, and the government debt-to-GDP

ratio is below 40 per cent, which is very low compared to most EM (emerging market) and DM (developed market) countries around the world.

Finally, the government implemented a few minor measures to boost the economy last year, including a temporary cut in the VAT rate from 10 per cent to 8 per cent and a cut in the environmental tax on gasoline. These measures probably only equated to about 0.5 per cent of GDP, though a planned increase in public sector salaries next year will probably equate to another circa 1 per cent of GDP in stimulus to the economy. That said, we again believe the government could do much more to support the economy if it needed to.

EXPORTS AND MANUFACTURING REBOUNDING

In 2023, a plunge in Vietnam’s manufacturing output and exports were the biggest drags on the economy, just as we predicted in our “Looking Ahead at 2023” report, which was a non-consensus call at that time. However, Vietnam’s longest streak of falling exports in over a decade has already bottomed out and export growth is likely to accelerate to some degree throughout 2024.

Global export orders are poised to start expanding again because the inventories of US retailers and other consumer-facing firms look likely to end 2023 down about 5-7 per cent year-on-year, according to recent earnings calls from companies like Walmart, Target, Best Buy, Nike, and others. The inventories of US retailers had surged by well over 20 per cent year-onyear in late-2022, and the resulting destocking efforts are reflected in the plunge in global export orders.

Inventory depletion in 2023 explains why Vietnam’s overall exports deteriorated from 11 per cent growth in 2022 to a 4 per cent drop in 2023. With exports equating to over 80 per cent of GDP, a swing of that magnitude has a major impact on GDP growth. We only expect a modest rebound in exports to the US this year, partly because US credit card debt surged ~40 per cent over the last two years, which is constraining US consumers’ capabilities to continue purchasing “Made in Vietnam” products and which helps explains why 2023 holiday spending in the US was reportedly tepid.

Computers and electronics exports are already rebounding, though exports of smartphones and low value garment products are still falling (note that each of those three product categories accounted for about 15 per cent of Vietnam’s total exports last year). Sales of PCs and other “work from home” products plunged post-Covid, but users have started upgrading to computers that are sufficiently powerful to run AI applications. This helps explain why market researchers Canalys expects global PC sales to rebound from a 12 per cent drop in 2023 to nearly 10 per cent growth in 2024.

Additionally, we note that Vietnam’s imports of the electronic components used to manufacture computers and consumer electronics is surging, which is a reliable leading indicator that companies are ramping up to fulfil the orders in their pipelines.

Finally, garment and footwear exports have not started recovering yet because: 1) demand from US consumers remains weak (Target’s CEO noted that some US consumers put off buying winter clothes last year until the weather actually turned cold); 2) some production is relocating to countries with cheaper wages (especially Bangladesh); and 3) some production is moving out of Asia entirely to minimize the possibility that any of the cotton or other raw material inputs were sourced from China.

All of that said, the overseas customers of garment and footwear factories in Vietnam have generally guided those local firms to expect an increase in orders this year, according to our industry contacts. However, those Vietnamese factory managers also lament that their customers have essentially been giving them small lot and / or last-minute orders rather than the pipeline of 6-12 months’ work as they had in the past.

DOMESTIC CONSUMPTION RECOVERING

In 2023, consumer spending in Vietnam was depressed by layoffs in the manufacturing sector, which affected lower-income consumers, and by the country’s “frozen” real estate market, which affected middleand upper-income consumers, though this weakness was largely offset by a surge in foreign tourist arrivals. The number of foreign tourists visiting Vietnam leapt from 20 per cent of pre-Covid levels in 2022 to 70 per cent in 2023, accounting for most of the country’s 7.1 per cent real retail sales growth last year. Consequently, we estimate that the growth in spending by local Vietnamese consumers (excluding tourists) was nearly flat last year. That said, consumer spending and sentiment in Vietnam both bottomed in mid-2023. One reason sentiment and spending started recovering in the middle of last year is that the employment picture started improving around that time. In early2023, highly publicized factory layoffs were a major drag on spending and sentiment, but the pace of layoffs slowed by mid-2023. The layoffs were a direct consequence of the drop in exports, which had also slowed by then, and by late2023, firms resumed hiring workers.

Specifically, factories started expanding their workforces in October, after having laid off workers for most of the year, according to S&P Global’s PMI survey for Vietnam. Consequently, industrial employment expanded by nearly 1 per cent month-on-month in October, according to the General Statistics Office (GSO), and by the end of the year industrial employment had fully recovered (i.e., it was essentially unchanged year-on-year).

That said, wages grew by less than 5 per cent year-on-year, which is lower than Vietnam’s typical 7-10 per cent year-onyear factory wage growth, reflecting weak conditions in the labor market.

Consumer sentiment and spending got a further boost in late-2023 from the nascent thawing of the country’s “frozen” real estate market. The highly-publicized slowdown in Vietnam’s real estate market negatively impacted consumer sentiment to a degree that is out of proportion to the reality of the issues that the market actually faces. Consequently, a modest thawing could disproportionately boost consumer sentiment this year.

The temporary surge of interest rates weighed on home prices, which in turn dampened consumer sentiment, but lower mortgage interest rates / monthly payments will also free up money for homeowners to spend on purchases (mortgage rates in Vietnam are floating and linked to banks’ deposit rates).

That said, last year’s temporary spike in savings rates generated windfall income for savers, some of which got spent in the economy (a similar phenomenon helps explain the surprising strength of the US economy last year). Consequently, it is difficult to disentangle the impact of last year’s temporary surge in interest rates on consumption in Vietnam, though lower rates will make it easier for consumers to finance purchases of “big ticket” items which should support consumption this year (outstanding consumer loans growth was very weak in 2023).

Finally, the labor and real estate markets were not the only influences on consumer spending last year; we have focused on these factors because they had the biggest impact. For example, the government’s temporary reduction in the VAT rate from 10 per cent to 8 per cent also supported spending, but we do not believe that cut was big enough to significantly influence consumer behavior.

FDI KEEPS GETTING BETTER

Every year in our “Looking Ahead” reports, we remind readers of Vietnam’s key appeal to FDI investors: 1) wages are less than half those in China but the quality of the workforce is comparable, according to surveys by JETRO and others; 2) Vietnam’s geographic proximity to Asia’s high-tech industry supply chains; and 3) Vietnam is in the “friendshoring” cohort of countries at low risk of having tariffs imposed on their exports to the US.

Last year, Vietnam’s appeal to foreign investors continued to improve, as did the quality of the FDI the country attracted. The most important developments on both of these fronts were that the US and Vietnam raised their diplomatic relationship to a comprehensive strategic partnership, Xi Jinping visited Vietnam three months after President Joe Biden’s visit in September, making Vietnam the only country in Asia that Xi visited last year and the only country that both Presidents visited in 2023, while Apple announced that it will move some key engineering functions to Vietnam for the first time, in addition to its current manufacturing / assembly activities.

The first two points illustrate Vietnam’s unique position in the world’s evolving geopolitical landscape, which benefits investors because multinational companies that set up a factory in the country need not worry about being able to sell their products in the US market nor their ability to access production inputs from China, since Vietnam is being actively courted by both countries. The International Monetary Fund (IMF), the Atlantic Council, and others have highlighted that geopolitics is becoming an increasingly important factor in how companies decide which countries to invest in.

Next, Apple’s announcement that it will move some research and development (R&D) activity to Vietnam for the first time follows its 2022 decision to start making the Apple Watch in the country, which is a particularly complicated product to manufacture. Our Looking Ahead 2023 report cited Apple insiders who said the company has “big plans for Vietnam”. The transition from assembling products to actually designing those products is a further step up in the complexity of the activities the company conducts in Vietnam.

We mentioned in our previous reports that the single most powerful growth driver for a country like Vietnam is an increase in the complexity of the products and services it is able to produce, according to research from Harvard and others. We believe Apple’s latest move is a step (albeit a modest one) towards the development of a semiconductor industry in Vietnam, which is currently the subject of considerable discussion among executives from leading US and Taiwanese firms such as Nvidia.

Finally, the main caveat to all the positive points above is that Vietnam needs to accelerate infrastructure development in order to maximize high-quality FDI inflows. Vietnam’s transportation and logistics infrastructure urgently needs to be upgraded, and FDI companies have concerns about its ability to reliably supply electricity to industrial users, following last summer’s power outages in northern Vietnam.

CONCLUSIONS

We expect Vietnam’s GDP growth to increase to 6-6.5 per cent in 2024, driven by a rebound in the manufacturing sector and by improvements in consumer sentiment and spending. Manufacturing had already started rebounding in late-2023 because the demand for “Made in Vietnam” products - especially for consumer electronics products - from consumers in the US and EU started to recover last year.

Consumption by Vietnamese consumers (excluding tourists) also already started rebounding in late-2023 because of improvements in the labor market and because Vietnam’s “frozen” real estate market started to thaw, thanks in part to last year’s big decline in interest rates. Lower interest rates also supported the stock market in 2023, but we expect rates to remain much more stable this year and for stock market investors to re-focus on fundamentals this year.

Consequently, a modest expected increase in earnings growth, coupled with the market’s cheap valuations, should help drive a modest increase in Vietnamese stock prices this year, especially given potential catalysts including the widely anticipated implementation of the stock market’s new KRX trading system, which would ultimately help pave the way for the market to be upgraded to “Emerging Market” status.

Finally, we expect a fairly wide dispersion in the performance of individual stocks and sectors in the stock market, which will once again enable active managers like VinaCapital to outperform the overall stock market. ◼