A change in export momentum
Exports rose just 4.1% year on year in April - the slowest pace since July 2016 - as shipments of electronics fell on a yearly basis for the first time in over two years, said HSBC`s report.
This is quite significant, not only because it breaks the country's recently strong momentum, but also because electronics exports constitute about a third of Vietnam's overall exports, the report assessed.
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However, according to the report, the decline in electronics exports in April is partly due to a seasonal shift in production to newer models that are likely to be released in the third quarter. The April Vietnam Manufacturing Purchasing Managers' Index (PMI) also showed a bounce-back in manufacturing sentiment as a result higher in output and new orders, which also contributed to a sharper rise in employment from previous months.
As a result, HSBC forecasted exports to stabilize in the coming months, although there remains risks, given the electronics industry's strong performance in 2017, which is likely to cap consumer demand this year. Not to mention that any protectionist measures abroad would invariably affect Vietnam as a heavily trade-reliant economy.
Meanwhile, headline CPI surprised to the downside once again for the second consecutive month, rising 2.8% year on year from the previous 2.7%. Indeed, prices in most headline components largely remained unchanged on a month on month, non-seasonally adjusted basis. This bodes well for the government staying within the "below 4%" inflation target.
HSBC previously expected the headline CPI would breach above 4% by mid-year after a rapid rise in prices in February, but data from March onwards indicate that those risks have largely subsided. Indeed, this also means that there are downside risks to our headline average forecast of 4.0% for 2018.
However, it is also important to note that a significant reason for the downside surprise in April was due to health prices remaining constant on a monthly basis, which meant that healthcare costs rose just 13% year on year. This was its lowest increase in two years, but the report expected healthcare prices to continue rising moving forward as the government accelerates its healthcare subsidy reforms. This should cause a higher upward shift in consumer prices from the previous two months.
Moreover, oil prices have continued to climb higher since the beginning of the year and should cause higher CPI readings in the next few months, as the government allows pump prices to be adjusted on a 15-day basis. That said, the most recent CPI prints strengthen HSBC's conviction that the SBV will likely keep its policy rate on hold this year, hiking only if inflation risks persist and growth remains robust.
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