FOREIGN INVESTORS: VIETNAM ECONOMIC UPDATE - SLOWER GROWTH BUT POSITIVE SIGN EMERGED --- The total Index of Industrial Production (IIP) of the Industrial sector was up 9.6% YoY in November and up 10.1% YoY for the first 11 months of 2018. On a standalone basis, the IIP of the Industrial sector in November (9.6% YoY) was significantly higher than in October (7.7% YoY) thanks to the positive growth of the Mining sector and a slight improvement of the Manufacturing sector.
The IIP of the Mining sector was up 0.2% YoY in November but down 9.5% YoY in October. The improvement of the Mining mainly stemmed from higher production volumes of natural gas (16.4% YoY). By contrast, crude oil and coal production fell by 12.7% YoY and 0.2% YoY, respectively. Higher gas production but lower coal production might be related to the demand of produced electricity in the dry season when domestic coal production was inadequate to supply needs. The low base in the same period of 2017 was also a reason.
For the whole year of 2018, the IIP of the Mining sector will improve compared to 2017 because coal and natural gas production return to positive growth. The growth of coal and natural gas production in the first 11 months of 2018 were positive at 9.6% YoY and 1.7% YoY respectively, while both of them were negative in 2017.
The IIP of the Manufacturing sector increased by 11% YoY in November. This was higher than October (10.1% YoY) but still lower than the average of first 10 months of 2018 (12.5% YoY). So that, cumulatively 11 months of 2018, it was down by 12.2% YoY. The most important sectors improved in November, such as Electronics (from -1.5% YoY in October to 1.7% YoY in November), Motor vehicles (from 14.2% YoY to 20.2% YoY), and Petrochemicals (from 81.9% YoY to 103.5% YoY). The IIP of the Pharmaceutical sector increased by 32.5% YoY in November, easing concerns about a sudden deceleration in October (-0.2% YoY). The IIP of the Basic Metals sector maintained a high growth rate of 39% YoY for two consecutive months.
The IIP of the Textiles and Clothing sector increased by 13.2% YoY, the lowest in five months, but Textile and Clothing exports in November grew 20.3% YoY and raised the IIP of this sector up to 17.4% YoY for the first 11 months of 2018. Given this happened at the same as the Pharmaceuticals sector, it was likely that the deceleration of the Textiles and Clothing sector in November was only temporary.
The Furniture manufacturing sector, which we noted in the last report, reached a high growth rate of 20.1% YoY in November and cumulatively of 13.4% YoY in the first 11 months of 2018 up from 11.4% YoY in the first 10 months of 2018. Having over 20% YoY growth in the IIP for the past four consecutive months was a very positive change for the Furniture manufacturing sector because it was less than 15% YoY for many years. The exports of Wood and Wooden products in November also increased by 21.9% YoY, which led to an increase in exports for the first 11 months of 2018 of 16.3% YoY.
The Furniture manufacturing sector benefited from the US-China trade war not only in trading activities but also in FDI acttraction. If taking full advantage, Vietnam will have a new motivation for growth thanks to cheap labor costs and abundant raw materials. The export value of Wood and Wooden products from Vietnam in the first 11 months of 2018 was USD 8 billion, while the import value was only at USD 2 billion.
Cumulatively for the first 11 months, some sectors had high growth rates and contributed to the total growth of the Manufacturing sector including Petrochemicals at 63% YoY, Basic Metals at 23.7% YoY, Pharmaceuticals at 22.3% YoY, Motor vehicles at 16.3% YoY, and Paper and Funiture had the same growth rate of 13.4% YoY. The Paper sector was quite volatile; however, in the last five months it achieved stable growth of around 15% YoY.
Even while experiencing double digit growth at 11.2% YoY, the Electronics sector was on a downward trend which might become a hindrance to total growth next year. Hopes for the Electronics sector include the presence of domestic “rookie” companies and the investment of Samsung into new assembly plants in Vietnam to replace the factories in China. However, heavy dependence on the Telephones sector will continue to imply risks for growth.
The total IIP of the Industrial sector in the fourth quarter will likely be lower than the first three quarters if the Manufacturing sector does not have a large improvement in December and the Mining sector continues to shrink. As key players in boosting economic growth, slower IIP growth will reduce overall GDP growth. Therefore, the GDP growth rate in 4Q2018 might be at the lowest level of the year.
Services becomes a platform for growth
Retail Sales (not adjusted for inflation) in November rose to the highest level of the year, up 9.34% YoY, of which Wholesale and Retail Trading will promise to maintain a high growth rate in 4Q2018. While Retail Sales were at 8.6% YoY, 8.3% YoY, and 8.8% YoY in Q1, Q2 and Q3 2018, the GDP growth of Wholesale and Retail trading was up 7.45% YoY, 8.21% YoY, and 8.48% YoY respectively. The Wholesale and Retail trading is ranked third only after the Manufacturing and Agricultural sectors, so over 8% YoY in GDP growth of that sector will impact positively on overall growth.
Although Retail Sales were positive, we need to consider about the employment situation and growth in travel, two factors that have a large impact on domestic consumption. The Labor Employed Index (LEI) for the first 11 months stood at 3.1% YoY, marking the 6th consecutive month around 3% YoY. Employment dropped by 1.2% YoY in the Mining sector, increased by 3.5% YoY in the Manufacturing sector, and decreased by 4.3% in the Electronics sector. If employment situation does not improve, it will be difficult to increase personal income and push up consumer demand.
International visitors to Vietnam in November grew by 11% YoY, much lower than the cumulative 10- month growth of 22.4% YoY. This pulled the 11-month growth down to 21.3% YoY, the lowest in 29 months (not including low season months during the Tet holiday). Visitors from China and Korea increased by 26.9% YoY and 46.5% YoY respectively, higher than the overall growth but still on a downward trend. In November, the number of Chinese vistors increased by only 9% YoY while reaching 38.6% YoY in the same period last year. As in our previous reports, slower economic growth and the depreciation of the CNY have affected not only travelling & tourism demand of the Chinese but also to exporting commodities from Vietnam to China.
Carriage of passengers and cargo continued to be a bright spot with the volume of traffic carried increasing by 11% YoY for passengers and 7.4% YoY for cargo. For passengers, even though the volume of traffic carried grew less than the peak of 12.3% YoY, it was higher than the same period last year of 10.3% YoY. For cargo, even though the volume growth of traffic carried by sea in November was the lowest among five types of transport (5.2% YoY), one good signal was that it continued to improve and was the highest in many years. Sea shipping has a high contribution to the total volume of traffic carried at 51%, so the improvement of sea shipping has a positive impact on the shipping industry overall. This also implies that the physical trade between Vietnam and the world, specifically the long distant markets, is increasing remarkably. Transportation & Warehousing ranked the 11th sector having the largest proportion in GDP and grew at 7.55% YoY in 9 months of 2018, and that improvement in 4Q2018 will push up the overall growth.
Overall, the macroeconomic data in November, and for the first 11 months, showed that GDP in 4Q2018 might be at the lowest level for the whole year. 2018 started in a favorable condition and Vietnam’s economy would have begun to fly high if it did not suddenly appear to reverse course. The most notable event was the reduction of Samsung production volumes and the escalation of the trade war. From rising 7.4% YoY, the overall GDP fell 6.9% YoY in Q3 and might be even lower in 4Q2018.
Vietnam’s economy is quite open and our two biggest trading partners, the US and China, also the two largest markets in the world, are currently engaged in a trade war. Therefore, Vietnam is facing challenges that have not happened before. In that context, understanding the internal forces and taking advantage of external opportunities will be decisive factors to drive the economy out of trouble and to accelerate it in the upcoming years.
(Source: SSI Securities Services) ---- Full report available here Recent report for FOREIGN INVESTORS here
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