Vietnam's export decline bottomed out: VinaCapital

This year, Vietnam has had its longest period of declining exports in almost a decade. According to VinaCapital's Chief Economist Michael Kokalari, there is clear evidence that Vietnam's exports are expected to revive in the fourth quarter, led by a bottoming out of the US inventory cycle and an acceleration in multinational corporations' transfer of production to Vietnam. 

According to a newly published analysis by Kokalari, the United States is Vietnam's largest export market, accounting for around one-quarter of overall exports.

"However, in anticipation of a post-COVID re-opening boom that never materialized, US retailers and other consumer product companies purchased far too many Made in Vietnam or Made in Asia products last year." When COVID lockdowns were released, instead of purchasing more produced goods, US consumers spent their money on services such as vacations and dining out. To make things worse, corporations have overordered items from Asian manufacturers in reaction to supply-chain concerns and shortages, causing stockpiles at companies such as Walmart, Target, and Nike to balloon by more than 20% year on year in late 2022," he added.

In reaction to their bloated stocks, US retailers cut orders at manufacturers in Vietnam this year, which explains why Vietnam's exports to the US declined by more than 20% year on year in the first seven months of this year after increasing by more than 20% in the same time last year. However, throughout 2023, US corporations have been vigorously destocking.

All of this, according to Kokalari, is strongly related to Vietnam's export statistics. The intensive inventory reduction efforts of companies such as Walmart and others led to a drop in Vietnam's exports in the first quarter, but that destocking is nearing its end, and Vietnam's exports to the US climbed by about 7% month on month in July. 

As a result, the year-on-year reduction in Vietnam's exports to the US improved from a 26% year-on-year drop in June to a 14% year-on-year drop in July, helping to reduce the year-on-year decline in Vietnam's overall exports from 12% in the first six months to 2% in July.

Finally, in addition to a cyclical improvement in US exports, Vietnam is benefiting from corporations shifting manufacturing there. All Asian exporters could profit to some extent from a de-stocking-driven export rebound, but Vietnam is the only nation in Asia benefiting considerably from the building of new factories. 

"We are confident that the improvement in Vietnam's exports will accelerate as 2023 progresses, based on several reliable leading indicators, including Vietnam's import growth finally caught up to export growth on a sequential basis in July, after having lagged significantly for much of 2023; the ongoing decline in export orders for Vietnam's factories finally eased in July; and firms' inventories of raw materials increased in July for the first time since late-2022," said the report.

According to the research, high-tech items like consumer electronics and cellphones, as well as clothing and footwear, make up more than half of Vietnam's exports to the US, with the remainder made up of a variety of other products such as furniture and agricultural products.

Earlier this year, global sales of personal computers were falling by more than 30% year on year (Vietnam's high-tech exports fell by more than 10% year on year in the first half), but the decline in PC and consumer electronics sales has now ended, according to senior Walmart executives, who recently noted a "modest improvement" in consumer electronics sales. 

As a result, Vietnam's exports of such items increased from a 3% year-on-year decline in June to a 28% year-on-year increase in July, making it the single largest contributor to Vietnam's export rebound last month and helping propel Vietnam's exports to more than $30 billion for the first time this year.

Next, since Vietnam is the world's second-largest smartphone exporter, new product introductions may have a significant influence on exports and manufacturing activity (Samsung accounts for a quarter of total exports).  

Finally, garments and footwear account for nearly 20% of Vietnam's exports, and exports of those products to the US are unlikely to rebound until next year because retailers in the US are destocking such products much slower than consumer electronics retailers. According to local consumer mood surveys, garment shipments to the Republic of Korea (RoK) and Japan increased by nearly 30% month over month in July as apparel demand revived in both nations.

According to the analysis, there is tangible evidence that Vietnam's exports will improve in the fourth quarter, owing mostly to a bottoming out of the US inventory cycle but also to an acceleration in the movement of manufacturing to Vietnam. 

This comeback is expected to help improve Vietnam's GDP growth from below 5% in 2023 to 6.5% in 2024, propelling the profit growth of the VN-Index (VNI) from 6% in 2023 to over 20% in 2024, which should underpin the VN-Index in the months ahead, according to Kokalari.

Source: VinaCapital, VietnamPlus