The balance of payments in the first half of 2024 showed a deficit of nearly US$7.44 billion, a significant reversal from the surplus of nearly US$4.58 billion during the same period last year. What caused this shift?

Sharp deficit in Q2 According to updated figures from the State Bank of Vietnam, the balance of payments in Q2 2024 recorded a deficit of nearly US$6.07 billionómore than 4.4 times the deficit seen in Q1. This represents a marked shift from the surplus of nearly US$3.4 billion in Q2 last year. The fact that both Q1 and Q2 this year saw deficits indicates a concerning trend, particularly as this contrasts sharply with last yearís surpluses in the same periods. Cumulatively, the balance of payments in the first six months of 2024 resulted in a deficit of nearly US$7.44 billion, a stark contrast to the surplus of nearly US$4.58 billion during the same period in 2023. While trade surpluses and foreign direct investment (FDI) remained robust, they were insufficient to offset the growing deficit, as several contributing factors persisted. Specifically, the current account balance in Q2 posted a surplus of US$4.51 billion, but this was only 45% of the surplus recorded in the same period last year. Cumulatively, the current account balance for the first half of 2024 reached US$9.73 billion, representing a 20% decline from last year. Meanwhile, the merchandise trade surplus also saw a slight drop of 2%, totaling US$20.43 billion. Although exports (FOB) rose by 15%, imports surged by 17%, largely driven by increased demand for machinery and materials due to expanding investments fueled by the economic recovery. In addition to the increase in merchandise imports, service imports in the first half of 2024 surged by 23% compared to the same period last year, outpacing the 19% rise in service exports. This led to a service trade deficit of over US$5.14 billion, a 34% year-on-year increase. The majority of this deficit stems from maritime transport services, which have grown in line with international trade. Vietnamís heavy reliance on foreign shipping companies for transport and logistics services exacerbates this imbalance. At the same time, the deficit in the income balance also grew by 8% compared to the same period last year, reaching US$11.6 billion. Although income from the collection stream increased significantly by 41%, it remained relatively small at nearly US$2.79 billion. In contrast, spendingóthough growing at a more modest 13%ówas much larger, amounting to US$14.39 billion. This trend was driven in part by FDI enterprises accelerating profit repatriation during the first half of the year, in response to the risk of a high U.S. dollar-Vietnam dong exchange rate and the wide gap between U.S. dollar deposit rates in Vietnam and other countries. The final component of the current account balance is transfers, which posted a surplus of US$6.04 billion in the first half of the year. While this helped boost the current account surplus, it still represented a slight decline of 0.3% compared to the same period last year. Current transfers on the income side, which include remittances, reached nearly US$8.12 billion, up 7% year-on-year. On the expenditure side, transfers amounted to nearly US$2.08 billion, a 38% increase from the previous year. In summary, while the merchandise trade balance and transfersótypically positive contributors to the current accountódeclined slightly compared to last year, the service trade balance and income balance, traditionally in deficit, saw their deficits expand further. This combination narrowed the overall current account surplus compared to the same period in 2023. Portfolio investment capital withdrawn, foreign debt repayment up In the first half of 2024, the financial balance experienced a notable shift. While it posted a surplus of US$1.44 billion in Q1, this was followed by a sharp deficit of US$4.82 billion in Q2, which contributed significantly to the large overall deficit in the balance of payments for that period. Despite realized FDI capital reaching US$8.6 billion in the first half of 2024óa year-on-year increase of 8%óthere was a withdrawal of US$0.25 billion in FDI capital. This was in contrast to the US$0.35 billion in FDI capital transfers recorded during the same period last year, resulting in net FDI capital of US$8.35 billion, matching the figure from the previous year. More concerning is the sharp rise in portfolio investment capital withdrawals, which amounted to over US$2.1 billionó21 times higher than the US$0.1 billion withdrawn during the same period last year. This substantial outflow aligns with the persistent net selling activity by foreign investors on Vietnamís stock exchange throughout the first half of the year. Other investment activities also showed troubling trends, with a deficit of US$11.06 billion in the first half of 2024, a 66% increase from the same period last year. This deficit was driven primarily by an outflow of funds abroad and the repayment of foreign debt by the private sector. In particular, the amount of money transferred abroad during this period surged by 49% year-on-year to nearly US$4.95 billion. The corporate and public sectors accounted for US$4.6 billion of this total, marking a 31% increase. Meanwhile, the banking sector contributed only US$347 million. On the flip side, over US$3.21 billion was withdrawn from deposits at credit institutions in Vietnam during the first half of 2024, a 1% year-on-year increase. This outflow is likely driven by concerns over exchange rate risks and the significant gap between U.S. dollar deposit rates in Vietnam and other countries. Since late 2015, Vietnam has capped U.S. dollar deposit rates at zero percent, while U.S. dollar interest rates in other countries have surged in line with the U.S. Federal Reserve's rate hikes over the past two years. In terms of foreign debt repayment, the net amount withdrawn reached nearly US$2.95 billion in the first half of 2024, almost doubling the figure from the same period last year. Net short-term withdrawals were modest at US$6 million, but net long-term withdrawals exceeded US$2.94 billionóa stark contrast to the net inflow of US$0.48 billion during the same period in 2023. This significant withdrawal was primarily driven by the borrowing and debt repayment activities of the private sector. Loan disbursements amounted to US$4.21 billion, down 32% year-on-year, while principal repayments surged 31% to nearly US$6.53 billion. As a result, the private sectorís net loan withdrawal reached US$2.31 billion, with more than US$1.62 billion withdrawn in Q2 alone. This contrasts with the net loan inflow of nearly US$1.21 billion seen in the first half of 2023. Despite a current account balance surplus of over US$9.73 billion and a financial balance deficit of US$4.82 billion, the balance of payments recorded a deficit of nearly US$7.44 billion. The key factor behind this outcome was the significant outflow of foreign currency through unofficial channels. This is reflected in the ìerrors and omissionsî item, which surged 34% year-on-year, reaching nearly US$12.35 billion in the first half of the year. Of this, over US$8.03 billion was recorded in Q1 and US$4.31 billion in Q2.