Macro Update – February 2026: INDUSTRIAL EXPANSION AMID GEOPOLITICAL FRICTION

February 2026 macroeconomic data reveals a pronounced divergence between domestic consumption and industrial production. Against a backdrop of heightening geopolitical volatility, this bifurcation raises structural concerns regarding supply chain resilience, energy security, and the central bank’s runway for further monetary accommodation.

• Headline inflation has moderated, primarily shielded by deflationary pressures in the food and energy components. February CPI rose 3.35% YoY and 1.14% MoM, largely driven by seasonal Lunar New Year (Tet) consumption spikes while core CPI presents a more concerning narrative, remaining elevated at 3.74% YoY in February and averaging 3.47% YoY for 2M26.
• Retail sales momentum is decelerating. February retail sales reached 613.7 VNDtn (+8.5% YoY), bringing the 2M26 cumulative total to 1,236.6 VNDtn (+7.9% YoY).
• A rebound in manufacturing activities. Despite the seasonal distortion of the Tet holiday reducing February working days, the manufacturing sector demonstrates a solid, broad-based recovery. The cumulative 2M26 Industrial Production Index (IIP) expanded by 10.4% YoY, a marked acceleration from the 7.5% YoY growth seen in 2M25.
• Trade deficit widens on capital expenditure cycle. The trade balance shifted into deficit, recording a US$1.04bn shortfall in February and widening the cumulative 2M26 deficit to US$2.98bn (2M25: +US$1.77bn). Rather than signaling weakness, this widening deficit is structurally positive; it is driven by the FDI sector aggressively ramping up imports of capital goods to front-load capacity expansion for the upcoming production cycle.
• Divergence between pledges and disbursements. Total registered FDI contracted by 12.6% YoY to US$6.03bn in 2M26. This decline was primarily driven by a drop in supplemental capital adjustments, reflecting a wait-and-see approach from incumbent investors ahead of the new Investment Law’s implementation on March 1, 2026. Conversely, disbursed FDI provided a significant bright spot, expanding by 8.8% YoY to US$3.21bn—the highest two-month figure in five years.

As of February 26, credit growth expanded by 1.4% YTD, outpacing a tepid deposit growth of just 0.36%. While regulatory efforts to curtail capital flows into the real estate sector have successfully moderated headline credit expansion, they have failed to meaningfully reduce the banking system’s structural reliance on the interbank liquidity—specifically OMO and State Treasury deposits.

• Entering early March 2026, liquidity constraints resurfaced abruptly. The overnight interbank rate hovered near the 10% threshold, driven by a confluence of tightening factors: maturity mismatches in FX swap contracts, scheduled State Treasury deposit auctions, and a contraction of outstanding Reverse Repurchase Agreements (RRP) on the OMO channel. However, swift intervention by the State Bank of Vietnam (SBV) successfully anchored interest rates in Market 2. This stabilization was achieved through fresh FX swap issuances and net liquidity injections via OMO, complemented by the State Treasury resuming deposit auctions at the “Big 4” state-owned commercial banks.
• Elevated borrowing costs. Despite these central bank interventions, the persistent divergence between credit and deposit growth in Market 1 during the first two months of the year continues to tether commercial banks to interbank funding.
• Cyclical demand and geopolitical frictions. On the foreign exchange front, excess VND liquidity in late February along with cyclical corporate FX demand for imported capital goods, catalyzed a rapid spike in the exchange rate.
• A high plateau for rates, with room for credit expansion. Looking ahead to 1H26, we project that while the broader interest rate environment may soften marginally in 2Q26, it will structurally remain at a higher base relative to FY2025. This elevated plateau is dictated by persistent structural funding deficits within the banking system that continue to lag accelerating loan demand. Nonetheless, we anticipate the exchange rate environment will gradually stabilize. This relative FX resilience will furnish the SBV with the requisite monetary accommodation space to extend credit growth quotas—a crucial prerequisite for engineering the government’s ambitious GDP growth target of at least 10% for FY2026.