Previous Quarterly Editions
Expropriation Risk: 41 41 46 47 Political Violence Risk: 39 40 40 40 Terrorism Risk: 18 18 18 18 Exchange Transfer and Trade Sanction Risk: 51 51 49 51 Sovereign Default Risk: 53 53 50 49
TREND ▲ OUTLOOK ►
The recent trade tensions between Washington and Beijing have contributed to a rise of more than 30% in Vietnamese exports to the US during the first half of 2019. FDI inflows into the country, already strong, have increased as Chinese and China-based firms opt to relocate export-oriented manufacturing operations to Vietnam in order to side-step higher US import tariffs. While Vietnam is certainly not the only option available, in many cases being considered alongside Malaysia and India, it appears on most short lists of US companies looking to diversify their supply chains. Meanwhile, Hanoi formally signed a long-awaited and wide-ranging free trade deal with the EU in June that will see import duties on 99% of Vietnamese exports removed within seven years. Although this still needs ratification, it could increase exports to Europe by 20% as soon as 2020, according to some estimates. The economy remains robust. Having grown by 7.1% in 2018, the IMF expects a more sustainable 6.5% both this year and next. The budget deficit is trending down, as is public debt, while credit growth is being carefully managed. Inflation is expected to be a manageable 3.6% in 2019, broadly on a par with 2017 and 2018. Tensions between Hanoi and Beijing over contested territorial claims in the South China Sea have increased again in recent months. In the latest episode, a Chinese survey ship and various support vessels entered Vanguard Bank, an area inside Vietnam's EEZ where Vietnamese-contracted oil rigs are operating. It is clear that, despite agreement at the ASEAN-China summit in July on a first draft of a new Code of Conduct for the South China Sea, the intensity of the situation between Beijing and Hanoi needs to be handled bilaterally. Beyond the potential for an armed offshore stand-off, there is the possibility that any ratcheting up of tensions could spark another bout of anti-China protests within Vietnam. These resulted in significant damage to foreign-owned factories in 2014. There were more unauthorised protests across the country last year in response to Hanoi’s intention to offer 99-year leases in three special economic zones to foreign firms, as the move was widely interpreted as an attempt by the government to benefit China investors. Another problem for the government was signalled by the US Treasury Department in May when it included Vietnam on a list of potential currency manipulators. The accusation is that Hanoi may have actively sought to keep the value of the dong down in order to boost its export competitiveness. Soon after, President Trump suggested that Vietnam was taking greater advantage of US than even China in terms of trade policy. Vietnam currently has an annual trade surplus of some 45 billion dollars with the US, up from virtually nil at the start of the millennium.
TREND ▲ OUTLOOK ▲
The trend of moving manufacturing operations to Vietnam, which includes the building of new facilities, has been helped by the low risk of asset expropriation. However, technology companies remain concerned about the cyber security legislation that came into force in January. This empowers the Ministry of Public Security to decide what constitutes undesirable online content. It also requires that all technology service providers have their Vietnam data stored on servers physically located within the country by the end of 2019. Within weeks of the new law coming into effect, the government had accused Facebook of permitting anti-government and 'slanderous' posts on its platform, and then failing to remove them and block the users who posted them when told to do so. Subsequent moves by the company, which expects to reach 45 million users in the country this year, to remove some of this material has defused the situation but the government now appears to be favouring a domestic alternative to Facebook. Foreign investors have legitimate worries about the data localisation requirements, as well as more general and reputational concerns about greater government control over online content.
TREND ► OUTLOOK ▲
In a country where half the population already use the internet regularly, new restrictions on social media in the cyber security law sparked a rare wave of street protests that appeared to take the government by surprise. As such protests are very unusual, the prospect that access to social media might become more difficult clearly touched a nerve. Since Nguyen Phu Trong assumed the post of General Secretary of the ruling Vietnamese Communist Party, and subsequently also became state president, the party has shown a growing lack of tolerance for perceived agitators, both within and outside its own ranks, and is keen to bring social media into line with the tight controls on conventional media. Senior Party leaders are aware that its greatest weakness in terms of legitimacy is the ideological linkage with the leadership in China, which continues to sit uncomfortably with the strong nationalist sentiment running through much of Vietnamese society.
TREND ► OUTLOOK ►
While condemned by human rights groups, which have pointed out the recent increase in the number of political prisoners, the Vietnamese security apparatus has been successful in deterring not only acts of terrorism but also most other forms of violent and non-violent protest.
TREND ▲ OUTLOOK ▼
The central bank closely manages the exchange rate for the dong, and the currency is not freely convertible outside the country. The greatest sanctions risk at present stems from Washington’s decision in May to place Vietnam on a watch-list for potential currency manipulation. Hanoi is taking the warning seriously and is likely to ensure that the country takes more high-value US exports, including cars, as well as more agricultural produce in order to avoid any possibility of new US tariffs.
TREND ▼ OUTLOOK ►
Most of Vietnam’s public debt is long-term in maturity and the total is roughly equivalent to a manageable 55% of GDP. The country consistently runs a fiscal deficit, but this is currently below 4% and is trending downwards. The latest IMF country assessment is largely positive, noting stricter limits on new government guarantees and welcoming the recent fiscal consolidation efforts.
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