Previous Quarterly Editions
Expropriation Risk: 46 47 47 48 Political Violence Risk: 40 40 38 38 Terrorism Risk: 18 18 18 18 Exchange Transfer and Trade Sanction Risk: 49 51 52 54 Sovereign Default Risk: 53 49 48 51
TREND ▲ OUTLOOK ▲
Vietnam entered 2020 on a positive note, with a robust economy enjoying rising foreign direct investment (FDI) inflows and benefiting from trade tensions between the US and China, a major bilateral free trade deal finally ratified by the EU, and preparations well underway to assume the rotating chair of ASEAN. However, news of the COVID-19 outbreak in China in January 2020 quickly cast a shadow over Vietnam’s economic prospects. The fact that the country has a busy land border with China, together with its experience of the SARS outbreak in 2003, led the government in Hanoi to move quickly to implement mass quarantining and the country was in full lockdown mode by the end of March 2020 even though the official number of cases was relatively low. In Vietnam, the impact of COVID-19 is likely to be felt most in terms of rising unemployment and a decline in manufacturing output. The country has been a major winner from globalisation, having proved highly successful at plugging into international production networks and supply chains over recent decades. While this has resulted in substantial FDI inflows, it has also left the country highly exposed to economic contagion across a range of manufacturing and service sectors. The tourism and hospitality sector will perhaps face the greatest impact, but overseas orders for the production of garments, footwear and a diverse range of electronic goods have already begun to contract significantly. Much will depend on how long and how severe the global economic downturn is, although both Vietnam’s economy and its political system should be able to weather the storm. As in China, the reach of the state apparatus is extensive, and the government’s ability to enforce restrictions intended to mitigate the impact of the virus is greater than in many other countries, with the consequence of making government actions appear effective and so limiting criticism. Nonetheless, Vietnam’s public health and welfare services are under-resourced and will be severely tested. It remains to be seen whether the virus crisis will delay preparations for the Communist Party’s next Congress, currently still scheduled for January 2021. These Congresses set the country’s strategic course for the next five years and are the time for instituting changes in its leadership. Much of the political jostling occurs in a spate of meetings convened by the Party in the months running up to the Congress itself, which makes this year particularly significant. In February 2020, along with a number of other Southeast Asian countries, Vietnam was removed from Washington’s list of developing economies. The move came without warning and means less preferential treatment on trade issues as well as a lower threshold for triggering an investigation into any alleged dumping of, or state subsidies for, Vietnamese products exported to the US market.
TREND ▲ OUTLOOK ►
The recent uptick in moving export-oriented manufacturing operations to Vietnam has been helped not only by US-China tensions but also by the relatively low risk of asset expropriation. However, technology companies remain concerned about the cyber security legislation that came into force last year. This empowers the Ministry of Public Security to decide what constitutes undesirable online content. It also requires all technology service providers to have all of their Vietnam-related data stored on servers physically located within the country, and therefore potentially open to being accessed by Vietnam’s security apparatus. Foreign investors have legitimate worries about these data localisation requirements, as well as more general and reputational concerns about greater government control over online content. This is in addition to long-held concerns around the lack of intellectual property protection in Vietnam.
TREND ► OUTLOOK ►
Since 2018, when Nguyễn Phú Trong added the country’s presidency to his post as General Secretary of the Communist Party of Vietnam, the Party has shown an increasing lack of tolerance for perceived agitators, both within its own ranks and in the country at large. It has been bringing the rules governing social media into line with the tight controls that already exist on conventional media, most of which is state-controlled and all of which is closely monitored. Senior Party leaders are all too aware of the unpopularity of its ideological linkage with the leadership in China, which sits uncomfortably with the strong nationalist sentiment running through much of Vietnamese society. This tends to come into sharp relief when Sino-Vietnamese tensions grow over competing territorial claims in the South China Sea, where clashes continue over Chinese harassment of Vietnamese fishing boats. But the risk of popular discontent over the government’s handling of the COVID-19 situation is low.
While often condemned by human rights groups, which have pointed out the recent increase in the number of political prisoners held on charges related to blogging and other social media posts, 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.
The central bank cut its main lending rate from 6% to 5% in March 2020 in response to the virus crisis and it is continuing to closely manage the exchange rate for the dong, which is not freely convertible outside the country. The greatest sanctions risk at present stems from Washington’s decision in 2019 to place Vietnam on a watch-list for potential currency manipulation. Hanoi took the warning seriously and has explored ways to absorb more US exports, from cars to agricultural produce, in a bid to lower the possibility of new US tariffs. However, the size of Vietnam’s trade surplus with the US has continued to increase, and risk of retaliatory action remains. The recent decision by Washington to remove Vietnam from the list of developing countries will also increase the risk of higher tariffs on some exports to the US.
Vietnam’s aggregate public debt is roughly equivalent to 55% of GDP. The fiscal deficit has been below 4% in recent years and was trending downwards before the impact of the virus, which will now act as a stress test for Vietnam’s fiscal and monetary systems. Although some of the country’s corporations that are highly leveraged may struggle, the government itself is not a major borrower in the international financial markets and the bulk of its foreign debt is owed to multilateral development institutions. However, it is not clear how much of the foreign debt taken on by state-owned enterprises (SOEs) is implicitly guaranteed by the government, which could face unexpected problems on this front if SOEs are heavily impacted by the COVID-19 crisis.
Return to contents Next Chapter