Previous Quarterly Editions
Expropriation Risk: 47 47 48 48 Political Violence Risk: 40 38 38 36 Terrorism Risk: 18 18 18 18 Exchange Transfer and Trade Sanction Risk: 51 52 54 55 Sovereign Default Risk: 49 48 51 51
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The impact of COVID-19 on Vietnam’s economy has been considerable but by no means devastating. The IMF and the Asian Development Bank expect growth to fall to 3-4% for 2020, while Hanoi is now aiming for around 5%. A major contributing factor in Vietnam’s recent economic growth trajectory has been its ability to attract FDI inflows, notably in export-oriented manufacturing sectors such as footwear and garments as well as consumer electronics. But these supply chains have been dislocated considerably by COVID-19 and have served as transmitters of economic contagion. Tourism has also been heavily affected, while remittance income has dropped steeply. The Vietnamese government has handled the health aspects of COVID-19 with the vigorous enforcement of restrictions and protocols and the early use of intensive testing. While some observers question the accuracy of the extraordinary low official numbers, it is nonetheless true that Hanoi’s rapid response to the initial outbreak and its willingness to strictly quarantine suspected clusters have been highly effective. One consequence may be that Vietnam’s economy will be in a position to return to normal more quickly than many others. It was notable that the forward-looking purchasing managers’ index (PMI) for Vietnam in May 2020 was at 42.7, compared with 35.5 for the ASEAN region as a whole, and was above 50 in June 2020. Hanoi has instituted a number of fiscal and monetary easing measures intended to help mitigate the economic impact of the COVID-19 pandemic, with the government also looking to ramp up public spending on infrastructure projects to act as a stimulus. In June 2020, it announced that construction would begin on a 9.3-billion-dollar (USD) tourist resort south of Ho Chi Minh City that had previously been held up by environmental concerns. Away from COVID-19, the ongoing trade tensions between China and the US continue to benefit Vietnam as manufacturers seek to side-step the risk of sanctions and other measures, by relocating some or all of their operations to Vietnam. The appeal of Vietnam as a host country for export-oriented production has risen markedly with the National Assembly’s ratification in June 2020 of an extensive bilateral trade deal with the EU. The deal, due to come into effect in August 2020, sees Brussels lift all tariffs on 71% of Vietnamese goods and gradually cut the rest in the next seven years, while Vietnam will lift import duties on 65% of all EU imports and phase out the rest over the next decade. Within Southeast Asia, only Singapore has a similar trade deal with the EU, Hanoi expects it to provide a further boost to FDI. As ASEAN chair for 2020, Hanoi has been keen to caution its fellow members about the threat posed by China’s offshore territorial ambitions. The worry in Hanoi is that Beijing will use the distraction of the COVID-19 pandemic to expand its activities in the South China Sea. One consequence of Chinese assertiveness in offshore oil and gas fields is that PetroVietnam, Hanoi’s state-owned energy company, announced in July 2020 that it has plans to add 100 megawatts of renewable energy capacity by 2025 and 900 megawatts by 2035, mainly through the use of wind farms.
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Technology companies remain concerned about the cyber security legislation that came into force in 2019 last year. This empowers the Ministry of Public Security to decide what constitutes undesirable online content. It also requires all technology service providers to keep 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 the heavy government control over online content. This is in addition to long-held concerns around the lack of intellectual property protection in Vietnam.
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Since Nguyen Phu Trong added the country’s presidency to his post as General Secretary of the Communist Party of Vietnam in 2018, the party has shown an increasing lack of tolerance for anything resembling dissent, either within its own ranks or 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. If necessary, this would help protect the Party from a build-up of resentment over its handling of COVID-19, but support for its approach appears to have been high from the outset and remains firm. By contrast, senior Party leaders are well 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.
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 acts of terrorism and most forms of violent and non-violent protest. It has also helped to assure compliance with lockdown regulations.
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In response to COVID-19, the central bank cuts in March and May 2020 have taken its policy rate down from 6% to 4.5%. However, the Vietnamese dong, which is not freely convertible outside the country, has held fairly steady against the US dollar over recent months in 2020. The only risk of sanctions 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 in a bid to lower the possibility of new US tariffs. Nonetheless, the size of Vietnam’s trade surplus with the US has continued to rise, and the risk of retaliatory action remains, particularly during the run-up to US elections in November 2020. The recent decision by Washington to graduate Vietnam from its list of developing countries may also increase the risk of higher tariffs on some exports to the US.
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Vietnam’s government is not a major borrower on the international financial markets. It has about 54 billion USD in sovereign debt, the bulk of which is owed to multilateral development institutions. However, it is not clear how much of the foreign debt taken on by state-owned enterprises is implicitly guaranteed by the government. The aggregate public debt started 2020 at roughly equivalent to 55% of GDP and the fiscal deficit, which has been below 4% in recent years, was trending downwards before the impact of COVID-19. After spiking up in March 2020, spreads on credit default swaps have been trending down in recent months. In May 2020, S&P maintained its BB rating with a stable outlook, similar to the assessment from Fitch in April 2020.
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