Previous Quarterly Editions
Expropriation Risk: 57 57 57 57 Political Violence Risk: 48 48 48 48 Terrorism Risk: 18 18 18 18 Exchange Transfer and Trade Sanction Risk: 55 55 64 64 Sovereign Default Risk: 47 47 47 47
TREND ►
A general air of positivity currently surrounds Vietnam and its economic prospects for the remainder of 2021. The country’s highly effective response in containing the public health threat posed by COVID-19 means that Vietnam is well positioned for an economic revival. At the time of writing (early May 2021), Vietnam had recorded just over 3,230 cases of COVID-19, and 35 deaths. The recent signing and ratification of various free trade agreements, as well as on-going China-US tensions, mean that foreign direct investment inflows are expected to increase steadily.
Meanwhile, although elections for the National Assembly are not due until June 2021, most of the key political decision-making and leadership appointments around the January 2021 Vietnam Communist Party (VCP) Congress have been completed. This will allow policymakers to focus on reinvigorating the economy, which was still able to grow by around 2.5% in 2020, despite the pandemic.
Forecasts for GDP growth in 2021-22 tend to average around 6-7%- the government is aiming for 6.5% growth in 2021. The forward-looking purchasing manager’s index (PMI) was at 53.6 in March 2021, the highest figure since July 2019, and an indication of growth momentum in Vietnam’s manufacturing sector. Order books are reported to be filling up, with overseas demand at levels not seen since November 2018. Business sentiment is at its highest in over 20 months.
At the VCP’s five-yearly Congress in January 2021, the incumbent General Secretary Nguyen Phu Trong was re-elected for a third term. This came as some surprise given his age (76), concerns about his health and because third terms are rare. This tends to suggest that a consensus agreement on his replacement could not be attained.
The new prime minister, unveiled in early April 2021, is the relatively unknown Pham Minh Chinh, aged 63. He has risen through the VCP leadership ranks and the national security apparatus and is seen as being a strong advocate for Trong’s anti-corruption drive of recent years. Chinh replaces Nguyen Xuan Phuc (66), who is being moved over to the more ceremonial role of state President. The latter move entails a return to the previous modality of having the positions of VCP general secretary and state President held by different individuals. Phuc is widely regarded as having led a successful response to the pandemic; it will be Chinh’s task to leverage that into a successful economic recovery.
Rounding out the four most senior leadership positions in Vietnam, a new chair of the National Assembly has been appointed, former finance minister and deputy prime minister, Vuong Dinh Hue. He previously served as chair of the VCP’s central economic commission and the government’s chief auditor.
Among the priorities facing the new leadership will be ensuring that the robust pre-pandemic economic growth momentum returns. This will entail ensuring that Vietnam’s legal and regulatory regime is made compliant with commitments made under the EU-Vietnam trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership, among others. This process could drive the next wave of economic reforms.
The government will also have to contend with long-running, rising tensions over competing offshore territorial claims with China in the South China Sea, and the increasing impact of climate change on the two main river deltas that dominate Vietnam’s agricultural sector.
Companies relying on the storage of data remain concerned about Vietnam’s cyber security legislation that empowers the Ministry of Public Security to decide what constitutes undesirable online content and requires all internet service providers to keep their Vietnam-related data stored on servers located within the country.
Foreign investors have 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. But regarding physical assets, the risk of expropriation is low.
The risk of political violence is low. The VCP has displayed an increasing lack of tolerance for anything resembling dissent, whether within its own ranks or Vietnam at large. Recent years have seen it extend the draconian rules for conventional media to include social media; both are closely monitored. Recent events in Myanmar will probably increase these tendencies among Vietnam’s leadership.
The most likely source of any public displays of violence, such as riots, would be if China made any provocative moves over the South China Sea, thereby triggering a reaction among those Vietnamese that feel Hanoi is not sufficiently hard-line towards Beijing.
The ideological linkages between the Chinese and Vietnamese communist parties do not always sit comfortably with the strong nationalist sentiment that runs through much of Vietnamese society. However, Vietnam’s highly effective police and security apparatus can be expected to react speedily and firmly to any violence. The same apparatus ensured compliance with pandemic-related lockdown regulations since March 2020.
While often criticised by human rights groups, citing the numbers of political prisoners held on charges related to blogging and other social media posts that criticise the government, Vietnam’s security apparatus has been successful in thwarting acts of terrorism and most forms of violent protest. While anti-government sentiment exists among some of the Vietnamese diaspora, their ability to conduct terrorist acts in Vietnam is slight.
The Vietnamese dong is not freely convertible outside the country and has held firm against the US dollar over the last year, despite COVID-19. At present, the main risk of economic 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, including timber, in a bid to reduce the size of Vietnam’s trade surplus with the United States.
However, this surplus continues to rise, largely as growing numbers of China-based export-oriented manufacturers relocate to Vietnam, trying to side-step China-US trade tensions. In January 2021, Washington designated Vietnam a currency manipulator, but held back from announcing punitive sanctions. In early April 2021, the new US trade representative held a virtual meeting with Vietnam’s trade minister, raising US concerns relating to Vietnam’s currency, alleged illegal timber practices, agriculture and digital trade. These discussions between Hanoi and Washington will continue throughout 2021.
In March 2020, the International Monetary Fund (IMF) released the findings of its latest Article IV negotiations with Vietnam, and broadly gave the country a good bill of health. The government is not a major borrower on the international financial markets, and the IMF estimates its total external debt as around USD140bn, or 38.5% of GDP.
The bulk of this debt is owed to multilateral development institutions at below-market terms, although it is not always clear whether some foreign debt taken on by state-owned enterprises is implicitly guaranteed by the government, even if not recorded on the country’s balance sheet.
The IMF estimates Vietnam’s foreign exchange reserves to be around USD114bn. Increased government spending due to COVID-19 probably drove up the public budget deficit from around 3.5% of GDP to 5.5% in 2021, but it remains manageable. Total public and publicly guaranteed debt are estimated to be the equivalent of around 47% of Vietnam’s GDP.
In mid-March 2021, Moody’s revised its outlook from ‘negative’ to ‘positive’ and kept its rating for Vietnam at Ba3. In early April 2021, Fitch revised its outlook for Vietnam from ‘stable’ to ‘positive’, and affirmed its rating of ‘BB’, citing continued strengthening of its external finances due to persistent current account surpluses and rising international reserves. Despite COVID-19, Vietnam’s foreign exchange reserves are thought to have increased in 2020, to around USD95bn. Standard and Poor’s has maintained a ‘stable’ outlook for Vietnam, at BB, since April 2019.
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