Previous Quarterly Editions
Expropriation Risk: 57 57 57 57 ► Political Violence Risk: 48 48 48 48 ► Terrorism Risk: 18 18 18 17 ▼ Exchange Transfer and Trade Sanction Risk: 55 64 64 55 ▼ Sovereign Default Risk: 47 47 47 37 ▼
TREND ▼
A dramatic surge in COVID-19 infection rates that began in May 2021 has undermined what had been until then an impressive revival of the highly resilient Vietnamese economy in the latter half of 2020 and the first quarter of 2021. Despite the imposition of stringent lockdown measures, that surge gained considerable momentum during the summer and is not yet under control, particularly in the economically important south of the country. As of late August, there had been over 435,000 confirmed cases of COVID-19 infection, and over 10,500 associated fatalities. At the time of writing, just 2.3 million (around 2.3% of the population) have been vaccinated.
To give a sense of the enormity of this most recent surge, prior to May 2021 Vietnam had recorded just 4,000 COVID-19 infections and 35 deaths. The latest lockdown measures are causing a widespread economic slowdown, including rising unemployment and under-employment, which will be placing an additional strain on the livelihoods of some of Vietnam’s least affluent communities and those dependent on the informal sector.
Trade and export-oriented manufacturing are both important elements of the Vietnamese economy, and so the recent dislocations seen in global value chains and cross-border production networks are having an adverse impact. The trade balance has gone into deficit for the first time in several years, as firms -- including the important foreign-invested sector -- are obliged to reduce or completely suspend operations, in response to public health measures and other pandemic-related protocols.
The World Bank anticipates that the Vietnamese economy may grow by around 4.5% in 2021, at best, compared with 2.9% in 2020 and 7.0% in 2019, and that Vietnam’s current account surplus will be minimal this year. With fiscal revenues substantially diminished in 2021, the fiscal deficit is expected to rise to 6% of Gross Domestic Product (GDP), although aggregate public debt should stay within sustainable levels. The banking and finance sector should not be markedly affected by the 2021 surge in COVID-19 infections and the resulting lockdown measures, although non-performing loan levels will almost certainly increase, particularly regarding debt obligations in the hard-hit service sector.
Nonetheless, all the major credit ratings agencies have maintained their country risk levels -- BB for Standard & Poor’s and Fitch, and Ba3 for Moody’s -- and all three have a positive outlook for Vietnam.
Both the US secretary of defence and vice-president visited Hanoi over the summer, signalling Washington’s desire to make Vietnam a priority security partner in South-east Asia, along with Singapore. On the strategic front, Hanoi wishes to see the United States convey its support for Vietnam’s territorial claims in the South China Sea, as both countries seek to manage the perceived threat posed by China, albeit from differing ideological stances.
On more immediate issues, Hanoi wants Washington to provide more COVID-19 vaccines, while the latter wants Vietnam to play a role in addressing the global semiconductor chip shortage that has developed since late 2020. In a symbolic gesture, the US vice-president announced in Hanoi that the United States will be building a new USD1.2bn embassy in the Vietnamese capital, as well as opening a US Center for Disease Control and Prevention office for Southeast Asia, in Vietnam.
TREND ►
Companies relying on the storage of internet 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 physically to keep all 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 around Hanoi’s intense monitoring and control over all online content. For the government, which has complete hegemony over conventional media, the internet and social media are seen as a potential source of opposition to its rule. This is in addition to long-held concerns around the general inadequacy of intellectual property protection in Vietnam. But regarding physical assets, the risk of expropriation is low.
The risk of political violence is low. The ruling Vietnamese communist party has displayed scant tolerance for anything resembling open dissent, whether within its own ranks or in Vietnam at large. Recent years have seen the party extend the draconian rules for conventional media to include social media; both are closely monitored. Recent events in Myanmar, where there was a coup in February and there is now active and armed resistance post-coup, 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 its competing territorial claims in the South China Sea (or ‘East Sea’, as it is known in Vietnam), thereby triggering a reaction among those Vietnamese who feel their leadership is not sufficiently hard-line in opposition to Beijing’s strategic ambitions.
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 (and Chinese) society. However, Vietnam’s highly effective police and security apparatus can be expected to react speedily and firmly to any violence. The same apparatus has ensured high degrees of compliance with pandemic related lockdown regulations since March 2020.
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 nonetheless been successful in thwarting any 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 virtually nil.
The Vietnamese dong is not freely convertible outside the country, and has been appreciating against the US dollar over the last year, despite the impact of COVID-19.
In December 2019, Washington placed Hanoi on a watch-list for potential currency manipulation, but in April 2021 the United States announced that Vietnam (and Switzerland) had been taken off this list, and therefore were no longer subject to the threat of economic sanctions. Hanoi had previously taken this threat of US sanctions seriously, and explored ways to absorb more US exports, in a bid to reduce the scale of its trade surplus with the United States. In 2019, the United States accounted for about 23% of Vietnam’s total exports; greater than China (16%), Japan or South Korea (8% each). In contrast, the United States accounted for less than 6% of Vietnam’s total imports.
However, this trade surplus with the United States continues to rise, largely as growing numbers of China-based export-oriented manufacturers relocate to Vietnam, in a bid to side-step China-US trade tensions. In early April, the US trade secretary held a virtual meeting with Vietnam’s opposite number, raising US concerns pertaining to allegedly illegal timber practices, agriculture and digital trade.
In March 2021, 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 IMF estimates Vietnam’s foreign exchange reserves to be around USD114bn.
The government is not a major borrower on the international financial markets, and the IMF estimates its total public and publicly guaranteed debt at around 47% of Gross Domestic Product (GDP). The bulk of Vietnam’s external debt -- around 39% of GDP -- is owed to multilateral development institutions at below-market terms. 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. In May 2021, Standard & Poor’s also kept Vietnam at a ‘BB’ rating, but upgraded its outlook from ‘stable’ to ‘positive’.
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