Previous Quarterly Editions
Expropriation Risk: 56 56 56 57 ▲Political Violence Risk:48 48 48 48 ►Terrorism Risk:18 17 16 15 ►Exchange Transfer and Trade Sanction Risk: 64 55 55 55 ►Sovereign Default Risk:37 37 37 47 ▲
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
In economics, Vietnam has undergone a radical shift in alignment in recent decades, from being a distant Asian outpost of the Soviet Union’s socialist bloc, and subject to Western sanctions, to being an active and integrated element of Western international trade and investment. Regarding politics, Vietnam is ostensibly communist, retaining close ideological ties to Russia and China, but finds itself in thinly veiled tension with Beijing over competing territorial claims notably in the South China Sea/East Sea, and to a lesser degree in neighbouring Cambodia and Laos.
Given Vietnam’s reliance on Russia for military hardware, Hanoi maintains ties with Moscow, continuing to uphold a two-decade old comprehensive strategic partnership. However, Vietnam’s official stance towards Russia’s February 2022 invasion of Ukraine has seen it trying to adopt a position of principled neutrality. But the parallels between Russia’s invasion and Hanoi’s fears China may do something similar in Vietnam, are not lost on at least some of Vietnam’s policymakers.
Vietnam’s alignment with the West has undergone a significant change since the Soviet Union’s demise and Hanoi’s commencement of economic reforms during the 1980s-1990s. Vietnam’s trading links with the West are considerable and it has received significant foreign investment, much focused on export-oriented assembly and manufacturing of goods for the West. As an attractive host country for this kind of investment activity, Vietnam has been able to move up the value chain, especially also as Chinese firms have moved to Vietnam in recent years, to avoid U.S. sanctions on China.
While Hanoi and Beijing, both led by communist governments, are in theory political partners, tensions between both countries simmer, as evidenced by occasional naval incidents in territorial waters claimed by both and sporadic anti-China protests in Vietnam. Anxieties in Hanoi about not provoking Beijing are always a consideration when mulling overtures by Western countries, to put relations on a more strategic partnership level; Vietnam’s leadership realises the West sees it as a vehicle to contain China
Therefore, thus far, Hanoi has shied from establishing such relations, preferring to be an active member of various regional and bilateral economic agreements and trade pacts, which bring benefits to Vietnam’s economy without provoking China. Vietnam wishes to remain unaligned if possible, persisting with long-held political allegiances that tend to be Eastward looking, and further developing more recent more Westward-looking economic relations.
Expropriation risk of physical assets in Vietnam is relatively low, notwithstanding the lack of an independent judiciary and several weak institutions that make for a less-than-robust or benign operating environment for foreign business. However, Vietnam’s increasing reliance on foreign investment inflows to power its economic advancement mean that it has little incentive to gain a reputation for elevated expropriation risk.
Companies relying on the storage of internet data remain concerned about Vietnam’s 2018 cyber security law, which empowers the Ministry of Public Security to decide what constitutes undesirable online content and requires all internet service providers to keep all their Vietnam-related data stored on servers located in Vietnam, and open to inspection. In August 2022, a long-awaited decree was issued providing details on how the law is to be implemented and enforced.
Foreign investors have worries about these data localisation requirements, and 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 undesirable sources of criticism. This is in addition to long-held concerns around the general inadequacy of Vietnam’s intellectual property protections.
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The political violence risk is low. The communist government has no tolerance for anything resembling open dissent, within its own ranks or the population. Vietnam’s internal security apparatus is highly effective. The most likely source of public violence, such as riots, would be if China made provocative moves over its competing territorial claims, with some Vietnamese feeling their leadership is not sufficiently hard-line in opposing Beijing’s strategic ambitions. This has occurred before, with damage inflicted on businesses believed, rightly or wrongly, to be Chinese-owned.
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 effective police and security apparatus would react speedily and firmly to any violence. The same apparatus ensured high compliance with pandemic-related lockdown regulations throughout 2020-21.
Vietnam is at very low risk of terrorism. While criticised for media controls, the security apparatus has been successful in thwarting any potential acts of organised terrorism and most forms of violent protest. While anti-government sentiment exists among some of the Vietnamese diaspora, their ability to conduct terrorist acts inside Vietnam is virtually nothing.
The dong is not freely convertible outside Vietnam and has held relatively steady against the U.S. dollar in recent years. In December 2019, Washington placed Hanoi on a watch-list for potential currency manipulation, but in April 2021 announced Vietnam had been removed from the list, and therefore was no longer subject to the threat of economic sanctions. Hanoi had previously taken this threat of U.S. sanctions seriously, and explored ways to absorb more U.S. exports, hoping to reduce its trade surplus with the U.S.
Nonetheless, this trade surplus continues to rise, largely as growing numbers of China-based export-oriented manufacturers relocate to Vietnam, as noted, hoping to side-step China/U.S. trade tensions. In early April, U.S. officials held a virtual meeting with Vietnamese officials, raising U.S. concerns over allegedly illegal timber practices, agriculture, and digital trade. While some retaliation for perceived trade violations is conceivable by the U.S. or others, these are unlikely to be large or long-lasting, given the scale of foreign investment Vietnam and its role as an important trading partner.
In early July 2022, the International Monetary Fund (IMF) released the findings of its latest Article IV negotiations with Vietnam, broadly giving the country a good bill of health. The IMF estimates Vietnam’s foreign exchange reserves to be around USD125 billion, or about four months of import cover. The government is not a major borrower on the international financial markets, and the IMF estimates Vietnam’s total public and publicly guaranteed debt at around 40% of GDP.
Net borrowing by the government has been trending up in recent years, largely due to the pandemic, and may reach 3.8% of GDP in 2022, according to the IMF. However, most of Vietnam’s external debt, around 35% of GDP, is owed to multilateral development institutions at below-market terms.
In early September 2022, Moody’s revised its rating for Vietnam from Ba3 with positive outlook, to Ba2 with stable outlook. This followed S&P’s May decision to change Vietnam’s credit rating from BB with positive outlook to BB+ with stable outlook. Fitch maintains Vietnam at BB with a positive outlook. Having recorded below-normal GDP growth rates of 2.9% and 2.6% in 2020 and 2021, respectively, due to the pandemic’s impact, the IMF is forecasting 6% Vietnamese GDP growth in 2022, bucking a regional trend of more modest growth.
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