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  1. 1. IMPORTANT NOTICE:The information in this PDF file is subject to Business Monitor International’s full copyrightand entitlements as defined and protected by international law. The contents of the file are for thesole use of the addressee. All content in this file is owned and operated by Business MonitorInternational, and the copying or distribution of this file, internally or externally, is strictly prohibitedwithout the prior written permission and consent of Business Monitor International Ltd.If you wish to distribute the file, please email the Subscriptions Department atsubs@businessmonitor.com, providing details of your subscription and the number of recipientsyou wish to forward or distribute this information to. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.
  2. 2. Q3 2011 www.businessmonitor.comVietnaMBusiness Forecast reportincludes 10-year forecast to 2020Published by BusIness MonItor InternatIonal ltdIncludes 10-year forecasts to end-2017Positive Steps Towards Sustainable Growthissn 1745-0764published by Business Monitor international Ltd.copy Deadline: 19 May 2011
  3. 3. 2 VietnaM – MacroeconoMic Data anD Forecasts 2006 2007 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f Population, mn [4] 84.1 85.2 86.2 87.3 88.4 89.3 90.2 91.1 92.0 92.8 nominal GdP, us$bn [5] 60.9 71.1 89.8 92.8 101.9 113.0 129.7 150.8 174.5 200.6 VietnaM Q3 2011 nominal GdP, Vndbn [5] 974,265.8 1,143,715.1 1,485,038.0 1,658,389.0 1,953,223.3 2,326,853.6 2,641,667.1 2,985,462.7 3,358,614.4 3,761,091.7 GdP per capita, us$ [5] 724 835 1,041 1,063 1,153 1,265 1,438 1,656 1,897 2,161 real GdP growth, % change y-o-y [5] 8.2 8.5 6.3 5.3 6.8 6.3 7.2 7.2 7.2 7.2 industrial production index, % y-o-y, ave [1,5] 18.0 16.8 13.6 6.7 14.1 10.0 15.0 16.0 17.0 16.0 unemployment, % of labour force, eop [5] 4.8 4.6 4.7 6.0 5.0 6.0 5.0 5.0 5.0 5.0 Budget balance, Vndbn [6] 13,000.0 -11,194.0 9,897.0 -108,722.0 -87,725.0 -74,356.4 -43,290.0 -38,594.2 -30,862.3 -19,111.8 Budget balance, % of GdP [6] 1.3 -1.0 0.7 -6.6 -4.5 -3.2 -1.6 -1.3 -0.9 -0.5 consumer prices, % y-o-y, eop [2,5] 6.6 12.6 19.9 6.5 11.8 7.2 6.0 6.0 5.0 5.0 consumer prices, % y-o-y, ave [2,5] 7.5 8.3 23.0 7.0 9.2 11.5 6.5 6.0 5.5 5.0 central bank policy rate, % [7] 8.20 8.20 8.50 9.00 9.00 14.00 11.00 9.00 8.00 7.00www.businessmonitor.com exchange rate Vnd/us$, eop [8] 16,056.00 16,017.00 17,483.00 18,469.00 19,498.00 20,650.00 20,650.00 20,100.00 19,500.00 19,000.00 exchange rate Vnd/us$, ave [8] 15,993.58 16,077.42 16,543.00 17,868.67 19,174.42 20,600.00 20,375.00 19,800.00 19,250.00 18,750.00 exchange rate Vnd/eur, eop [8] 21,187.50 23,367.20 24,476.20 23,455.63 26,082.48 28,600.00 26,800.00 24,375.00 23,750.00 23,125.00 Goods exports, us$bn [9] 39.8 48.6 62.7 57.1 64.0 69.7 77.4 86.7 97.0 108.7 Goods imports, us$bn [9] 42.6 58.9 75.5 65.4 71.3 78.4 87.0 96.6 107.2 119.0 Balance of trade in goods, us$bn [9] -2.8 -10.4 -12.8 -8.3 -7.3 -8.7 -9.7 -10.0 -10.2 -10.3 Balance of trade in goods and services, us$bn [3,10] -4.2 -13.4 -18.1 -14.0 -13.1 -15.3 -17.1 -18.4 -19.8 -21.2 current account, us$bn [9] -0.2 -7.1 -10.8 -7.4 -5.6 -7.0 -8.1 -8.4 -8.8 -9.2 current account, % of GdP [9] -0.3 -10.0 -12.0 -8.0 -5.5 -6.2 -6.2 -5.6 -5.0 -4.6 foreign reserves ex gold, us$bn [9] 13.4 23.5 23.9 16.4 17.5 20.1 22.9 25.9 29.3 33.1 import cover, months g&s [9] 3.8 4.8 3.8 3.1 3.0 3.1 3.2 3.2 3.3 3.3 total external debt stock, us$mn [11] 18,610.2 22,737.0 24,963.9 28,673.8 31,407.3 34,276.6 37,131.9 40,229.4 43,589.7 47,234.9 total external debt stock, % of GdP [11] 30.6 32.0 27.8 30.9 30.8 30.4 28.6 26.7 25.0 23.6 total external debt stock % of XGs [11] 40.8 40.8 35.1 45.1 44.0 43.8 42.7 41.2 39.8 38.5 Notes: e/f = BMI estimates/forecasts. 1 At 1994 prices; 2 Base year 2000; 3 Includes investment income flows up until 2004; Sources: 4 World Bank/BMI calculation/BMI; 5 General Statistics Office; 6 Asian Development Bank, Ministry of Finance; 7 State Bank of Vietnam; 8 BMI; 9 Asian Development Bank; 10 Asian Development Bank, General Statistics Office from 2020; 11 World Bank.Business Monitor international ltd
  4. 4. contentsexecutive summary ................................................................................................................................. 5core Views ......................................................................................................................................................................................5Major Forecast changes ................................................................................................................................................................5Key risks to outlook ....................................................................................................................................................................5chapter 1: political outlook .................................................................................................................... 7sWot analysis .......................................................................................................................................................... 7BMi political risk ratings ........................................................................................................................................ 7Foreign policy ............................................................................................................................................................ 8international rights Groups threaten politburo’s Grip on power international human rights organisations are calling for Vietnam to be reinstated on the us government’s list of countries of Particular concern in 2011, pressuring Hanoi to release religious and political detainees.Domestic politics....................................................................................................................................................... 9Hmong crackdown not a sign of Broader instability the Vietnamese government’s aggressive crackdown on Hmong demonstrations has raised concerns over growing public unrest.Long-term political outlook .................................................................................................................................. 10Key political challenges over the coming Decade Vietnam’s biggest political question over the coming decade is whether one-party rule under the communist Party of Vietnam (cPV) will face growing calls for democratisation, as was the case in other major south east asian countries.taBLe: VietnaM poLiticaL oVerVieW .......................................................................................................................................................... 10chapter 2: economic outlook ............................................................................................................... 13sWot analysis ........................................................................................................................................................ 13BMi economic risk ratings ................................................................................................................................... 13economic activity ................................................................................................................................................... 14public spending cuts to Keep economic Growth subdued the Vietnamese government’s shift in focus from driving economic growth towards fighting inflation and addressing macroeconomic imbalances is beginning to have a cooling effect on the economy.taBLe: econoMic actiVitY ............................................................................................................................................................................. 14Monetary policy ....................................................................................................................................................... 16risks of excessive tightening to Keep rates on Hold the state Bank of Vietnam introduced another 100-basis-point hike on april 29, bringing the policy rate from 13.00% to 14.00%.exchange rate policy ............................................................................................................................................. 17VnD: selling pressures set to Wane on sBV intervention aggressive monetary tightening by the state Bank of Vietnam in recent months – the central bank introduced 500 basis points of rate hikes from february to april – will help anchor inflation expectations and provide support for confidence in the dong.taBLe: eXcHanGe rate ................................................................................................................................................................................... 17investment climate ................................................................................................................................................. 18Government puts privatisation efforts Back in Focus the Vietnamese government is in a renewed push to privatise state-owned enterprises and has given the go-ahead to raise limits on foreign ownership in Vietnamese banks and listed companies.Business Monitor international ltd www.businessmonitor.com 3
  5. 5. VietnaM Q3 2011Key sector outlook ................................................................................................................................................. 19Foreign competition Forcing Banks to catch up the Vietnamese government has undertaken extensive reforms in recent years to raise the competitiveness of domestic banks.chapter 3: 10-Year Forecast .................................................................................................................. 21the Vietnamese economy to 2020........................................................................................................................ 21rebalancing needed to Maintain High Growth We remain positive about Vietnam’s growth prospects over the next 10 years, in spite of the adjustment of our average GdP growth projection over 2013-2019 from 8.0% to 6.9%.taBLe: VietnaM LonG-terM MacroeconoMic Forecasts .................................................................................................................. 21chapter 4: Business environment ........................................................................................................ 23sWot analysis ........................................................................................................................................................ 23BMi Business environment risk ratings ............................................................................................................. 23investment climate.................................................................................................................................................. 24De-Dollarisation push to create uncertainty in a bid to reduce Vietnam’s heavy reliance on the us dollar, the state Bank of Vietnam has introduced a series of measures to discourage the use of the currency in recent months.Business environment outlook ............................................................................................................................. 25institutions .............................................................................................................................................................. 25taBLe: BMi Business anD operation risK ratinGs .............................................................................................................................. 26infrastructure .......................................................................................................................................................... 27taBLe: BMi LeGaL FraMeWorK ratinG....................................................................................................................................................... 27taBLe: LaBour Force QuaLitY..................................................................................................................................................................... 28taBLe: asia, annuaL FDi inFLoWs ................................................................................................................................................................ 29taBLe: traDe anD inVestMent ratinGs .................................................................................................................................................... 30taBLe: VietnaM top eXport Destinations .............................................................................................................................................. 32operational risk ..................................................................................................................................................... 33chapter 5: Key sectors .......................................................................................................................... 35Defence .................................................................................................................................................................... 35taBLe: VietnaM’s DeFence eXpenDiture, 2008-2015 ............................................................................................................................... 38Freight transport..................................................................................................................................................... 39taBLe: roaD FreiGHt ....................................................................................................................................................................................... 40taBLe: raiL FreiGHt ......................................................................................................................................................................................... 40taBLe: air FreiGHt ........................................................................................................................................................................................... 41taBLe: MaritiMe FreiGHt ................................................................................................................................................................................ 41other Key sectors ................................................................................................................................................... 42taBLe: FooD anD DrinK sector KeY inDicators ................................................................................................................................... 42taBLe: pHarMaceuticaLs sector KeY inDicators .............................................................................................................................. 42taBLe: oiL anD Gas sector KeY inDicators ........................................................................................................................................... 42taBLe: autos sector KeY inDicators ...................................................................................................................................................... 43taBLe: inFrastructure sector KeY inDicators ................................................................................................................................. 43taBLe: teLecoMs sector KeY inDicators............................................................................................................................................... 43chapter 6: BMi Global assumptions .................................................................................................... 45Global outlook ......................................................................................................................................................... 45Modest Downgrade to Global Growth, But upbeat outlook intacttaBLe: GLoBaL assuMptions ........................................................................................................................................................................ 45taBLe: DeVeLopeD states reaL GDp GroWtH Forecast (% cHG Y-o-Y)......................................................................................... 46taBLe: reaL GDp GroWtH – BLooMBerG consensus Forecasts.................................................................................................... 46taBLe: eMerGinG MarKets aGGreGate GroWtH (% cHG Y-o-Y) ........................................................................................................ 474 www.businessmonitor.com Business Monitor international ltd
  6. 6. executive summarycore Views Major Forecast changes Vietnam’s real GdP growth will moderate in 2011 as the full impact We have revised our end-2011 policy rate forecast from 13.00% to of monetary tightening begins to feed through the economy. Public 14.00% to reflect the central bank’s 100-basis-point rate hike in april. spending cuts further suggest that economy activity will remain We expect interest rates to remain on hold through the end of the year. depressed in H211. However, private consumption should remain resilient on the back of increased government subsidies for the poor Key risks to outlook and robust labour market conditions. Downside Growth risks From rising commodity prices: should commodity prices continue to trend higher through 2011, we could selling pressures on the Vietnamese dong should continue to wane see the central bank adopting a more hawkish stance on monetary on the back of an improved outlook on inflation, a narrowing trade policy. further rate hikes would put considerable downside pressure deficit and continued efforts by the state Bank of Vietnam to curb on economic growth. us dollar speculation and de-dollarise the economy. Devaluation risks From persistent trade Deficit: despite multiple the state Bank of Vietnam’s monetary tightening cycle will come to devaluations since late 2009, Vietnam’s trade deficit has failed to an end in H211 as inflationary pressures begin to moderate on the see a sustained improvement. the latest devaluation in february will back of softening food prices. take several months before the full extent of its impact on the trade balance can be gauged. should we fail to see compelling evidence of an improvement in the trade balance, we would not be surprised to see the dong coming under further selling pressures.Business Monitor international ltd www.businessmonitor.com 5
  7. 7. Chapter 1: Brief Methodology political outlooksWot analysis BMi political risk ratings Vietnam’s short-term political risk rating of 76.9 reflects a largely stablestrengths political system, kept in place by the ruling communist Party of Vietnam’s the communist Party of Vietnam remains committed to market- monopoly on power. While public expressions of discontent have so far oriented reforms and we do not expect major shifts in policy direction been limited, slower growth and high inflation pose a threat to stability over the next five years. the one-party system is generally conducive in the near term. However, we see one-party rule as inherently unsus- to short-term political stability. tainable in the longer term, and thus accord Vietnam a rating of 53.8 in relations with the us have witnessed a marked improvement, and our long-term political risk ratings, due mainly to a score of 27.6 in the Washington sees Hanoi as a potential geopolitical ally in south east ‘characteristics of polity’ rating. asia.Weaknesses s-t political rank trend singapore 96.7 1 = corruption among government officials poses a major threat to the Brunei darussalam 90.6 2 = Hong Kong 86.7 3 = legitimacy of the ruling communist Party. taiwan 83.3 4 = there is increasing (albeit still limited) public dissatisfaction with the laos 80.4 5 = china 80.4 5 = leadership’s tight control over political dissent. Malaysia 79.0 7 = south Korea 77.7 8 =opportunities sri lanka 77.1 9 = Vietnam 76.9 10 = the government recognises the threat corruption poses to its legiti- indonesia 73.5 11 = north Korea 73.5 11 = macy, and has acted to clamp down on graft among party officials. Philippines 67.9 13 = Vietnam has allowed legislators to become more vocal in criticis- thailand 65.4 14 = Bangladesh 64.6 15 - ing government policies. this is opening up opportunities for more india 64.0 16 + cambodia 62.7 17 = checks and balances within the one-party system. Bhutan 61.0 18 = Myanmar 54.8 19 =threats Papua new Guinea 51.9 20 = Pakistan 44.0 21 + Macroeconomic instabilities in 2010 and 2011 are likely to weigh on Regional ave 72.7 / Global ave 66.8 / Emerging Markets ave 64.5 public acceptance of the one-party system, and street demonstrations L-t political rank trend to protest economic conditions could develop into a full-on challenge singapore 82.6 1 + south Korea 82.2 2 = of undemocractic rule. taiwan 75.4 3 = Hong Kong 72.9 4 = although strong domestic control will ensure little change to Viet- china 67.4 5 - nam’s political scene in the next few years, over the longer term, Malaysia 67.2 6 = india 66.7 7 = the one-party-state will probably be unsustainable. Brunei darussalam 65.6 8 = Philippines 62.8 9 = relations with china have deteriorated over recent years due to Bangladesh 62.6 10 = sri lanka 60.2 11 = Beijing’s more assertive stance over disputed islands in the south indonesia 59.0 12 = Papua new Guinea 58.7 13 = china sea and domestic criticism of a large chinese investment cambodia 57.9 14 = into a bauxite mining project in the central highlands, which could thailand 56.8 15 = north Korea 55.2 16 = potentially cause wide-scale environmental damage. Vietnam 53.8 17 = Pakistan 52.7 18 = Bhutan 51.0 19 = laos 44.5 20 = Myanmar 33.3 21 = Regional ave 61.8 / Global ave 63.8 / Emerging Markets ave 60.3Business Monitor international ltd www.businessmonitor.com 7
  8. 8. VietnaM Q3 2011 believe Hanoi has underestimated the consequences of dissentForeign policy suppression through the use of aggressive force, which has at- tracted the attention of international rights groups. Should theinternational rights Groups threaten government continue to ignore calls to release religious andpolitburo’s Grip on power political detainees, we warn that international rights groups may push to exercise their political influence on the international BMi VieW community to impose economic sanctions on Vietnam.International human rights organisations are calling for Vietnam to bereinstated on the US government’s list of Countries of Particular Con- under pressure For political change south east asia – short-term Political risk ratingscern in 2011, pressuring Hanoi to release religious and political detain- 100ees. We believe the politburo is unlikely to submit to pressures from STPR Regional Average 95human rights groups and allow for democratic reforms. However, we 90are beginning to see evidence that public dissent and growing pressure 85from international rights groups are becoming a threat that could even- 80tually undermine the Communist Party of Vietnam’s political agenda 75over the coming years. 70 65 60Hanoi is under increasing pressure from international human 55rights organisations to release detained religious leaders and pro- 50democracy dissidents or risk further political pressure from the Cambodia Myanmar Philippines Brunei Indonesia Singapore Vietnam Thailand MalaysiaUS, including possible economic sanctions. International rights Laosgroups including Human Rights Watch, Freedom House andAmnesty International are calling for Vietnam to be reinstated Source: BMIon the US government’s Countries of Particular Concern list in2011. This would classify Vietnam among a list of countries, a Weak attempt to appease politicalincluding China, Myanmar, Eritrea, Iran, North Korea, Saudi activistsArabia, Sudan and Uzbekistan, that are deemed responsible In what we see as an attempt by the government to pacify politi-for committing severe violations of religious freedom and hu- cal activists and human rights groups, the Vietnamese Appealsman rights under the International Religious Freedom Act. We Court announced its decision in April to reduce the jail sentencebelieve such a scenario would severely undermine Vietnam’s given to popular democracy activist Vi Duc Hoi from eight tocredentials in assuming a leadership role within the Association five years. The former party member of the CPV was convictedof Southeast Asian Nations, and threaten its ambition to extend in 2007 for conducting propaganda against the single-party po-political influence in the region over the coming years. litical system and proposing democratic reforms. Human rights groups have accused and criticised the Vietnamese governmentMaintaining a Grip on power of torturing political detainees during interrogation to pressureVietnam’s politburo has maintained an assertive stance in them into confessions and to disclose information about otherdefending its single-party political system and maintaining its pro-democracy activists.grip on power over the years. This has attracted criticism forresorting to aggressive means of suppressing political dissent We believe the government’s move to reduce jail sentencesand ignoring human rights issues. The Communist Party of for political detainees will be insufficient to appease politicalVietnam (CPV)’s National Congress in January 2011 also saw dissidents and international rights groups. The recent wave ofkey party leaders reiterating ideals of a single-party system and political uprising in the Middle East has raised doubts over thezero tolerance for pro-democracy movements, suggesting the sustainability of authoritative and suppressive governmentspolitburo is unlikely to submit to growing pressures to observe such as the CPV. Pro-democracy movements in Vietnam remainhuman rights and allow for democratic reforms in the near term. confined to small groups of political activists with limited in-However, we are beginning to see evidence that public dissent fluence on the CPV and capacity to push for major change. Asis slowly becoming a threat that could undermine the CPV’s such, we see are no compelling reason to revise our short-termpolitical monopoly in the longer term. More worryingly, we political risks rating of 76.9 out of 100 for Vietnam (see chart).8 www.businessmonitor.com Business Monitor international ltd
  9. 9. poLiticaL outLooKThat said, we believe calls for democratic reforms will gradually evidence to suggest a large-scale political uprising could occurgain ground as the government continues to adopt aggressive in the short to medium term.measures to suppress public dissent. Combined with growingpressure from international rights groups, this will threaten the no signs of Widespread unrestCPV’s political agenda to maintain an authoritarian government Incidences of political demonstrations and public unrest in recentover the coming years. years suggest dissent against the government is related to wide- ranging and separate areas of concerns. These areas of concern include religious freedom, accountability and transparency of the government, land rights violations, income inequality and callsDomestic politics for democratic reforms. This is in stark contrast to a widespread and unified movement to challenge the government, which weHmong crackdown not a sign of believe would represent a more precarious scenario. We do notBroader instability rule out the possibility that these separate causes of dissent could gather momentum and eventually become a serious threat to BMi VieW political stability and policy continuity in Vietnam. However,The Vietnamese government’s aggressive crackdown on Hmong dem- at least in the near term, we have yet to see compelling evidenceonstrations has raised concerns over growing public unrest. Although that these relatively small-scale demonstrations are gaining inwe acknowledge public unrest remains a threat to political stability in momentum or becoming an urgent threat to the government.Vietnam, we see limited evidence that a large-scale political uprisingcould occur in the short to medium term. From our perspective, in- According to local media reports, the latest political demonstra-cidences of political demonstrations in recent years do not reflect a tion in May appears to be due to concerns unique to the ethnicwidespread and unified movement for political change, and we do not Hmong community in Dien Bien province. Foreign ministryexpect the latest incident to spread across the broader population. spokeswoman Nguyen Phuong Nga issued a statement on May 5 claiming the government had to step in after individual ele- inherently unstable ments were suspected of taking advantage of the situation to components of long-term Political risk rating encourage the crowd into establishing an independent ‘kingdom’ 80 70 of the Hmong. The Vietnamese government has consistently 60 maintained an assertive stance in defending its single-party 50 40 political system and maintaining its grip on power over the 30 years. Thus, we are not surprised that the government has taken 20 such an aggressive stance on clamping down on the Hmong 10 0 protestors. Indeed, similar incidents of public unrest among the ethnic community in Vietnam’s Central Highlands in 2001 Characteristics of society Policy continuity Characteristics of polity Scope of state and 2004 were quickly suppressed by the government. Given that such incidents do not reflect a widespread movement for political change, we believe these protests are unlikely to attract the interest of the broader population. As such, we believe risk of contagion remains remote and anti-establishment sentiment will remain limited to a minority group.Source: BMIIn what we see as an aggressive move to stem public unrest, Moderating inflation to cool tensionsthe Vietnamese government ordered a military crackdown on A key factor posing a greater risk to widespread public unrestHmong demonstrations in the north west province of Dien Bien is the recent surge in cost of living as a result of double-digiton May 5. Around 5,000-7,000 protesters – mainly consisting inflation, particularly food prices. The lower-income popula-of members from the ethnic Hmong population – took part in tion, which allocates a significant share of its household budgetsthe demonstrations, demanding for democratic reforms and towards food and daily necessities, has been struggling to copereligious freedom. Although we acknowledge public unrest with higher grain prices and rising transportation costs in recentremains a threat to political stability in Vietnam, we see limited months. The negative impact of surging food prices has beenBusiness Monitor international ltd www.businessmonitor.com 9
  10. 10. VietnaM Q3 2011disproportionately skewed towards lower-income groups in com- fuelling pro-democracy sentiment. This explains the relativelyparison to the dominant middle class. However, on this front, we low score for our long-term political risk rating for Vietnam,expect inflationary pressures to moderate in H211 as aggressive which currently stands at 53.8 out of 100.monetary tightening by the central bank begins to feed throughthe economy. More importantly, our commodities team forecastsa relatively weak outlook for grain prices through 2011, whichshould help provide relief to the lower-income population. The Long-term political outlookVietnamese government is fully aware that further increases inprices of essential goods could risk undermining political stabil- Key political challenges over theity. In respond to that, it has implemented strict price controls on coming Decadeessential goods. To limit risks of a supply shortage due to sup-pressed prices, subsidies will be increased for producers of essential BMi VieWgoods, particularly the agricultural sector, and the government Vietnam’s biggest political question over the coming decade is whetherhas also promised to maintain social subsidies for the poor. We one-party rule under the Communist Party of Vietnam (CPV) will facebelieve the move will help mitigate risk of public dissent. growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario envisages the CPVLess optimistic in the Longer term transforming itself into a technocratic administration, it faces majorHaving argued against concerns of a large-scale political upris- economic challenges which if mismanaged could lead to widespreading in the short to medium term, we highlight that our long-term unrest. On the foreign policy front, we expect an increasingly powerfulpolitical outlook for Vietnam remains less optimistic. Indeed, China to drive Vietnam further into the camp of Asian nations with closewe have repeatedly argued that Vietnam’s one-party political relations with the US.system is inherently unstable in the long term (see Long-TermPolitical Outlook section). Calls for democratic reforms are gain- Although Vietnam is a politically stable country, we viewing momentum, albeit very slowly. Nonetheless, we warn that the ruling Communist Party of Vietnam’s (CPV) monopolyfurther policy mistakes by the government - such as failing to on political power as unsustainable over the long term. Oneaddress inflationary pressures and income inequality – would risk of the CPV’s biggest challenges will be managing Vietnam’s taBLe: VietnaM poLiticaL oVerVieW system of Government single-party socialist republic Head of state President nguyen Minh triet (serving first five-year term) Head of Government Prime Minister nguyen tan dung (serving first five-year term) last election Parliamentary – May 2007 communist Party congress – april 2006 composition of current Government communist Party of Vietnam Key figures the 14-person communist Party Politburo, elected by the 160-person party central committee at the national party congress, acts as the de facto highest decision-making body and comprises the top leadership of the cPV. its most important members are: Party General secretary nong duc Manh, state President nguyen Minh triet, Prime Minister nguyen tan dung and General Minister of Public security le Hong anh. other Key Posts deputy Prime Minister – nguyen sinh Hung; foreign Minister – Pham Gia Khiem; Minister of Plan- ning and investment – Vo Hong Phuc; Vice President – truong My Hoa; central Bank Governor – nguyen Van Giau Main Political Parties (number of seats in parliament) communist Party of Vietnam (cPV): founded in Hong Kong in 1930, the cPV has been in power in north Vietnam since independence in 1954 and in the south since the end of the american War in 1975. divisions exist within the party between a younger, more reform-minded faction originat- ing from southern Vietnam and an older generation, originating from the north, more aligned to traditionally communist ideology. next election Presidential and Parliamentary – May 2012 ongoing disputes ongoing dispute with china, Malaysia, the Philippines and taiwan over spratly islands in south china sea Key relations/ treaties asean and Wto member, temporary seat (2008-2009) on the un security council. BMi short-term Political risk rating 76.9 BMi structural Political risk rating 53.8 Source: BMI10 www.businessmonitor.com Business Monitor international ltd
  11. 11. poLiticaL outLooKtransformation into a more pluralistic society over the coming has ceded to pressure from the US to allow a higher degree ofdecade and beyond. Indeed, the CPV’s strict control of the religious freedom, but is wary of the Catholic Church becom-media and political opinion is already cracking, with a growing ing a rallying point of political opposition, as was the case innumber of internet bloggers becoming increasingly critical of Communist Poland and the Philippines during the Marcos dic-government policy. tatorship. The Vietnamese government has thus slapped heavy sentences on Catholic activists who have extended their fightchallenges and threats to stability to encompass increased political freedom.Inflation And Devaluation As Drivers Of Discontent: Asin neighbouring China, economic growth has brought sizeable Relations With China: Relations with China have becomematerial gains for the majority of the population. However, the increasingly strained in recent years as Beijing has expanded itsVietnamese government’s loose fiscal and monetary policies economic, political and military influence southwards. The mainhave led to high levels of inflation and repeated devaluations point of contention is the conflicting territorial claims for theof the dong in recent years, which have eroded the real value of Paracel and Spratly Islands in the South China Sea. Vietnam’swages and savings. A failure to contain inflation at a reasonable relations with China have also been strained by the large bilaterallevel and uphold the real value of the dong could undermine trade deficit it runs with its northern neighbour, which amountsconfidence in the regime. to more than 10% of GDP, and criticism of a Chinese-financed bauxite mining project in the central highlands.Divisions Within The Communist Party: High inflation anddevaluation have opened schisms within the CPV leadership That said, the regimes in Beijing and Hanoi share the samebetween proponents of continued economic reform and a more ideological base and political system, and contacts betweenconservative wing which believes that a deceleration or even re- their respective politburos have decreased tension betweenversal of reform policies would benefit macroeconomic stability. them. Nonetheless, we believe Vietnam will seek increasingly close relations with the US – and potentially India and Japan –Ethnic And Regional Tensions: Vietnam is relatively ho- in the defence sphere, as a hedge against China’s rising powermogeneous, with ethnic Viet comprising almost 90% of the in the region.population. Ethnic minorities in the Central Highlands havepreviously objected to government policies promoting migra- Vietnam’s long-term political risk rating of 53.8 out of 100 istion of ethnic Viet into the highland region. While protests weighed down by a score of 27.6 in the ‘characteristics of polity’have died down, they could emerge in future. A potential spark subcomponent. This is due to the limited independence of thecould be the Chinese-financed bauxite mining project in Lam judiciary, the ban on political parties other than the CPV andDong and Dak Nong provinces, which is currently causing severe limitations on the media and civil society. While thesewidespread environmental damage and raising ire among the factors may presage stability in the short term, the experiencelocal population. of other South East Asian nations shows that rising wealth and development later lead to calls for political liberalisation. WeThere are also continued cultural differences between the have thus drawn up three scenarios for Vietnam’s political future:population of the Red River Delta around the capital Hanoi inthe north and the population of the Mekong Delta in the south, scenarios For political changewhere Ho Chi Minh City (formerly Saigon, the ex-capital of Core Scenario – CPV Turns Into A Technocratic Regime:South Vietnam) remains the commercial capital. While the Our core scenario is for the Communist Party of Vietnamgeneral perception is that northerners are more supportive (CPV) to shift increasingly towards a technocratic form ofof socialist rule and the southerners more inclined to support government aimed at maintaining high economic growth levelscontinued economic reform, a strong concept of national unity and an acceptable distribution of wealth across the population.nevertheless exists in both parts of the country. Ambitious young Vietnamese are already joining the CPV as a career path and as a means to serve their country rather thanDemands For Increased Religious Rights: One of the most because of ideological convictions. We thus foresee a continu-concerted challenges against the CPV in recent years has come ation of economic reforms in spite of the criticism emanatingfrom Catholics wishing for a stronger recognition of their right from older more traditionally minded party members. However,to worship in what is still a nominally atheist country. Hanoi intermittent periods of harsh repression against pro-democracyBusiness Monitor international ltd www.businessmonitor.com 11
  12. 12. VietnaM Q3 2011activists and other government critics are a strong indicationthat political liberalisation is not in the offing.Best Case Scenario – Gradual Political Liberalisation: Ourbest-case scenario is the above scenario combined with a gradualmove towards political liberalisation involving an expanded rolefor the National Assembly, greater scope for differing opinionwithin the CPV, increased political competition at elections, andgreater media freedom. This scenario would see Vietnam movingfrom a one-party system towards a dominant-party system ofthe kind seen in neighbouring Cambodia, Malaysia and Singa-pore, where elections are held but only the ruling party has arealistic chance of winning them. Looking even further beyondthe horizon, the experiences of South Korea, Taiwan, and Japanhave shown that even dominant-party systems eventually giveway to opposition rule. However, in Vietnam’s case this maybe more than a decade away.Worst-Case Scenario – Mass Unrest And Violent Suppres-sion: Our worst-case scenario involves severe policy misstepsthat lead to a period of prolonged economic upheaval with highunemployment and rapid inflation eroding wealth. This wouldsignificantly strengthen the case for regime change, as advocatedby the pro-democracy movement. Faced with widespread streetprotests and an all-out challenge to one-party rule, we believe thatat least part of the CPV leadership would support a crackdownon demonstrators by security forces in order to stay in power.A violent suppression of street protests as seen in Beijing in1989 and in Myanmar in 2007 could easily result in a numberof deaths and the imposition of sanctions by the internationalcommunity. If so, Vietnam would likely face not only diplomaticisolation but also economic weakness as exports and foreigndirect investment tumble.12 www.businessmonitor.com Business Monitor international ltd
  13. 13. Chapter 2: economic outlooksWot analysis BMi economic risk ratings Vietnam’s short-term economic risk rating of 50.0 reflects a deteriora-strengths tion of external conditions and the result of the government attempting Vietnam has been one of the fastest-growing economies in asia in to supplant a sharp reduction in external demand with fiscal stimulus. recent years, with GdP growth averaging 7.2% annually between Vietnam’s chronic fiscal and current account deficits also weigh down 2000 and 2010. our long-term economic risk ratings, where the fiscal and external the economic boom has lifted many Vietnamese out of poverty, components score 30.0 and 33.3 out of 100 respectively. However, with the official poverty rate in the country falling from 58% in 1993 this is partly offset by a robust score of 85.0 in the growth component, to 16% in 2006. reflecting a strong potential for rapid economic expansion and bringingWeaknesses the overall rating to 54.5. Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable to global economic s-t economy rank trend china 94.0 1 + uncertainties in 2011. the fiscal deficit is dominated by substantial taiwan 84.8 2 = Hong Kong 81.7 3 = spending on social subsidies that could be difficult to withdraw. singapore 80.0 4 = the heavily managed and weak dong currency reduces incentives south Korea 78.3 5 = Brunei darussalam 74.2 6 = to improve quality of exports, and also keeps import costs high, Malaysia 72.5 7 = thailand 71.5 8 - contributing to inflationary pressures. Myanmar 68.1 9 = indonesia 64.6 10 =opportunities Philippines 64.2 11 - india 62.1 12 = Wto membership has given Vietnam access to both foreign markets Bangladesh 60.8 13 = and capital, while making Vietnamese enterprises stronger through sri lanka 52.5 14 = laos 52.3 15 = increased competition. Pakistan 51.2 16 = Vietnam 50.0 17 - the government will in spite of the current macroeconomic woes, Papua new Guinea 42.9 18 = Bhutan 40.8 19 = continue to move forward with market reforms, including privatisation cambodia 31.9 20 = north Korea - - - of state-owned enterprises, and liberalising the banking sector. Regional ave 62.3 / Global ave 54.2 / Emerging Markets ave 53.0 urbanisation will continue to be a long-term growth driver. the un L-t economy rank trend forecasts the urban population rising from 29% of the population to china 79.2 1 = Hong Kong 77.6 2 = more than 50% by the early 2040s. singapore 76.9 3 =threats taiwan Malaysia 73.5 73.3 4 5 = = inflation and deficit concerns have caused some investors to re-assess south Korea 72.2 6 = Bangladesh 68.5 7 = their hitherto upbeat view of Vietnam. if the government focuses too thailand 66.0 8 - Brunei darussalam 65.2 9 = much on stimulating growth and fails to root out inflationary pressure, india 61.0 10 = Myanmar 57.2 11 = it risks prolonging macroeconomic instability, which could lead to a indonesia 55.1 12 = Philippines 54.7 13 - potential crisis. Vietnam 54.5 14 = Prolonged macroeconomic instability could prompt the authorities sri lanka 50.7 15 = Papua new Guinea 49.3 16 = to put reforms on hold as they struggle to stabilise the economy. Bhutan 45.6 17 = laos 45.1 18 = Pakistan 42.3 19 = cambodia 37.8 20 = north Korea - - - Regional ave 58.1 / Global ave 52.5 / Emerging Markets ave 50.3Business Monitor international ltd www.businessmonitor.com 13
  14. 14. VietnaM Q3 2011 growth came in at a relatively subdued 5.4% year-on-yeareconomic activity (y-o-y) in Q111, compared with 7.2% in Q410. We expect economic activity to moderate over the coming months aspublic spending cuts to Keep the full impact of fiscal and monetary tightening continues toeconomic Growth subdued feed through the economy. This is in line with our forecast that economic growth will slow from 6.8% in 2010 to 6.3% BMi VieW in 2011. From our perspective, attempts by the governmentThe Vietnamese government’s shift in focus from driving economic to cool the overheating economy are a positive move that willgrowth towards fighting inflation and addressing macroeconomic imbal- help facilitate a more stable growth trajectory for Vietnamances is beginning to have a cooling effect on the economy. Vietnam’s over the longer term.real GDP growth came in at a relatively subdued 5.4% year-on-year inQ111, compared with 7.2% in Q410. We expect public spending cuts public spending a Key Drag on Growthand tighter credit conditions to keep economic activity depressed over Prime Minister Nguyen Tan Dung unveiled the government’sthe coming months. Accordingly, we are maintaining our forecast for latest measure to cool the economy on March 31, highlightingreal GDP growth to come in at a subdued 6.3% in 2011. plans to slash the fiscal budget by 7.4% this year. Accord- ing to the plan, public spending cuts will amount to around slowdown ahead VND50trn (US$2.4bn) of investment in public projects. We real GdP Growth, % chg y-o-y see this as a strong indication that the government is seri- 9 ous about addressing mounting inflationary pressures and 8 an overheating economy. However, given that the impact 7 of fiscal tightening has yet to be reflected in Q111 data, we 6 expect economic activity to continue to slow in Q211. Ac- 5 cordingly, we expect reduced public spending to be a key 4 drag on growth over the coming months. Business investments could also come under pressure as public projects begin to 3 be put on hold. 2 1 removing the punch Bowl 0 In line with the Vietnamese government’s attempt to slash Q111 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q210 Q310 Q410 Q110 public spending to cool the economy, the State Bank of VietnamSource: General Statistics Office, BMI (SBV) has also embarked on aggressive monetary tightening. Following a total of 300 basis points (bps) of rate hikes inLatest economic figures published by the General Statistics February, the central bank hiked rates by 100bps in March andOffice suggest a shift in the Vietnamese government’s focus April, bringing the policy rate from 9.00% at the beginningfrom driving economic growth towards fighting inflation of the year to 14.00%. The SBV’s move came after headlineand addressing macroeconomic imbalances is beginning to consumer price inflation (CPI) accelerated to a 25-monthhave a cooling effect on the economy. Vietnam’s real GDP high of 13.9% y-o-y in March, suggesting that inflation is at taBLe: econoMic actiVitY 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f nominal GdP, Vndbn [2] 1,485,038.0 1,658,389.0 1,953,223.3 2,326,853.6 2,641,667.1 2,985,462.7 3,358,614.4 3,761,091.7 nominal GdP, us$bn [2] 89.8 92.8 101.9 113.0 129.7 150.8 174.5 200.6 real GdP growth, % change y-o-y [2] 6.3 5.3 6.8 6.3 7.2 7.2 7.2 7.2 GdP per capita, us$ [2] 1,041 1,063 1,153 1,265 1,438 1,656 1,897 2,161 Population, mn [3] 86.2 87.3 88.4 89.3 90.2 91.1 92.0 92.8 industrial production index, % y-o-y, ave [1,2] 13.6 6.7 14.1 10.0 15.0 16.0 17.0 16.0 unemployment, % of labour force, eop [2] 4.7 6.0 5.0 6.0 5.0 5.0 5.0 5.0 Notes: e/f = BMI estimates/forecasts. 1 At 1994 prices; Sources: 2 General Statistics Office; 3 World Bank/BMI calculation/BMI.14 www.businessmonitor.com Business Monitor international ltd
  15. 15. econoMic outLooKmajor risk of exceeding the central bank’s target of 7% this 2011 will stay in play.year. Accordingly, we have revised our policy rate forecastfrom 13.00% to 14.00% for end-2011, reflecting the SBV’s a Drag on economic Growth Goods exports & imports, us$mn (lHs) &latest rate hike. We expect the SBV to hold its policy rate at trade Balance, us$mn (rHs)14.00% as we see inflationary pressures moderating over the 10,000 4,000coming months. Indeed, the multi-month high headline CPI Trade Balance RHS 9,000 3,000 Exports LHSreading in March could be due to one-off effects of a currency 8,000 Imports LHS 2,000devaluation in February – which caused a spike in import prices 7,000– and electricity and fuel price adjustments in March (see our 6,000 1,000online service, March 29, ‘Wait-And-See For The SBV’). We 5,000 0acknowledge that the full impact of monetary tightening by 4,000 -1,000the SBV, which was only introduced in late February, will 3,000 -2,000take several months to feed through the economy. However, 2,000we note that lending rates, which have risen to 18.0-22.0% in 1,000 -3,000recent weeks, are already beginning to have a cooling effect 0 -4,000 Jan-11 May-05 Sep-05 May-06 Sep-06 May-07 Sep-07 May-08 Sep-08 May-09 Sep-09 May-10 Sep-10 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10on economic activity. Depressed By tight credit Source: General Statistics Office, BMI industrial Production, Vndbn (lHs) & % chg y-o-y (rHs)100,000 70 Industrial Production (LHS) 60 narrowing trade Deficit not enough to 90,000 % chg y-o-y (RHS) offset tightening Measures 50 80,000 Looking at the latest trade figures, we note that trade exports 40 70,000 came in at a robust 26.0% y-o-y in March, an encouraging 30 sign that Vietnamese exports could have benefited from an 60,000 20 8.5% currency devaluation in February. However, trade im- 50,000 10 ports also registered a significant increase of 21.5% y-o-y in 40,000 0 March, resulting in a trade deficit of US$1.2bn. We note that 30,000 a devaluation in the Vietnamese dong, which will dampen -10 demand for imports, should gradually translate into a smaller 20,000 -20 trade deficit in Q211. This in turn suggests that we could Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 potentially see rising net exports acting as a cushion against an expected slowdown in domestic demand. Nonetheless, weSource: General Statistics Office, BMI believe that any increase in net exports will be overshadowedindustrial production Growth stagnates by the combined effect of fiscal and monetary tightening inAs the accompanying chart shows, industrial production growth the coming months. Therefore, we are happy to maintain ourremained stagnant at a moderate growth rate of 15.1% y-o-y in forecast for Vietnam’s real GDP growth to come in at 6.3% inMarch. We believe tight credit conditions due to high lending 2011. Our forecast is slightly lower compared to the govern-rates, coupled with expectations for a slowdown in domestic ment’s growth target of 7.0-7.5% this year. However, givendemand will help keep industrial activity depressed in Q211. that the government has already reversed its pro-growth stancePrivate consumption should also start to cool as public spend- on the economy, we expect the government to revise its growthing and industrial activity continue to moderate over the com- target accordingly in the coming months.ing months. That said, we believe private consumption willremain resilient as the government plans to provide financialsupport to lower-income households to help offset the impactof fiscal tightening. Moreover, a strong labour market shouldalso help to provide support for private consumption in thecoming months. As such, our long-held view that privateconsumption will remain a key driver of economic growth inBusiness Monitor international ltd www.businessmonitor.com 15

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