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Q3 2011
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VietnaM
Business Forecast report
includes 10-year forecast to 2020
Published by BusIness MonItor InternatIonal ltd

Includes 10-year forecasts to end-2017
Positive Steps Towards Sustainable Growth

issn 1745-0764
published by Business Monitor international Ltd.
copy Deadline: 19 May 2011

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 7.00

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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

contents

executive summary ................................................................................................................................. 5
core Views ......................................................................................................................................................................................5
Major Forecast changes ................................................................................................................................................................5
Key risks to outlook ....................................................................................................................................................................5

chapter 1: political outlook .................................................................................................................... 7
sWot analysis .......................................................................................................................................................... 7
BMi political risk ratings ........................................................................................................................................ 7
Foreign policy ............................................................................................................................................................ 8
international 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....................................................................................................................................................... 9
Hmong 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 .................................................................................................................................. 10
Key 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 .......................................................................................................................................................... 10

chapter 2: economic outlook ............................................................................................................... 13
sWot analysis ........................................................................................................................................................ 13
BMi economic risk ratings ................................................................................................................................... 13
economic activity ................................................................................................................................................... 14
public 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 ............................................................................................................................................................................. 14

Monetary policy ....................................................................................................................................................... 16
risks 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 ............................................................................................................................................. 17
VnD: 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 ................................................................................................................................................................................... 17

investment climate ................................................................................................................................................. 18
Government 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

VietnaM Q3 2011

Key sector outlook ................................................................................................................................................. 19
Foreign 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 .................................................................................................................. 21
the Vietnamese economy to 2020........................................................................................................................ 21
rebalancing 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 .................................................................................................................. 21

chapter 4: Business environment ........................................................................................................ 23
sWot analysis ........................................................................................................................................................ 23
BMi Business environment risk ratings ............................................................................................................. 23
investment climate.................................................................................................................................................. 24
De-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 ............................................................................................................................. 25
institutions .............................................................................................................................................................. 25
taBLe: BMi Business anD operation risK ratinGs .............................................................................................................................. 26
infrastructure .......................................................................................................................................................... 27
taBLe: BMi LeGaL FraMeWorK ratinG....................................................................................................................................................... 27
taBLe: LaBour Force QuaLitY..................................................................................................................................................................... 28
taBLe: asia, annuaL FDi inFLoWs ................................................................................................................................................................ 29
taBLe: traDe anD inVestMent ratinGs .................................................................................................................................................... 30
taBLe: VietnaM top eXport Destinations .............................................................................................................................................. 32
operational risk ..................................................................................................................................................... 33

chapter 5: Key sectors .......................................................................................................................... 35
Defence .................................................................................................................................................................... 35
taBLe: VietnaM’s DeFence eXpenDiture, 2008-2015 ............................................................................................................................... 38

Freight transport..................................................................................................................................................... 39
taBLe: roaD FreiGHt ....................................................................................................................................................................................... 40
taBLe: raiL FreiGHt ......................................................................................................................................................................................... 40
taBLe: air FreiGHt ........................................................................................................................................................................................... 41
taBLe: MaritiMe FreiGHt ................................................................................................................................................................................ 41

other Key sectors ................................................................................................................................................... 42
taBLe: FooD anD DrinK sector KeY inDicators ................................................................................................................................... 42
taBLe: pHarMaceuticaLs sector KeY inDicators .............................................................................................................................. 42
taBLe: oiL anD Gas sector KeY inDicators ........................................................................................................................................... 42
taBLe: autos sector KeY inDicators ...................................................................................................................................................... 43
taBLe: inFrastructure sector KeY inDicators ................................................................................................................................. 43
taBLe: teLecoMs sector KeY inDicators............................................................................................................................................... 43

chapter 6: BMi Global assumptions .................................................................................................... 45
Global outlook ......................................................................................................................................................... 45
Modest Downgrade to Global Growth, But upbeat outlook intact
taBLe: GLoBaL assuMptions ........................................................................................................................................................................ 45
taBLe: DeVeLopeD states reaL GDp GroWtH Forecast (% cHG Y-o-Y)......................................................................................... 46
taBLe: reaL GDp GroWtH – BLooMBerG consensus Forecasts.................................................................................................... 46
taBLe: eMerGinG MarKets aGGreGate GroWtH (% cHG Y-o-Y) ........................................................................................................ 47

4 www.businessmonitor.com Business Monitor international ltd

executive summary

core 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.


Chapter 1:
Brief Methodology
political outlook

sWot analysis BMi political risk ratings
Vietnam’s short-term political risk rating of 76.9 reflects a largely stable
strengths 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 60.3


VietnaM Q3 2011

believe Hanoi has underestimated the consequences of dissent
Foreign policy suppression through the use of aggressive force, which has at-
tracted the attention of international rights groups. Should the
international rights Groups threaten government continue to ignore calls to release religious and
politburo’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 be
reinstated on the US government’s list of Countries of Particular Con- under pressure For political change
south east asia – short-term Political risk ratings
cern in 2011, pressuring Hanoi to release religious and political detain- 100
ees. We believe the politburo is unlikely to submit to pressures from STPR Regional Average 95
human rights groups and allow for democratic reforms. However, we 90
are beginning to see evidence that public dissent and growing pressure 85
from international rights groups are becoming a threat that could even- 80

tually undermine the Communist Party of Vietnam’s political agenda 75

over the coming years. 70
65
60
Hanoi is under increasing pressure from international human
55
rights organisations to release detained religious leaders and pro-
50
democracy dissidents or risk further political pressure from the

Cambodia

Myanmar
Philippines
Brunei

Indonesia
Singapore

Vietnam

Thailand
Malaysia
US, including possible economic sanctions. International rights Laos

groups including Human Rights Watch, Freedom House and
Amnesty International are calling for Vietnam to be reinstated Source: BMI
on the US government’s Countries of Particular Concern list in
2011. This would classify Vietnam among a list of countries, a Weak attempt to appease political
including China, Myanmar, Eritrea, Iran, North Korea, Saudi activists
Arabia, 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 Appeals
man rights under the International Religious Freedom Act. We Court announced its decision in April to reduce the jail sentence
believe such a scenario would severely undermine Vietnam’s given to popular democracy activist Vi Duc Hoi from eight to
credentials in assuming a leadership role within the Association five years. The former party member of the CPV was convicted
of 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 government
Maintaining a Grip on power of torturing political detainees during interrogation to pressure
Vietnam’s politburo has maintained an assertive stance in them into confessions and to disclose information about other
defending its single-party political system and maintaining its pro-democracy activists.
grip on power over the years. This has attracted criticism for
resorting to aggressive means of suppressing political dissent We believe the government’s move to reduce jail sentences
and ignoring human rights issues. The Communist Party of for political detainees will be insufficient to appease political
Vietnam (CPV)’s National Congress in January 2011 also saw dissidents and international rights groups. The recent wave of
key party leaders reiterating ideals of a single-party system and political uprising in the Middle East has raised doubts over the
zero tolerance for pro-democracy movements, suggesting the sustainability of authoritative and suppressive governments
politburo is unlikely to submit to growing pressures to observe such as the CPV. Pro-democracy movements in Vietnam remain
human 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. As
is slowly becoming a threat that could undermine the CPV’s such, we see are no compelling reason to revise our short-term
political monopoly in the longer term. More worryingly, we political risks rating of 76.9 out of 100 for Vietnam (see chart).


poLiticaL outLooK

That said, we believe calls for democratic reforms will gradually evidence to suggest a large-scale political uprising could occur
gain ground as the government continues to adopt aggressive in the short to medium term.
measures to suppress public dissent. Combined with growing
pressure from international rights groups, this will threaten the no signs of Widespread unrest
CPV’s political agenda to maintain an authoritarian government Incidences of political demonstrations and public unrest in recent
over 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 calls
Domestic politics for democratic reforms. This is in stark contrast to a widespread
and unified movement to challenge the government, which we
Hmong crackdown not a sign of believe would represent a more precarious scenario. We do not
Broader 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 evidence
onstrations has raised concerns over growing public unrest. Although that these relatively small-scale demonstrations are gaining in
we 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 uprising
could 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 ethnic
widespread and unified movement for political change, and we do not Hmong community in Dien Bien province. Foreign ministry
expect 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: BMI

In what we see as an aggressive move to stem public unrest, Moderating inflation to cool tensions
the Vietnamese government ordered a military crackdown on A key factor posing a greater risk to widespread public unrest
Hmong demonstrations in the north west province of Dien Bien is the recent surge in cost of living as a result of double-digit
on 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 budgets
the demonstrations, demanding for democratic reforms and towards food and daily necessities, has been struggling to cope
religious freedom. Although we acknowledge public unrest with higher grain prices and rising transportation costs in recent
remains a threat to political stability in Vietnam, we see limited months. The negative impact of surging food prices has been


VietnaM Q3 2011

disproportionately skewed towards lower-income groups in com- fuelling pro-democracy sentiment. This explains the relatively
parison 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 through
the economy. More importantly, our commodities team forecasts
a relatively weak outlook for grain prices through 2011, which
should help provide relief to the lower-income population. The Long-term political outlook
Vietnamese government is fully aware that further increases in
prices of essential goods could risk undermining political stabil- Key political challenges over the
ity. In respond to that, it has implemented strict price controls on coming Decade
essential goods. To limit risks of a supply shortage due to sup-
pressed prices, subsidies will be increased for producers of essential BMi VieW
goods, particularly the agricultural sector, and the government Vietnam’s biggest political question over the coming decade is whether
has also promised to maintain social subsidies for the poor. We one-party rule under the Communist Party of Vietnam (CPV) will face
believe 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 CPV
Less optimistic in the Longer term transforming itself into a technocratic administration, it faces major
Having argued against concerns of a large-scale political upris- economic challenges which if mismanaged could lead to widespread
ing in the short to medium term, we highlight that our long-term unrest. On the foreign policy front, we expect an increasingly powerful
political outlook for Vietnam remains less optimistic. Indeed, China to drive Vietnam further into the camp of Asian nations with close
we have repeatedly argued that Vietnam’s one-party political relations with the US.
system is inherently unstable in the long term (see Long-Term
Political Outlook section). Calls for democratic reforms are gain- Although Vietnam is a politically stable country, we view
ing momentum, albeit very slowly. Nonetheless, we warn that the ruling Communist Party of Vietnam’s (CPV) monopoly
further policy mistakes by the government - such as failing to on political power as unsustainable over the long term. One
address 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: BMI


poLiticaL outLooK

transformation into a more pluralistic society over the coming has ceded to pressure from the US to allow a higher degree of
decade 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 in
number 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 fight
challenges and threats to stability to encompass increased political freedom.
Inflation And Devaluation As Drivers Of Discontent: As
in neighbouring China, economic growth has brought sizeable Relations With China: Relations with China have become
material gains for the majority of the population. However, the increasingly strained in recent years as Beijing has expanded its
Vietnamese government’s loose fiscal and monetary policies economic, political and military influence southwards. The main
have led to high levels of inflation and repeated devaluations point of contention is the conflicting territorial claims for the
of the dong in recent years, which have eroded the real value of Paracel and Spratly Islands in the South China Sea. Vietnam’s
wages and savings. A failure to contain inflation at a reasonable relations with China have also been strained by the large bilateral
level and uphold the real value of the dong could undermine trade deficit it runs with its northern neighbour, which amounts
confidence 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 and
devaluation have opened schisms within the CPV leadership That said, the regimes in Beijing and Hanoi share the same
between proponents of continued economic reform and a more ideological base and political system, and contacts between
conservative wing which believes that a deceleration or even re- their respective politburos have decreased tension between
versal 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 power
mogeneous, with ethnic Viet comprising almost 90% of the in the region.
population. Ethnic minorities in the Central Highlands have
previously objected to government policies promoting migra- Vietnam’s long-term political risk rating of 53.8 out of 100 is
tion 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 the
could be the Chinese-financed bauxite mining project in Lam judiciary, the ban on political parties other than the CPV and
Dong and Dak Nong provinces, which is currently causing severe limitations on the media and civil society. While these
widespread environmental damage and raising ire among the factors may presage stability in the short term, the experience
local population. of other South East Asian nations shows that rising wealth and
development later lead to calls for political liberalisation. We
There 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 in
the north and the population of the Mekong Delta in the south, scenarios For political change
where 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 Vietnam
general perception is that northerners are more supportive (CPV) to shift increasingly towards a technocratic form of
of socialist rule and the southerners more inclined to support government aimed at maintaining high economic growth levels
continued 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 than
Demands 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 emanating
from 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-democracy


VietnaM Q3 2011

activists and other government critics are a strong indication
that political liberalisation is not in the offing.

Best Case Scenario – Gradual Political Liberalisation: Our
best-case scenario is the above scenario combined with a gradual
move towards political liberalisation involving an expanded role
for the National Assembly, greater scope for differing opinion
within the CPV, increased political competition at elections, and
greater media freedom. This scenario would see Vietnam moving
from a one-party system towards a dominant-party system of
the kind seen in neighbouring Cambodia, Malaysia and Singa-
pore, where elections are held but only the ruling party has a
realistic chance of winning them. Looking even further beyond
the horizon, the experiences of South Korea, Taiwan, and Japan
have shown that even dominant-party systems eventually give
way to opposition rule. However, in Vietnam’s case this may
be more than a decade away.

Worst-Case Scenario – Mass Unrest And Violent Suppres-
sion: Our worst-case scenario involves severe policy missteps
that lead to a period of prolonged economic upheaval with high
unemployment and rapid inflation eroding wealth. This would
significantly strengthen the case for regime change, as advocated
by the pro-democracy movement. Faced with widespread street
protests and an all-out challenge to one-party rule, we believe that
at least part of the CPV leadership would support a crackdown
on demonstrators by security forces in order to stay in power.
A violent suppression of street protests as seen in Beijing in
1989 and in Myanmar in 2007 could easily result in a number
of deaths and the imposition of sanctions by the international
community. If so, Vietnam would likely face not only diplomatic
isolation but also economic weakness as exports and foreign
direct investment tumble.


Chapter 2:
economic outlook

sWot 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 bringing
Weaknesses 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.
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 - - -


VietnaM Q3 2011

growth came in at a relatively subdued 5.4% year-on-year
economic activity (y-o-y) in Q111, compared with 7.2% in Q410. We expect
economic activity to moderate over the coming months as
public spending cuts to Keep the full impact of fiscal and monetary tightening continues to
economic 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 government
The Vietnamese government’s shift in focus from driving economic to cool the overheating economy are a positive move that will
growth towards fighting inflation and addressing macroeconomic imbal- help facilitate a more stable growth trajectory for Vietnam
ances 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 in
Q111, compared with 7.2% in Q410. We expect public spending cuts public spending a Key Drag on Growth
and tighter credit conditions to keep economic activity depressed over Prime Minister Nguyen Tan Dung unveiled the government’s
the coming months. Accordingly, we are maintaining our forecast for latest measure to cool the economy on March 31, highlighting
real 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 Vietnam
Source: General Statistics Office, BMI
(SBV) has also embarked on aggressive monetary tightening.
Following a total of 300 basis points (bps) of rate hikes in
Latest economic figures published by the General Statistics February, the central bank hiked rates by 100bps in March and
Office suggest a shift in the Vietnamese government’s focus April, bringing the policy rate from 9.00% at the beginning
from driving economic growth towards fighting inflation of the year to 14.00%. The SBV’s move came after headline
and addressing macroeconomic imbalances is beginning to consumer price inflation (CPI) accelerated to a 25-month
have 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.


econoMic outLooK

major risk of exceeding the central bank’s target of 7% this 2011 will stay in play.
year. Accordingly, we have revised our policy rate forecast
from 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 4,000
coming months. Indeed, the multi-month high headline CPI Trade Balance RHS
9,000 3,000
Exports LHS
reading in March could be due to one-off effects of a currency 8,000 Imports LHS
2,000
devaluation in February – which caused a spike in import prices 7,000
– and electricity and fuel price adjustments in March (see our 6,000 1,000

online service, March 29, ‘Wait-And-See For The SBV’). We 5,000 0
acknowledge that the full impact of monetary tightening by 4,000 -1,000
the SBV, which was only introduced in late February, will 3,000
-2,000
take several months to feed through the economy. However, 2,000
we note that lending rates, which have risen to 18.0-22.0% in 1,000 -3,000

recent 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-10
on 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, we
Source: General Statistics Office, BMI
believe that any increase in net exports will be overshadowed
industrial production Growth stagnates by the combined effect of fiscal and monetary tightening in
As the accompanying chart shows, industrial production growth the coming months. Therefore, we are happy to maintain our
remained 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% in
March. 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, given
demand will help keep industrial activity depressed in Q211. that the government has already reversed its pro-growth stance
Private consumption should also start to cool as public spend- on the economy, we expect the government to revise its growth
ing and industrial activity continue to moderate over the com- target accordingly in the coming months.
ing months. That said, we believe private consumption will
remain resilient as the government plans to provide financial
support to lower-income households to help offset the impact
of fiscal tightening. Moreover, a strong labour market should
also help to provide support for private consumption in the
coming months. As such, our long-held view that private
consumption will remain a key driver of economic growth in


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