Vietnam: Risk Assessment
Country Risk Rating
|B||Political and economic uncertainties and an occasionally difficult business environment can affect corporate payment behavior. Corporate default probability is appreciable.|
Business Climate Rating
|C||The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.|
Growth will remain robust
Growth will remain very vigorous in 2016. The export sectors will continue to benefit from the growth in foreign direct investments (FDI) and from Vietnam’s participation in several regional and bilateral free trade agreements. In addition, the country is benefiting from a move upmarket for its exports, especially electronics, thanks to the FDI. The country is now a production hub for South Korean companies’ smartphones and tablets. Demand from advanced countries is likely to offset the slowdown in demand from China, the third largest customer for Vietnamese exports. Exports should therefore remain sustained.
Furthermore, household consumption should continue to grow: consumer confidence is improving as inflation is kept in check after years of high and volatile inflation. Also, investment can be expected to benefit from the acceleration in industrial production and from a national plan aimed at promoting infrastructures. Nevertheless, it will continue to suffer from weaknesses in the banking system. In spite of a flexible monetary policy, credit growth will probably continue to be hampered by the high level of bad debt.
The sector farm should also grow after a year of poor weather conditions in 2015. After being negatively affected by the anti-Chinese riots in May 2014, tourism is likely to confirm the rebound that started end-2015.
Lastly, the Vietnamese economy will remain a two-tier economy, with foreign-owned companies enjoying robust growth and public companies with a high debt load and low profitability.
Government finances remain fragile
In 2016, the fiscal deficit and the public debt will in all likelihood continue to grow. In addition to the lack of transparency on government finances, the public debt remains very vulnerable to currency risk as close to 50% of it is denominated in foreign currencies. Moreover, the contingent liabilities could call into question the sustainability of the public debt in the medium term in the event of defaults by state-owned companies.
The country’s external accounts have now stabilized after significant capital outflows that forced the authorities to devalue the dong six times between 2008 and 2011. Exports have proved to be resilient in spite of the unfavorable international economic situation. Nevertheless, the current-account surplus will probably shrink in 2016 because of the import growth required to meet domestic demand. In August 2015, the central bank widened the dong’s fluctuation band from 1% to 2% and the currency has depreciated slightly throughout 2015. Despite the growth in foreign exchange reserves, they remain insufficient (3 months of imports in 2016). In 2016, the dong will also remain exposed to fluctuations in global risk aversion, in particular linked to the US monetary policy tightening.
The banking system remains fragile as it is insufficiently capitalized and highly dollarized. Despite the creation of a bad bank, credit risk remains significant and undervalued. Also, the high exposure of state-owned banks to state-owned companies that are lacking in transparency is an additional factor of weakness.
Geopolitical tensions and increased trade integration
The dispute over sovereignty in the South China Sea between Vietnam and China was rekindled in 2014 when a Chinese oil platform was installed in waters claimed by Vietnam. It generated strong anti-Chinese sentiment in Vietnam, even resulting in demonstrations and attacks against Chinese interests in Vietnam. China eventually dismantled the platform under pressure from the United States, and the ASEAN countries decided on establishing a code of conduct with China in this issue. In November 2015, during the APEC summit, Vietnam and the Philippines reached a strategic agreement aimed at increasing cooperation between the two countries, including in the resolution of this dispute. In 2016, Vietnam is expected to continue to consolidate its relations with the United States and Japan.
The country is also strengthening its trade integration at both the multilateral and the bilateral levels with, in particular, the signing of the TPP (Trans Pacific Partnership) in October 2015.
Governance is a risk in terms of appeal for foreign investors. Nevertheless, in 2015, the country simplified business registration and customs procedures. The Communist Party continues to control the country’s whole political, economic and social life.